Looking back and looking forth: the week in treasury

This week, in the UK house price data was in focus. Mortgage approvals increased to 66.7K from 62.2K, the highest printing since February 2008 and Nationwide House Prices rose sharply +1.0% m/m and 5.8%y/y.

The key data releases in the UK next week will be the services PMI and industrial output. The UK services PMI is expected to dip again slightly in October and having run quite solidly ahead of the hard data, moderation of the survey data. Of particular interest will be the performance of the employment indicator. So far, employment growth has been weak relative to output, which could suggest improvements in productivity. This would suggest that the unemployment rate will be relatively persistent and could push out the time it will take for unemployment to reach the bank’s 7% threshold. We expect UK IP to rebound on the month after a weak August reading but believe that momentum has probably peaked for now. Strong manufacturing PMIs could provide some uplift to IP in coming months, but the mining and extraction sectors are likely to remain a headwind.

The Bank of England will also release its rate and asset purchase decision. We expect policy to remain steady at 0.5% and quantitative easing at £375bn. Given the strength of the UK data, there appears to be no appetite on the Committee to ease policy further at this stage. Regarding forward guidance, survey data and comments from some MPC members appear to suggest broad satisfaction with the impact of the policy so far, and so we see limited need for the BoE to push back against market pricing in the near term. While it may be the case that financial markets are expecting rate hikes in the first half of 2015, there is evidence that the policy has fed through into the real economy. Ultimately Mr Carney’s intention was to give confidence to firms and households, and not necessarily financial markets, that rates will remain on hold for a long period of time. In this he appears to have succeeded. Although unemployment is the stated policy focus, ultimately it is wages (and unit labour costs) that will determine what the Bank of England does – and if wages remain weak, monetary policy can remain at present levels.

Over in the US, the impact of the government shutdown probably reduces the reliability of next week’s October jobs report and increases the uncertainty around forecasts. We may see slower growth in October nonfarm payrolls (120K) and a temporary rise in the October unemployment rate (7.5% from 7.2%) and third quarter GDP probably rose modestly (perhaps +2.0%). Consumer sentiment is expected to stabilize in early November after its government shutdown-related mark down in October.   September personal income and consumer spending should both register moderate increases, with subdued inflation.

In Euroland, final PMI prints, including peripheral PMIs, could show moderation in the periphery. Country IP data will also be released. In Sweden, services PMI and IP will be released. IP was weak last month, in part due to a fall in the mining sector. We think a small increase in the month in September seems plausible.

In Asia Pacific, for Japan there are no major indicators due out next week. Employment reports from New Zealand and Australia are due and in China, we exports are expected to be flat in year-on-year terms in October, while imports are expected to be up by 7.0%.

Apart from the Bank of England’s policy meeting, the ECB meeting is due next week, with no change in policy expected. The tone of the press conference should be dovish. Also the Riksbank minutes will be out. It was dovish in its October meeting, with a marginal downward revision to the repo rate path; we will look for this tone in the minutes. Also, we expect the RBA to keep interest rates unchanged. In the emerging markets, we expect central banks in Malaysia, Poland, and Peru to keep rates on hold.

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