Morning Update

Friday feeling, BoE meet market expectations, UK inflation expectations, markets look at US labour market this afternoon, and agreement on EU aid package for Ukraine.

Friday Feeling

Check out this weeks playlist here!

Bank of England Hold

Yesterday, the Bank of England met market expectations in holding their benchmark policy rate at 5.25%, marking the fourth consecutive hold. While the BoE dropped any reference to the possibility of further hikes, Threadneedle Street nonetheless stated that “monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term” as markets look for guidance into the central bank’s future monetary pathway.

This hold came as six members of the MPC meeting voted to maintain the status quo, while two members opted to hike rates 25bps to 5.5% and one other voted to cut rates 25bps. Hence, when comparing yesterday’s votes against the last monetary policy meeting six weeks ago, Threadneedle Street appeared more dovish. Indeed, during December’s meeting three members voted for a further hike while no member voted for a cut.

Markets expectations now point to five 25bps cuts this year starting in either May or June. The next chapter of monetary loosening of course follows fourteen consecutive rate hikes seen since the Bank of England started their latest tightening cycle in Q4 2021, which brought interest rates to their highest level since the GFC.

BoE Inflation Expectations

With inflation remaining well above their 2% target rate – having unexpectedly risen to 4% in December – the Bank of England laid out their forecasts for the CPI index. Here, the Monetary Policy Summary stated that CPI is expected to ease “temporarily” to the 2% target in Q2 before increasing again in Q3 and Q4. According to their most likely outcome, the BoE see inflation being at 2.75% by the end of the year.

Commenting on the drivers of this, the summary stated that “the Committee judges that the risks around its modal CPI inflation projection are skewed to the upside over the first half of the forecast period, stemming from geopolitical factors. It now judges that the risks from domestic price and wage pressures are more evenly balanced”. Looking further ahead, the BoE said that CPI was forecast to be 2.3% in two years’ time and 1.9% in three years.

As we looked at last year, according to the OECD, UK households still face the highest level of headline inflation across the G7, while Moody’s have forecasted that we will have the greatest rate of inflation in the group this year.

US Labour Market In the Spotlight

At 13:30 this afternoon, markets will turn their attention to the string of US labour data, in order to gain further insight into the health of the world’s largest economy. Given that the health of the US labour market is often taken as an important litmus test in looking at the impact of the Fed’s interest rate policy on the real economy, markets will be paying close attention to how the data may influence policy makers moving forward.

More specifically, markets will be looking at Nonfarm figures, the unemployment rate, the labour force participation rate and average hourly earnings.

The general market consensus is pointing to a Nonfarm payroll print of 180,000, which would mark a slightly softer level from last month’s figure of 216,000. While this would be below the one-year average of around 240,000 jobs, the figure would nonetheless be indicative of the resilience of the US labour market in light of the Fed’s monetary tightening.

Elsewhere, US unemployment is expected to rise marginally to 3.8%, rising 10bps from last month while average hourly earnings are expected to come in at 4.1%, unchanged from the previous pint.

With all eyes on the Fed’s future monetary pathway, and the extent to which the central bank will cut rates, this afternoons data will be closely analysed all around the world.

EU Agreement Reached on Funding for Ukraine

The European Union have broken a several month deadlock in pushing through a €50bn aid package for Ukraine. The proposed package is made up of €33bn in loans and €17bn in grants (with just under €20bn of this being earmarked to pay off interest payments to the EU). This comes as the Hungarian President Viktor Orban agreed to change his stance, which had previously blocked the package that relies on unanimous support from the European Commission. While many thought that Orban would only vote for the support if the EU agreed to release blocked funds to Hungary, it appears as though no such a commitment was laid out. The agreement has been well received by Kyiv who have been in the mist of a liquidity crisis, as the conflict approaches its two-year anniversary.