MORNING BID EUROPE-BoE’s Carney: a change of tone?

January 19, 2016

Bank of England Governor Mark Carney’s speech at the University of London at midday GMT will be closely watched for how — and indeed whether — he seeks to give more clues on the timing of any interest rate hike. A bold advocate of so-called “forward guidance” aimed at giving market players and investors insight into the central bank’s thinking, Carney’s best efforts have been repeatedly thwarted by the twists and turns of the UK economy. As recently as July, Carney was predicting that a decision on when to raise interest rates would probably become clearer around now, something it has patently not. A new tone of caution may well be discernible.

Once branded “sado-monetarists” by Nobel laureate economist Paul Krugman, the policy-makers of Sweden’s Riksbank are the subject of a long-anticipated review. Krugman’s complaint was that they snuffed out a perfectly good recovery by raising rates too soon and then being too slow to cut when the economy hit another weak patch. In the end, a leaked copy of the report obtained by Reuters does not follow the Krugman grievance but argues it should have a clearer role in policing economic threats like household debt levels while recommending a change to an inflation target that may allow less aggressive monetary policy. Given the persistent uncertainty about the health of the global economy, the report will be essential reading not only for Carney but his U.S. counterpart at the Fed, Janet Yellen.

A poll in Germany’s Bild newspaper today shows that support for Chancellor Angela Merkel’s conservative bloc has crumbled a further 2.5 percentage points to 32.5 percent, its lowest level since the 2013 election. Separate surveys have made the link between this drop-off in popularity and Merkel’s handling of the refugee/migrant crisis. Particularly in the wake of the Cologne attacks on women on New Year’s Eve, she is under pressure to act. Her ruling coalition now wants to limit migration from North Africa by declaring Morocco, Algeria and Tunisia “safe countries”, effectively cutting their citizens’ chances of being granted asylum to virtually zero.

The IMF will announce an update to its World Economic Outlook forecasts in London at 1000 GMT. With emerging markets in the doldrums and the stronger U.S. dollar weighing on exporters in the United States, the Fund’s forecasts from October are set to be lowered.

MARKETS AT 0745 GMT

Markets catch a breath as perhaps the worst fears from China’s latest health check weren’t realized. But there’s also not an awful lot to cheer about. In truth, we’re not really much wiser after the latest GDP/industry/retail/investment data dump. China’s economy is clearly slowing and, if anything, moving more slowly than consensus forecasts for Q4 and December. Quarter-on-quarter GDP growth of 1.6 pct, Dec industrial production growth of 5.9 pct, retail sales at 11.1 pct and urban investment of 10 pct all came in below expectations. The fact that didn’t scare the horses shows just how much fear has been built into the China story this year so far, laced with the by-now typical talk of new stimulus. Though with a weaker yuan considered by many to be one of those stimulus ingredients and the epicentre of global markets anxiety, then policy urgency on that score may not be cause for great optimism going forward.

At any rate, some stabilization is afoot, not least with U.S. markets returning after the Martin Luther King long weekend. Shanghai ended up more than 3 pct and Hong Kong was also up almost 2 pct, even as the pressure on the tightly controlled HK dollar pushed it to a 4-year low. Equity gains elsewhere in Asia were more modest, about half a pct in Tokyo, Seoul and Kuala Lumpur. Oil has also managed to get a slippery foothold and firmed back above $29 after plumbing new lows on Monday. With Wall St futures up more than 1 pct at this early stage, tentative signs of calm has seen some rebound in 2-year Treasury yields and the dollar index, with euro/dollar edging down to $1.087. Eurostocks are also called about 1.5 pct higher, with bund futures opening lower.

 

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