The pound dropped sharply against the dollar today, as Mark Carney, the Governor of the Bank of England, struck a dovish tone in his press conference following the central bank’s decision to keep UK interest rates on hold.
By Peter Martin
Thursday, November 5, 2015
The Monetary Policy Committee’s decision to make no change was widely expected, but it was Mr Carney’s comments, and news that the Bank of England has trimmed its growth and inflation forecasts that weakened the pound. Mr Carney made it clear that recent global economic developments lay behind this rethink. ‘The outlook for global growth has weakened since August,’ he said. ‘Many emerging-market economies have slowed markedly this year, and the committee has downgraded its assessment of their medium-term growth prospects.’ He added that although growth in advanced economies had continued, the MPC ‘expects the overall pace of UK-weighted global growth to be more modest than had been expected in August.’ The BoE inflation report projects UK real GDP as growing 2.7% this year and 2.5% in 2016, compared to 2.8% and 2.6% respectively in the last estimates. GBP/USD fell 1.04% to 1.5226. The pound’s weakness was reflected against other major currencies, falling more than 1% against the euro and 0.75% versus the Swiss franc.
After a stretch at or near 42-year lows, US initial jobless claims jumped higher last week, but still remain at levels that are historically low and enough to suggest a still-tightening labor market. Initial claims jumped 16,000 higher last week to 276,000, which also pushed the four-week moving average up, lifting it from 259,250 to 262,750. The increase in claims was unexpectedly large, but in itself is not enough to change the complexion of the labor market. If we see further increases next week, this impression may start to alter, though.
Agreeing with the picture of tight employment was third-quarter data showing a 1.4% increase in unit labor costs, a hefty increase from the 1.8% decline recorded for the second quarter. Year-on-year, labor costs were up 2.0% in the third quarter.
The leading US stock indices made the slightest of gains in early trading on Wall Street. Shortly after the opening bell, the Dow Jones was up 22 points or 0.12% at 17,890, while the S&P 500 Index rose 0.07% to 2103.8 and the NASDAQ 100 advanced 0.14% to 4725.9.
Dow component Walt Disney ($DIS) reports after the market close on Thursday.
Expectations of a Fed rate hike were reinforced yesterday by comments made by several key Fed officials, including Fed Chair Janet Yellen, who said that the FOMC expects the economy to grow at a pace sufficient to produce further improvements in the jobs market and to lift inflation back to target in the medium term and that ‘if the incoming information supports that expectation then our statement indicates that December would be a live possibility.’
Tomorrow’s Employment Situation report will be one of the key pieces of data used by the Fed in making that decision. Payroll growth has been disappointing in the last couple of reports, coming in at just 142,000 for September. That is expected to improve to 190,000 for October in tomorrow’s report, while the unemployment rate is anticipated to tick lower to 5.0% from 5.1%. Average hourly earnings may prove to be just as important, given that inflation has proved to be the more intransigent part of the Fed’s dual mandate. A 0.2% increase is expected here.
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