AUD up on better labor market; Riksbank, Bank of England decisions

Rates as of 06:30 GMT

Market Recap

Still a lot of volatility in the FX market for a period when things are supposed to be quieting down.

It’s nice (for me at least) to see currencies responding to domestic economics instead of simply a knee-jerk “risk on, risk off” movement. Looking at the currencies today, it looks like a “risk on” day, and yet stock markets are mixed at best – probably trending lower if anything.

Instead, AUD is up sharply on a better-than-expected labor market announcement this morning. The number of new jobs was more than double the market’s estimate (39.9k vs 15.0k) while the unemployment rate fell one tic to 5.2%, and with the participation rate holding steady. The labor market seems to be a more important policy target than inflation at the moment for the Reserve Bank of Australia, so any movement towards its target of around 4 ½% unemployment is welcome. AUD positive

NZD has been trending higher ever since European trading began yesterday. It spiked higher on news that Q3 GDP beat estimates, but just quickly lost the gains. However it then resumed trending higher. The action suggests to me that it was steady demand for the currency, not necessarily the news, causing it to appreciate – probably an interest rate differential trade. However NZD/USD has leveled off this morning – it looks like the move has gone far enough.

Finally, CAD also responded to a higher-than-expected inflation print as the core CPI – median came in at 2.4% yoy vs 2.2% expected (plus previous was revised up to 2.3% from 2.2%). The two other core inflation measures, common and trim, both came in in line with expectations.

However, it’s noticable that EUR is barely changed despite a much better-than-expected Ifo report. EUR doesn’t seem so responsive to economic indicators, perhaps because of the same reason JPY isn’t – the central bank is pretty much on hold and no one expects the odd indicator now and then to make much difference.

JPY was slightly lower, but that move had nothing to do with the Bank of Japan’s decision to keep policy unchanged, which in the event caused barely a ripple in the FX market. The BoJ downgraded its assessment of industrial production following the big typhoons in October while upgrading its view of public investment following the government’s fiscal spending package. Not much to go on here. Expectations for a rate cut collapsed in the wake of the meeting, but that doesn’t seem to have done much to support the currency. JPY neutral

As for GBP, today we have the Queen’s Speech in Parliament, when the monarch basically reads a speech prepared for her by the government outlining the government’s agenda for the coming session of Parliament. The fun should start right away as the government has said it will reintroduce the Withdrawal Agreement Bill to Parliament tomorrow.


Today’s market

The main event today is The Bank of England Monetary Policy Committee (MPC) meeting. There’s a very low likelihood of any change – the market puts it at 2%. Furthermore, I think people will continue to focus on politics, not monetary policy. The BoE, too – they abandoned their tightening bias back in August amidst worries about the impact that Brexit was having on the economy. At their last meeting (7 November), they said that “If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation.” No growth in GDP and a composite PMI below 50 for three of the last four months should convince anyone that something is needed “to reinforce the expected recovery in UK GDP growth…”

I can’t see anyone on the MPC calling for a change at this sensitive time. I expect another unanimous decision to keep rates steady, perhaps with some comments about the global outlook being mildly better, as we’ve heard from other central banks, but balanced by increased worries about the domestic picture.

It will be particularly interesting to see what if anything they say about Brexit. Will they say that “Brexit uncertainties remain entrenched” or will they say that the election has clarified things? I think we’ve just replaced one hurdle (leaving the EU) with a higher one (negotiating the future relationship). I expect the MPC members to just sit in horror and watch the show, mouths agape as the two trains steam (the UK and the EU) blow their whistles frantically but keep on the same track to a head-on collision – now with Scotland maybe trying to jump the track, too. But publicly they’ll probably be able to say relatively little. I think they will keep their comments fairly steady. As a result I don’t think this meeting will be a big market-mover.

Also, I don’t usually talk about Sweden or Norway (my time on this earth is limited), but there will be another central bank meeting today that may well be even more significant. Sweden’s Riksbank meets today and everyone expects them to raise their repo rate, currently -0.25%, up to zero. They first went negative in 2015. This would make the Riksbank the first central bank to exit from negative interest rates. But they may be a unique case as their venture into negative territory worked – inflation has returned to their 2% target.

The first economic indicator out today is UK retail sales. They’re expected to be pretty bad, with almost no growth on a mom basis (after two months of contraction and one of no growth) and slowing growth yoy. GBP negative if indeed anyone cares ahead of the results of the MPC meeting.

When the US day starts up, we get the Philadelphia Fed business outlook index. It’s expected to drop a tiny bit from the previous month, but nothing material. The Empire State index, which came out on Monday, was up a tiny bit, but more realistically has been virtually unchanged since June. Note that Tuesday’s US industrial production figure was up more than expected at +1.1%, which suggests that these figures may be underestimating the national rate of growth of output.

Initial jobless claims are back in the spotlight after soaring last week. That figure may have been just a statistical fluke however because of the extremely late date of Thanksgiving this year: 28 November, the latest possible date. When this last occurred in 2013, jobless claims displayed a similar pattern. The spike is therefore likely to revers over the next couple of weeks.

Existing home sales are expected to be down slightly from the previous month, as are new home sales (due out next week). This surprises me, because so much of the other housing data we’ve had recently has been very good. The National Association of Home Builders (NAHB) sentiment index in particular jumped to since June 1999, even higher than during the housing bubble around 2006 – and we all know how that ended. It could be that the wildfires in California have been holding down sales. (By the way, not that many houses have been destroyed in these fires – only 732 “structures” in at least 6,872 fire incidents, according to the California Department of Forestry and Fire Protection.

Overnight, Japan’s national CPI is expected to accelerate slightly at the headline level, in line with the Tokyo CPI, but the core-core – ex-fresh foods & energy – is forecast to remain the same. Pretty amazing considering that they raised the consumption tax 2 percentage point the previous month. Wake me up when Japan inflation gets above 1%. JPY neutral



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