3 Numbers: UK Looks Dovish On Rate, U.S. Jobless, Treasury Yields
James Picerno | Sep 10, 2015 01:33AM ET
- The Bank of England expected to stay dovish in today’s policy announcement
- US jobless claims will continue to paint an upbeat profile for the labour market
- The recent rise in the US 2-year Treasury yield hints at a rate hike next week
The Bank of England updates its outlook for monetary policy today. The event will be widely read in the wake of yesterday’s disappointing report on UK industrial output. Later, the weekly update on jobless claims will provide additional perspective on the still-encouraging outlook for the US labour market. Meanwhile, keep an eye on the US Treasury 2-year yield, which is rising due to what appears to be a revised outlook for a rate hike at next week’s Federal Reserve Bank policy meeting.
UK: Bank of England Policy Announcement and MPC Minutes (1100 GMT): Yesterday’s surprisingly weak data on industrial activity for July give the Bank of England (BoE) a new reason to delay plans for tightening monetary policy.
Thanks mostly to a weak manufacturing sector, output slumped 0.4% in July from the previous month, well below the consensus forecast for a slight gain. The year-on-year comparison is still positive, but the 0.8% annual gain is the weakest in five months and well below the 1.5%-2% range that prevailed in the previous two months.
By some accounts, the industrial data is flashing a warning. “The economy is losing momentum. I don’t think it’s collapsing – but there are clear signs of stress,” an economist at Royal Bank of Scotland Group told Bloomberg yesterday.
Another sign that UK growth is ticking lower is yesterday’s softer GDP report from the National Institute of Economic and Social Research (NIESR). The consultancy estimated economic activity increased 0.5% for the three months through August, down slightly from 0.6% for the quarterly data through July.
Overall, the latest numbers suggest that downside risk has inched higher and so it would be surprising to see the BoE turn hawkish in today’s policy announcement. Unsurprisingly, the crowd’s assuming that the central bank will leave the policy rate unchanged at 0.5%, according to Econoday.com’s consensus forecast.
US: Initial Jobless Claims (1230 GMT): This week’s update of the Federal Reserve’s broad-brush benchmark of the labour market advises that a moderate pace of growth momentum remained intact through August. The data suggests that last Friday’s weaker-than-expected payrolls report for August isn’t a sign that macro momentum is deteriorating.
The Labor Market Conditions Index (LMCI) – a multi-factor benchmark that offers a comprehensive measure of the job market – rose to 2.1, which marks a seven-month high. Positive and rising values are associated with expansions, according to the Fed, and so the latest release offers an encouraging outlook for the labour market and, by extension, the economy overall.
Get The News You Want
Another positive for the labour market: yesterday’s release of the government’s estimate of job openings in July, which jumped to 5.75 million was an all-time high for the 15-year history of this data set.
Meanwhile, a bullish message remains intact for jobless claims, a leading indicator for the labour market. Although new filings for unemployment benefits increased to an eight-week high at the end of August, the trend is still falling, based on the trailing one-year period (see dotted red line in chart below).
The upbeat message is expected to be reaffirmed in today’s release. Econoday.com’s consensus view sees claims falling 7,000 to a seasonally adjusted 275,000 for the week to September 5.
In other words, claims are on track to stick close to the four-decade low as of mid-July. Granted, today’s data reflects a light week for filings due to the long holiday weekend that just passed in the US. In any case, today’s release probably won't provide the bears with fresh ammunition for arguing that the economy is slipping over to the dark side.
U.S. 2-Year Yield: The encouraging numbers for the labour market (see post above) have lifted Treasury yields this week. In particular, the 2-year yield - considered the most sensitive spot on the yield curve for rate expectations - ticked up in mid-day trading yesterday (New York time) to 0.75%, matching the highest level for the past four years, based on daily data from Treasury.gov.
In short, the crowd is again raising the odds that the Federal Reserve Bank may start to raise interest rates later this month at the policy meeting that's scheduled for September 16 to 17.
“The data - in absolute terms, and relative to the level of unemployment and the population - now signal unambiguously that the labour market is unable to supply the people companies need,” said the chief economist at Pantheon Macroeconomics. “Usually, that means wages will accelerate, though the evidence for that now is mixed.”
If wage growth is set to pick up, combined with ongoing growth in payrolls, the case for tightening monetary policy is looking stronger. For a real-time estimate of whether the Fed’s likely to pull the trigger later this month, keep your eye on the 2-year. Another rise for this maturity will boost expectations that a rate hike is just around the corner after all.
Disclosure: Originally published at Saxo Bank TradingFloor.com
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.