Inflation report dampens interest rate expectations

Markets remain relaxed about disappointing figures from China and the US, while the Bank of England inflation report has resulted in a dialling down of interest rate expectations.

Bank of England
Source: Bloomberg

BoE thought unlikely to rate-hike

Initially the FTSE was given a boost by the Bank of England’s inflation report, as equity traders were able to relax about a possible November rate rise. Overall the BoE is still fretting about the lack of wage growth in the economy, which is preventing them from hitting the rate-hike button. Ultimately however, the pressure to act may become too much, at which point Mark Carney may go for the ‘symbolic hike’ option, with a very minor rise designed to demonstrate the bank’s willingness to act without compromising its policy direction. G4S has shot to the top of the leaderboard, surging 5% after its first-half figures. 

Given the scandals in the UK, the company is sensible to shift its focus abroad, hoping that its less-than-stellar operation will remain this side of the Channel.

US markets move on

Anaemic US retail sales did not stop US markets from pressing higher in the opening part of the session, a reflection of how this market is able to move on from the international worries of last week. Poland’s foreign minister, who sent markets into panic mode recently with his talk of war in Ukraine, has now done the opposite, but it would be better to hear conciliatory statements from Kiev or Moscow. With the Dow Jones back above 16,600 the bullish atmosphere is certainly recovering, with more than a few jittery investors now more relaxed following recent falls. Correction talk has receded, and this is likely to provide a foundation for further gains, absent any fresh news on the Ukraine situation.

Gold left stranded

While geopolitical tensions still have the ability to enliven the gold price, the crises in various parts of the world have diminished in terms of market impact, leaving gold stranded around the $1312 mark. One hope for gold bugs would be a situation in the US similar to that in the UK, where the central bank finds itself unwilling to raise rates thanks to an uneven recovery in the economy. If rates don’t rise as fast as expected then gold could once again find itself a favoured destination for money driven from US Treasuries. All this lies in the future, however, and so for now gold is condemned to languish around current levels.

Carney leaves markets cold

Those hoping for a hawkish Mr Carney were disappointed yet again, as the governor struck a tone that erred more towards the dovish end of things. Uplifts to economic growth and a better outlook for employment are no surprise, but the bank still thinks there is a degree of slack that needs working off, while the steady decline in wage growth provides a compelling reason to argue that a rate rise is unlikely this side of Christmas.   

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