The rising concerns over the global economic outlook of the past few weeks and yesterday’s fall in UK inflation have put shot to many rate expectations and you can certainly kiss goodbye to any rate hikes by the Bank of England this year. In the US, the correction in expectations has been most pronounced as pointed out by Simon in his note this morning where he talks about how the US 2 year bond yields have plunged. The Federal Reserve remains clear and consistent in saying that its decisions are data dependent, but it’s not mentioned anything about being sentiment dependent. Sentiment in the markets is a powerful phenomenon which has the potential to knock confidence, so going forward data on both sides of the Atlantic will be keenly watched to see if these US and UK economic booms are sustainable.
This morning’s UK unemployment figure has once again surprised to the downside with the rate falling to 6.0%, below the expected decline to 6.1% and is welcome news but is unlikely to sway any more MPC members to vote for rate hikes beyond the existing two that have. We wait to see what the release of next Wednesday’s minutes reveal but with inflation tumbling, key business and confidence surveys also coming off the boil and wage inflation still subdued, rate expectations for the BOE have been pushed right back. Cable (GBPUSD) initially rallied 30 points or so on the back of the figures just now, but already that move higher has fizzled out, showing what the market now thinks, which is rates lower for longer.