Weekly Market Review 02-08/11/2015

Bank of England to Ignite a Sterling Rally?

Next week, the spotlight will be shared by a pair of market-moving events from both sides of the “pond.” First, on Wednesday, the Bank of England will issue its Quarterly Inflation Report. That will be followed shortly thereafter by the MPC’s interest rate decision. Together, these two events could be a game changer for the Pound Sterling and the FTSE100.

Then, on Friday, back across the Atlantic, markets will await the US Labor Department’s NFP Report for October. Of course, dependent upon the outcome, that could impact Dollar sentiment, certainly, and perhaps Wall Street, as well.

If the Inflation Report shows that the BoE foresees a pickup in inflation that could raise the bets on a rate hike. That, of course, would push the Pound Sterling higher against its weaker peers, i.e. the Euro and the Japanese Yen. A potential rate hike, as suggested by the Inflation Report, would also hit the FTSE100.

Now, bear in mind that the period between the release of the Inflation Report and the BoE’s actual rate decision is only a few hours. That means you can expect wariness and volatility, perhaps in equal amounts, as investors try to assess the MPC’s thinking.

Markets Wary of BoE Surprise

Now, markets seem to be doubtful that the Bank of England is ready to engage with a rate hike. A recent poll suggested that the BOE’s 0.5% benchmark rate is likely to be contained at that level well into 2016. The fact is, however, the Inflation Report is a decisive factor in the MPC’s decision making process. The BoE has a 2% target inflation rate, and UK inflation is nowhere near that level. In September, inflation fell to -0.1% both on an annual and monthly basis.

One recent media poll is forecasting that inflation likely won’t reach the BoE target until sometime in2017. UK growth has also been relatively stagnant, with GDP slowing in the last quarter to 0.6%. Are inflation and growth the only factors for a BoE rate hike? Not in the least; the MPC will also take into account the US Federal Reserve’s decision. Analysts don’t believe that the BoE will jump before the Fed does, but that remains to be seen.

Will Non-Farms Disappoint, Again?

Speaking of the Federal Reserve, their mandate is two-fold; first, it is to ensure price stability and second, it is to ensure full employment. While the former isn’t spectacular at least Core Inflation has been improving. But so far, the latter has proved problematic. Earlier this year, it had seemed that new private sector jobs growth had been steadily improving.

But more recently, there has been one disappointment after another. The numbers of new jobs have been dwindling and disappointing. September’s NFP reading showed only 142,000 new jobs created, far below expectations. Moreover, previous upbeat figures have been consistently revised downward.

Another disappointment with NFP could play havoc on markets and on investors who are attempting to predict the Fed’s next possible move. If the NFP figure is stronger than expected, it will be taken as a signal that the US economy could accelerate. That would tend to provide support for retail sales which would have a positive impact on Wall Street indices.

Down to Business

On Wednesday, the Bank of England will be the markets’ main focus, first for the Inflation Report and then for the MPC’s rate decision. Given the current downbeat projections, there’s a lot of room for a surprise which could come with an upbeat inflation outlook. Investors can expect to see some volatility with the Pound Sterling and the FTSE100 until after the rate decision.

In the US, strong payroll figures would impact the US Dollar. It will also have an impact on Wall Street indices, including the S&P500, the NASDAQ100 and the DJIA. An increase in new workers tends to have a trickle-down effect and lends itself to improved retail sales. In turn, that supports the bottom line of many publicly traded corporates.

On the Plate

RBA Rate decision(Tuesday)- If the RBA hints at a possible rate cute the Aussie could face selling pressure.

BoE Rate Decision & Inflation Report(Thursday) – If the BoE hints at a possible rate hike coming sooner than expected , the Sterling could rally against weaker peers such as the Euro and the Yen.

Nonfarm Payrolls (Friday)- The main event for Wall Street and the dollar. If the NFP figure will bounce back above 200K both Wall Street and the dollar could get a boost.

Chart of the week: Apple

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