Market Info

UK CPI will be key for GBP. Watch the US NFIB survey for any signs of wage pressure which could upset stock markets.

13/02/2018 | OzForex

Tuesday 13 February

British Pound (GBP)

By the time London traders headed for the train home on Monday, the DJIA was up almost 400 points and a few hours later it officially closed up 410 points with the S&P 500 index up 1.4% at 2656. Indeed, this was the first time since January 26th that the equity market had spent the entire day in positive territory. Judged against this rally, the pound’s performance was pretty uninspiring. GBP/USD ended the day barely 20 pips higher, with the GBP losing ground against both the EUR and the AUD, though up against the CAD and NZD. Overnight in Asia, GBP/USD has added a quarter of a cent to the mid 1.38’s.

Speaking to MP’s yesterday, BoE MPC member Gertjan Vlieghe expanded somewhat on the conditions that might see a rate hike postponed, saying the Bank of England would likely reconsider its assumption of a “smooth” transition to Brexit if a breakdown in talks between London and Brussels causes big shifts in financial markets and economic indicators. Vlieghe said the Bank would watch surveys of businesses and households for big moves if expectations of a disorderly exit from the European Union became widespread. “And that might be the kind of material change that we’d (need to see to) say our assumption of ... a smooth transition is clearly not tenable any more.”

The big event today in the UK will be the January CPI figures. Inflation last month slowed from 3.1% to 3.0% and consensus looks for another drop to 2.9% in January. With BoE interest rate policy now aligned very closely with current and expected inflation, it should be a straight read-across for the GBP; the higher the number, the more it will raise expectations of a hike in interest rates at the May MPC meeting. Prior to last week’s meeting, the market-derived probability of a 25bp hike was just under 50%. On Thursday it jumped to 70% and today stands around 61%.

US Dollar (USD)

GBP/USD expected range: 1.3775 – 1.3950 The big question for Monday was whether buyers would step into the equity market even after its sharp reversal higher on Friday afternoon in New York. The answer most definitely was ’yes’. DJIA futures were up 175 points by the time of the London opening, 200 points at the opening bell on Wall Street and then closed 410 points higher. Indeed, the Dow Jones is now up more than 1500 points from last week’s low; having regained almost 50% of its entire peak-to-trough losses. Against this background, it could be said that the US Dollar actually did well to limit its losses to less than half a point on its index against a basket of major currencies. The high last Thursday was 90.25 - its best level since before Treasury Secretary Mnuchin’s comments in Davos two weeks’ earlier – and the USD retraced only slightly to 89.80.

US total government debt today stands at $20.49 trillion. The White House Office of Management and Budget yesterday released proposals under which the debt is projected to rise almost 50% over the next decade to $29.9tn in 2028. The annual increases in total debt are sequentially lower but even in Year 10, are projected to add some $352bn to the total stock of debt. The US Government has abandoned all pretence at a balanced budget. Along with the borrowing proposals, the US Administration also published its detailed infrastructure plans. According to Goldman Sachs who have the resources, expertise and connections to know such things, “the low odds of enactment this year have not changed, in our view…in light of the need for 60 votes in the Senate, a lack of bipartisan consensus regarding the appropriate structure for federal infrastructure funds, and political considerations ahead of the upcoming midterm election”. Whilst the odds of enactment are low, the odds of a US debt downgrade seem to be high and rising. Credit ratings agency Moody’s didn’t join S&P in downgrading the US in August 2011 but it seems to be hinting very strongly that it will now do so. Whether or not it actually matters is another question…

Today in the United States we have the NFIB small business survey which contains an important question on earnings. Last month’s Press Release breathlessly said that, “With a massive tax cut this year, accompanied by significant regulatory relief, we expect very strong growth, millions more jobs, and higher pay for Americans… There’s a critical shortage of qualified workers and it’s becoming a real cost driver for small businesses… They are raising compensation for workers in order to attract and keep good employees, but that’s a positive indicator for the overall economy.” The earnings trends number in the December survey was down 5 points to -15. This could be the key data point to watch today, both for equity and currency investors. Overnight in Asia, with EUR/USD back on a 1.23 ‘big figure’ for the first time in six days, the USD index has slipped around another quarter of a point.