August Inflation Report in focus

Bank of England (BoE) doves Carney, Miles, and Fisher, together with the more neutral McCafferty, will give evidence to the Treasury Select Committee on the August Inflation Report.

Their comments will be watched to judge the extent of unease about the recent rise in yields and sterling following the introduction of forward guidance, and therefore the potential for offsetting actions, particularly following yesterday’s fall in unemployment to 7.7%.

Carney seems likely to reiterate his 28 August speech while Miles will likely amplify on his (similar) comments from yesterday (higher rates reflect good economic news; unemployment will fall less than normal as productivity rises sharply; policy can become more expansionary and they’re not looking to tighten; talk of forward guidance being a failure is “ridiculously premature”).

The MPC members will follow convention by not discussing their recent votes in advance of next week’s minutes. Absent a change in the fundamentals of the policy or a clear indication that offsetting action will be taken, which seems unlikely at this early stage, the market seems likely to continue to focus on the strong UK data.

Of specific interest for gilt investors, the DMO will sell £3.75bn of 10 year gilts today, which is awkwardly timed to coincide with these BoE comments. We see no particular relative value in this bond, although gilts in general look cheap versus swaps, but a dovish stance from the MPC speakers could set the market up for strong price action afterwards – accepting that the medium outlook for yields is up and for prices down.

Meanwhile the pound has continued to be supported by strong data, including yesterday’s employment reading which whilst it was in line with our published expectations was better than market expectations. From here it looks as if the risks for the pound are on the downside, given the elevated level of UK data surprises and prospect of Fed tapering.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla