Bank of England may have to lower their growth and inflation forecast today in the light of the recent weakness in the PMI data, Sterling traders on alert
US futures are trading lower picking up the momentum where they left off yesterday. For the S&P 500 index, there were 288 stocks which moved lower and 213 stocks which moved up- the battle was won by the bears. Although, the volume was once again not impressive at all. The 200-day moving average is really putting the ceiling for the bulls and it appears that the bulls are losing ground. Nonetheless, the S&P 500 is up 8.91% year-to-date, the NASDAQ index is up 11.15% YTD and the Dow Jones is up 8.84% YTD.
Back in the UK, time is slipping away and Theresa May cannot see any light at the end of the tunnel. It is highly likely that she will return empty-handed from Brussels, especially in the light of recent comments from the head of the European Commission who said “there is a special place in hell” for those who orchestrated Brexit. May has no choice but to delay Brexit, and that is only possible if she gives up on her stubbornness.
Sterling is evidently reacting to this situation and what matters the most for traders is the delay of Brexit. No one has priced in that the U.K. will tumble out of Europe without any deal- something which is not short of any disaster. Clearly, this is not a scenario where no news is good news because the Pound-dollar two-month risk reversals are trading at the weakest level- giving a signal that speculators are preparing for steep fall in the price.
If the disorderly Brexit takes place, the economy will only become worse, because the wage growth is at a level not seen for ten years.
The feeble wage growth has pushed the inflation back to 2.1% from its previous reading of 3%. It is in this essence that Super Thursday; a day when the Bank of England makes its monetary policy decision, inflation and growth forecast, is going to be boring. Mark Carney, the governor of the Bank of England, has no reason to be hawkish. His main qualm, for now, is Brexit. If the disorderly exit takes place, there will be no shock to see the bank cutting the interest rate and opening up the quantitative easing taps again.
Even then we are not certain if these measures will be adequate to combat the situation. This Brexit situation has clouded the bank's choice about its monetary policy. Having said this, the bank cannot be excessively dovish either in its statement and I trust that they are going to balance their tone by carrying some hawkish element. Carney could warn about the likelihood of a steeper path of interest rate hikes if there is orderly Brexit- the only scenario for which the bank is appropriately prepared for.
What is also likely in this meeting is that the MPC members may also bring some of their inflation and growth to a reality; during their November meeting, the growth forecast was 0.3% for 4Q and 0.4% for 1Q, and given that we have experienced more weakness in the PMI numbers, the MPC will have to adjust these numbers today- a lower forecast.