It’s been a very interesting morning for financial markets, although the response in financial markets has been relatively muted under the circumstances.
The Singapore summit with U.S. President Donald Trump and North Korean leader Kim Jong Un went very smoothly and provided some optimism that a long-term peaceful solution can be found between the two countries. The lack of a response though may be a reflection of the fact that the agreement still lacks some detail and given the unpredictable and volatile nature of the two leaders, there’s no guarantee that it won’t run into significant difficulties. Still, progress is important which makes today a big success.
The UK has also been in focus this morning and will remain so over the next couple of days. The jobs report further highlighted the difficulties facing the Bank of England which is clearly keen to start raising interest rates and normalizing monetary policy. Unemployment remains very low which should be lifting wages more due to the tightness of the labor market but instead, earnings growth fell a little from a month earlier.
Alone this isn’t a major concern for the central bank but coming at a time when inflation is also dropping back towards target, it makes it more difficult to justify the need of a rate hike this year, particularly at a time of such uncertainty due to Brexit. The BoE has been heavily criticised for its misleading guidance over the last month – arguably unfairly – and if it is backed into a corner and doesn’t hike for the rest of the year, many will question the point of forward guidance if the central bank doesn’t follow through.
The UK government will begin debating and voting on the Lords amendments to the Brexit bill today which will be of interest should any of the votes have a significant impact on Prime Minister Theresa May’s negotiating stance, something she will be desperate to avoid. The pound may, therefore, be sensitive to these votes over the next couple of days, even if a number of them – should maybe defeated – be more of a symbolic blow to the PM.
U.S. inflation data will be released shortly ahead of the U.S. open and is expected to show price pressures picked up slightly last month, with CPI seen rising to 2.7% from 2.5% and core CPI to 2.2% from 2.1%. While both are above the Fed’s 2% target, they are not the central bank’s preferred inflation measures but they do come a couple of weeks earlier than them so may offer insight into what we can expect. With those measures already around target, it will be interesting to see what impact it has at the Fed meeting over the next couple of days and what, if any, impact it has on the economic projections.