The Week Ahead – Black Rain

Previous week: 04 September 2017 – 08 September 2017

UK CPI y/y—Tuesday 12 September 2017 4.30pm

UK CPI y/y was +2.9% in August, above consensus expectation of +2.8% and also above July’s figure of +2.6%. It is pretty darn close to the 3% hard ceiling whereby if breached, Mark Carney got to write an open letter to the Chancellor of the Exchequer to explain his failure to keep inflation within acceptable limits.

Quoting the Bank of England “If the target is missed by more than 1 percentage point on either side – i.e. if the annual rate of CPI inflation is more than 3% or less than 1% – the Governor of the Bank must write an open letter to the Chancellor explaining the reasons why inflation has increased or fallen to such an extent and what the Bank proposes to do to ensure inflation comes back to the target.”

UK Average Earnings Index 3m/y—Wednesday 13 September 2017 4.30pm

Wage growth came in at 2.1%. With inflation at 2.8%, Brits’ paychecks are shrinking 0.7% annually.

Image from Financial Times:

US Crude oil inventories—10.30 pm 13 September 2017 Wednesday

US crude inventories increased by +5.888 million barrels on the expectation of +4.82 million drop. Baker Hughes US oil rig count decreased by 7 from 756 to 749. Oil production was 9353 barrels per day for week ending 08/09/2017, an increase from 8781 barrels per day in the previous week, but still around 200 barrels per day pre Harvey. This massive drop in oil production was due to Texas going offline during Hurricane Harvey.

Image taken from Zerohedge:

BOE official bank rate, monetary policy summary, vote count—14 September 2017 7pm Thursday

Name Voting Record Dove/Hawk
Mark Carney 0 to increase, 45 to maintain, 1 to reduce Dove
Ben Broadbent 0 to increase, 70 to maintain, 1 to reduce Dove
Sir Jon Cunliffe 0 to increase, 41 to maintain, 1 to reduce Dove
​Sir David Ramsden No record (first meeting) Dove
Andrew Haldane 0 to increase, 34 to maintain, 1 to reduce Dove
Ian McCafferty 13 to increase, 42 to maintain, 1 to reduce Hawk
​Michael Saunders 2 to increase, 6 to maintain, 0 to reduce Hawk
​Silvana Tenreyro BOE: 0 to increase, 1 to maintain, 0 to reduce

Bank of Mauritius: 0 to increase, 8 to maintain, 3 to reduce

​Dr Gertjan Vlieghe 0 to increase, 18 to maintain, 2 to reduce Super Dove


Vote on Bank Rate went down ideological leanings. 7 members (all doves) voted to keep the bank rate unchanged while 2 members (hawks) voted to raise it by a quarter point.

Key points from Bank of England’s monetary policy summary dated 14th September:

  • Evidence continues to accumulate that the rate of potential supply growth has slowed in recent years. Overall, the latest indicators are consistent with UK demand growing a little in excess of this diminished rate of potential supply growth, and the continued erosion of what is now a fairly limited degree of spare capacity. 
  • Headline and core CPI inflation in August were slightly higher than anticipated. Twelve-month CPI inflation rose to 2.9% and is now expected to rise to above 3% in October.
  • With regards to Brexit: The MPC’s remit specifies that, in such exceptional circumstances, the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity. Recent developments suggest that remaining spare capacity in the economy is being absorbed a little more rapidly than expected at the time of the August Report, and that inflation remains likely to overshoot the 2% target over the next three years.
  • All MPC members continue to judge that, if the economy follows a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations. A majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.

In summary: Pull Factor to raise rates—Inflation is getting uncomfortably high. Push Factor to raise rates—Slack/unemployed capacity in the UK economy is almost diminished, implying that the economy is close to full capacity/employment. This is also evident in its unemployment which currently stands at 4.3%. A very hawkish statement. BOE, stacked full of doves, is now suggesting that they will raise rates soon.

