As widely expected, the Bank of England lowered interest rates by 25 basis points on Thursday to a historic low of 0.25%. However perhaps not as expected was the decision to increase purchases of government bonds by an additional £60 billion and purchase up to £10 billion in corporate bonds increasing total asset purchases to £435 billion per year. U.K. equities rallied on the news with both the FTSE100 & FTSE250 gaining +1.59% & +1.45% respectively, while the Pound fell -1.63% against the U.S. dollar and -1.49% against the Euro. The first chart below compares the FTSE100 in terms of GBP and USD, and the benefit of the falling pound represented by the white line which has a total return of 8.31% since the end of May while the orange line representing the index in terms of U.S. dollars is down -1.29%.
At the same time the bank also released its quarterly inflation forecasts which is expected to remain unchanged at 0.8% in 2016, before climbing to 1.9% (vs 1.5% prior) in 2017 and 2.4% (vs 2.1% prior) in 2018 as a result of the weaker pound. GDP growth forecasts for 2016 remain unchanged at 2.0% while growth is expected to slow in 2017 to just 0.8% against 2.3% prior and 1.8% in 2018 against 2.3%. Unemployment is expected to decrease slightly to 5% in 2016 before increasing in 2017 to 5.4% (vs 4.9% prior) and 5.6% (vs 4.9% prior) in 2018.
Overall the report forecasts a relatively bleak picture for growth and the market clearly expects further easing with the yields on U.K. government bonds falling, the 10 year yield dropped 15.9 basis points to 0.643 while the 2 year declined 7.9 basis points to 0.117 shown on the second chart below. Overall, while it is certainly not going to be a smooth ride as the U.K. withdraws from the EU monetary policy will remain very accommodative and this should continue to be supportive for equities.
European equities markets also rallied alongside U.K. equities with the Euro Stoxx 600 & DAX30 climbing +0.67% and +0.57% respectively. Data out of Europe was also positive with Markit construction PMI for Germany (MoM Jul) increasing to 51.6 vs 50.4 in June as did retail PMI (MoM Jul) up to 52.0 vs 51.6 prior. Euro-zone retail PMI (MoM Jul) also increased to 48.9 from 48.5, although not as positive as readings below 50 represent contraction.
In the U.S. initial jobless claims for July 30th were slightly higher than expected, increasing to 269,000 vs 265,000 expected with readings below 300,000 generally seen as consistent with a healthy labour market. Total continuing claims for July 23rd were also slightly higher than forecasts at 2.138m vs 2.130m expected. Attention will now turn to tonight’s non-farm payroll data with forecasts for an 180,000 increase in July and a decrease to 4.8% in the unemployment rate.
U.S. factory orders (MoM Jun) were also better than expected with a decline of only -1.5% with forecasts for a fall of -1.9% while durable goods orders (MoM Jun) were also slightly better than forecast with actual of -3.9% vs expectations of a -4.0% reading. The S&P500 finished the session flat, up just +0.02% while Nasdaq100 closed +0.2% higher and the U.S. dollar index up +0.22%.
Commodity prices were mixed on Thursday, with WTI & Brent crude oil up +2.69% & +2.46% respectively while copper fell -1.11%, natural gas -0.18% and iron ore -3.52%. Spot gold gained +0.22% while spot silver prices declined -0.28%.
Locally, the ASX200 closed modestly higher on Thursday, up +0.18% while the market is set for a slightly higher open this morning with ASX SPI200 futures up a further 8 points.
Data releases:
- Australian Performance of Construction Index (MoM Jul) 9:30am AEST
- Japan Labour Earnings (YoY Jun) 10:00am AEST
- RBA Quarterly Statement on Monetary Policy 11:30am AEST
- German Factory Orders (YoY Jun) 4:00pm AEST
- U.S. Unemployment, Non-farm Payrolls and Average Hourly Earnings (MoM Jul) 10:30pm AEST
- Canadian Unemployment Rate (MoM Jul) 10:30pm AEST
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via james.woods@rivkin.com.au or by phoning +612 8302 3600.