BoE Confuse As Jobs Report Looms

WHERE WE STAND – Short & sweet this morning, as it’s finally the end of what’s been a long and volatile week.

Anyway, the shambles on Threadneedle Street never fails to disappoint. The BoE duly delivered the 25bp cut that markets had priced yesterday, lowering Bank Rate to 4.50%, in what was a surprisingly dovish 9-0 vote. Even more surprisingly, external MPC members Dhingra and Mann preferred a larger 50bp reduction; Mann’s Damascene conversion from uber-hawk last year, to uber-dove now, is frankly rather baffling.

In any case, the remainder of the MPC don’t seem to be onboard with the idea of rapid Bank Rate reductions, with the policy statement reiterating that a “gradual and careful” approach will be followed, and that policy must remain “restrictive for sufficiently long” to bear down on inflationary pressures. That’s just as well really, given that the Bank now forecast CPI peaking at 3.7% in the third quarter of this year (vs. 2.8% previously), and not returning to the 2% target for almost three years.

My base case remains that the BoE will continue with a predictable pace of 25bp cuts once per quarter, as incoming inflation data simply shan’t allow them to cut more aggressively. One must remember that the Bank’s mandate is price stability, not bailing out the Government via interest rate cuts to support growth as a result of the Treasury’s fiscal ineptitude – even if policymakers themselves appear to have forgotten that. In any case, I still find little to like about GBP assets, and still favour playing things from the short side.

Elsewhere, Thursday proved a relatively quiet day.

The dollar recovered some of its recent lost ground, though a sustained move back above the 108 figure was too much for the bulls to ask for at this stage, with conviction lacking ahead of today’s jobs report. Still, the case for further USD upside remains a strong one, in my mind, particularly as the ‘US exceptionalism’ narrative persists, and as trade uncertainty lingers.

Meanwhile, Treasuries trod water for most of the day, as did stocks on Wall Street, which went nowhere particularly quickly. While I remain somewhat cautious on equities in the short-term, the longer-term path of least resistance should continue to lead to the upside, as strong earnings growth, and solid earnings growth, combine to power further upside, albeit in choppier fashion than seen over the last 18 months or so.

LOOK AHEAD – It’s finally Friday, and it’s also Jobs Day!

Headline nonfarm payrolls are set to have risen +170k in January (range +105k to +240k), while unemployment is expected to have held steady at 4.1%, with average hourly earnings having risen by 0.3% MoM. Risks, though, to the NFP print tilt marginally to the downside, owing to the impact of wildfires in California, as well as a brutal snap of cold weather which hit during the survey week.

That said, it’s tough to imagine the jobs report being a game-changer from a policy perspective, with Fed Chair Powell having noted that policymakers need to see either “real” inflation progress, or “some” labour market weakness, in order to unlock another rate cut. Not forgetting, of course, a continued focus on Trump’s fiscal policies. For markets, though, the report is likely to be a case of ‘good news is good news’, or vice versa, with a focus on the underlying economic story, as opposed to any potential policy implications.

Also due today are jobs figures from Canada, where markets price a 4-in-5 chance of a March BoC cut, as well as preliminary UMich consumer sentiment data.