Bank of England Report Opens Door Wider to an Earlier Rate Hike

November 13, 2013

Sterling rose as high as $1.6004 following release of the central bank’s quarterly inflation report and shows a net gain of 0.4% from Tuesday’s close.

The dollar otherwise climbed 0.5% against the kiwi and 0.1% versus the euro and Swiss franc.  The dollar has softened 0.2% against the yen and 0.1% relative to the Australian and Canadian dollars.  The Chinese yuan is steady.

A non-enlightening statement from China’s third Communist Party plenum depressed Chinese share prices by 2.2%.  In other Pacific Rim markets, equities fell by 1.8% in Indonesia, 1.9% in Hong Kong, 1.4% in Australia, 1.1% in Taiwan, 1.6% in South Korea, 0.7% in Malaysia, 0.6% in Taiwan, 0.4% in Singapore and India and 0.2% in Japan. 

European stocks are lower in price as well with drops of 1.1% in Britain, 0.8% in Italy, 0.4% in Spain, 0.5% in France and 0.3% in Germany.

The 10-year British gilt yield advanced four basis points to 2.84%.  The German bund dipped a basis point, while the Japanese JGB is unchanged.

The prices of gold and WTI crude oil are each 0.2% firmer at $1273.80 per ounce and $93.20 per barrel.

The Bank of England Inflation Report revised projected GDP growth higher to 1.6% this year and 2.8% in 2014 and, more importantly, expects unemployment to fall to the 7.0% staging point for rate hike consideration sooner than imagined three months ago, that is shortly after mid-2015.  It’s even possible that conditions for a rate hike could materialize in about a year instead of later than 2015 as projected before.

British labor market data reinforced the market reaction to the central bank’s quarterly report.  The claimant jobless count decreased by another 41.7K in September after a 44.7K decline in August, and the claimant-based jobless rate dipped to 3.9%, a 44-month low.  The ILO-based unemployment rate fell to 7.6% in 3Q, lowest since February-April 2009.  On-year growth in wage earnings, however, remained below 1.0% at 0.7% including bonuses and 0.8% excluding such in September.

Japanese core domestic private machinery orders settled back 2.1% in September but were 11.4% greater than a year before.  For the third quarter as a whole, such rose 4.3%, which was a far better result than the 5.3% drop predicted three months ago by government bureaucrats.  This followed a 6.8% quarterly sequential advance in 2Q.  Foreign machinery orders posted quarter-over-quarter increases of 11.4% in 1Q13, 4.9% in 2Q and 10.9% last quarter, while public-sector orders went up 24.7% in 2Q and 8.6% last quarter.

Japanese corporate goods prices dipped 0.1% on month in October but accelerated to a 12-month increase of 2.5% from 2.2% in September.  A big part of the gain reflected oil products, which gained 0.9% on month and 12.7% on year.

Australian labor cost pressures decelerated unexpectedly last quarter, which seemingly buys the central bank more time before considering any tightening of policy.  The 0.5% 3Q-over-2Q rise in the wage price index was down from 0.7% in the prior two quarters and the smallest gain in a few years.  The 2.7% on-year advance of the index was a full percentage point than such climbed in the year to 3Q12.

Australian consumer confidence recovered 1.9% in November from a 2.1% October decline.  Aussie motor vehicle sales dropped by 0.7% on month and 2.6% on year in October.  New Zealand food prices slid 1.0% in October and recorded only a 0.8% 12-month rate of increase.  RBNZ Governor Wheeler warned that slower Chinese growth will impact New Zealand’s economy negatively.

Chinese officials released a statement containing little guidance about planned change in policies going forward other than a general intent to involve markets more heavily in the allocation of productive resources.  South Korean unemployment held steady at 3.0% in September.

Euroland industrial production fell 0.5% on month and 1.0% on year in September.  Such slid 0.8% at an annualized rate between 2Q and 3Q following rises in both the first and second quarters of this year.  September output was already 0.2% less than the third-quarter average level.  Between August and September, output plunged 11.2% in Portugal and declined by 0.8% in Germany, 0.4% in France and 0.7% in Greece.

Dutch retail sales were 6.1% lower in September than a year before.  The Dutch EUR 3.26 billion trade surplus was scantily changed in September from August.

Spanish consumer prices rose 0.4% on month but dipped 0.1% on year in October.

September retail sales were 4.1% higher in Brazil but up merely 0.2% in South Africa compared to September 2012 levels.  Indonesia and Turkey recorded sizable current account deficits again.  Indonesia’s gap in 3Q13 equaled 3.8% of GDP (roughly $8.45 billion), which although slightly surpassing government expectations was less than in the second quarter.  Turkey’s September deficit amounted to $3.28 billion, 35% wider than the August shortfall.

U.S. mortgage applications fell 1.8% last week, a period that saw the 30-year fixed mortgage rate jump 12 basis points to 4.44%.

The U.S. budget is due today.  Tomorrow sees the release of Ezone and Japanese GDP figures.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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