Real interest rates and risk – speech by Gertjan Vlieghe—15 September 2017

Dr Gertjan Vlieghe, one of the most dovish members in the MPE, gave a hawkish speech, a day after the BOE released a hawkish monetary policy statement. His voting record is as follows: 0 to increase, 18 to maintain, 2 to reduce. He was the only person that voted to reduce the bank rate in the first BOE MPC meeting that followed the Brexit referendum. Without significant data on Brexit’s negative impact to the UK economy, he decided to vote to reduce the bank rate. That vote showed me that he is a very dovish individual. However, his stance on interest rates have changed. He, a dove, is now hawkish.

Quoting Dr Gertjan Vlieghe’s speech dated 15 September 2017:

  • Until recently, I thought the appropriate response of monetary policy was to be patient, given modest growth and subdued underlying inflationary pressure. But the evolution of the data is increasingly suggesting that we are approaching the moment when Bank Rate may need to rise.
  • First, despite a clear weakening of GDP growth in the first half of this year, the amount of economic slack continues to be eroded.
  • Second, consumption growth generally held up better than I expected over the past year.
  • The wider economic backdrop over the past year has been one of improving global growth, and in particular an improving outlook for Eurozone growth, which generally benefits UK external demand.
  • But, acting in the other direction, is the continued uncertainty about the UK’s future trading relations with the EU and the rest of the world.
  • If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months.

Mark Carney supports rate hike

From Zerohedge:


Goldman Sachs have readjusted their call on BOE rate hike from Q4 2018 to November 2017.

US CPI—8.30pm 14 September 2017 Thursday

Name Actual (August) Expected Last (July)
Headline CPI m/m +0.4% +0.3% +0.1%
Headline CPI y/y +1.9% +1.8% +1.7%
Core CPI m/m +0.2% +0.2% +0.2%
Core CPI y/y +1.7% +1.6% +1.7%

Though still under Fed’s 2% inflation mandate, it seemed that inflation is picking up.

US Retail Sales—8.30pm 15 September 2017 Friday

Name Actual (August) Expected Last (July)
Headline Retail Sales m/m -0.2% +0.1% +0.3% (Revised from +0.6%)
Headline Retail Sales y/y +3.2% +3.5%
Core Retail Sales m/m +0.2% +0.5% +0.4% (Revised from +0.5%)


Coming week: 25 September 2017 – 29 September 2017

US Crude oil inventories—10.30 pm 13 September 2017 Thursday

Another draw in inventories? Will oil production recover from Hurricane Harvey?

Federal funds rate, FOMC statement, Press conference, Economic projections—2am 21 September 2017 Thursday

Probability of Federal Funds Rates remaining unchanged stands at 98.6%. However, initiation of Quantitative Tightening is the thing to look out for.

BOJ Policy Rate, press conference, monetary policy statement—21 September 2017 Thursday

Core inflation in Japan stands at +0.5%, way off the Bank of Japan’s 2% target.

Image taken from Tradingeconomics:

Trade Ideas

AUD/USD long

AUD/USD is taking support at 0.80.

With regards to the Federal Reserve, initiation of Quantitative Tightening starting in September and hiking rates by 25 basis points in December is mostly priced in. There is of course the potential for the scenario whereby the Fed chooses to postpone the initiation of Quantitative Tightening which will surprise the capital markets.

Parsing through the Statement on Monetary Policy Decision by Reserve Bank of Australia  dated 05 September 2017, it seemed to suggest that issues that were holding them back from raising rates were starting to dissipate and become less significant when making their decisions.

Key points from “Statement by Philip Lowe, Governor: Monetary Policy Decision” dated 05 September 2017:

  • Wage growth remains low. This is likely to continue for a while yet, although stronger conditions in the labour market should see some lift in wages growth over time. Inflation also remains low and is expected to pick up gradually as the economy strengthens.
  • Wage growth remains low in most countries, as does core inflation. Headline inflation rates have declined recently, largely reflecting the earlier decline in oil prices.
  • The recent data have been consistent with the Bank’s expectation that growth in the Australian economy will gradually pick up over the coming year. The decline in mining investment will soon run its course.




Inflation Expectations The Week Ahead - Bitcoin