The decade anniversary of the Lehman’s bankruptcy approaches with plenty of commentary of what, if anything, we have learnt and whether or not it has been applied, let alone applied effectively. What we do know for sure is that when two central banks, European Central Bank (ECB) and Bank of England (BoE) meet this Thursday, they do so with still ultra-easy monetary policy in place.
The BoE has, on-net, lifted its official rate from the crisis level 0.50% (after a Brexit vote induced cut to 0.25%) to 0.75%. Still, looking through the prism of real rates (i.e. inflation adjusted) as a gauge of policy (using Breakevens), the UK’s 10-year is still deeply negative at -1.55%. In historical terms the low was -2.25% in April 2017. It has been negative since July 2011. 10-years ago it was over +1.2%. The 1990-end - August 2008 average was 2.56% (although this is within a declining trend).
After the recent hike, nobody is expecting another this time, and we do not expect any dissension on the MPC either. The GBP OIS CURVE doesn’t fully price 1% Bank Rate until the backend of 2019, although the recent relatively positive economic data and Brexit noise have brought this forward from mid-2020.
The ‘fresh’ information will come via the statement. Comments on wage growth, which the BoE does expect to accelerate, will be interesting especially within the context of a growing skills shortage and impact on inflation. Also released, the Bank’s latest Agents Summary of Business Conditions which will provide more detail on the UK economy. Governor Carney speaks the day after the meeting (Friday).
Meanwhile, the ECB is still expanding its balance sheet and, given the Bank’s guidance, isn’t expected to begin lifting the Depo Rate from -0.4% until September 2019 at the earliest. The market doesn’t fully price a 10bp hike late 2019. 1Y1M EONIA (currently for September 2019) is at -27bp and ticking less negative, which it should do if the market believes the ECB is on message - watch for a lurch higher here if the ECB becomes more hawkish this Thursday.
A greater emphasis on wage dynamics, which continue to make some belief in a September 2019 lift-off, might do the trick. Two Eurozone measures of pay, ‘Negotiated Wages’ and ‘Compensation per Employee’ are now both growing at or above 2% y/y; the key here is sustainability and follow through to inflation.
President Draghi’s presser is likely to reinforce his/GC belief that expansive policy is still required with the still low core-CPI used to support and possibly recent disappointing German factory orders and industrial production, especially if seen as a wider EMU Area issue (Spain also below forecast, although France was above). German IP was heavily influenced by some technical problems in the auto sector.
Whether this is enough to explain away the data, especially with the poor German factory orders, and therefore allow policymaker to see through what if is shaping up to be a poor Q3 for Europe’s powerhouse economy is of interest. The orders fall is suggestive of problems in relation to trade tariffs, and the impact of this topic within the fresh ECB Staff Macroeconomic Projection is also of interest.
The CPI outlook and any evidence of aforementioned wage pressures filtering through, plus the outlook for the Euro also need consideration. As to the latter, 25-delta risk reversals are Euro negative. Macroeconomic divergence with US is likely to become a topic once more should hard Eurozone economic data prove inferior to the US. This will also weigh on the Euro and Eurozone equities. The spread between US/Euro Area Citi Surprise Indices is once more moving in favour of the US.
Marcus Dewsnap is Senior Editor/Analyst at Informa Global Markets.
