Sterling buoyant ahead of BoE update

OVERNIGHT

Asian equity market performance is mixed this morning following modest rises in the US and most European markets yesterday. On Monday US Treasury Secretary Yellen again warned about the potential dangers to the economy if the impasse in Congress over raising the federal debt ceiling is not soon resolved. US Federal Reserve policymaker Goolsbee said that the situation made it harder to assess credit conditions. German industrial production yesterday fell by 3.4% in March primarily reflecting a slump in car production.

THE DAY AHEAD

The outcomes of the monetary policy updates from the US Federal Reserve and the European Central Bank (ECB), as well as renewed concerns about US regional banks, ensured that financial markets remained volatile last week. As expected, both raised interest rates again but also as expected their signals for future policy action diverged. 

The Fed signalled a possible rate hike pause starting from its next update in mid-June while the ECB pointed to further hikes ahead. Only a couple of days after the Fed’s announcement, a stronger than expected US labour market report questioned whether the Fed’s pause may be coming too early. However, it should be noted that there are a lot more data to digest before the Fed’s next policy statement on 14 June, including another monthly labour report and two CPI releases (including one this week).

Next up is the Bank of England’s monetary policy update on Thursday. Other key events this week include tomorrow’s US inflation data and Friday’s UK GDP report. Ahead of that, today’s economics calendar points to a slow start to the holiday-shortened week.  The only notable data release for the rest of today is the US NFIB small business optimism index for April. SMEs are the part of the economy that is likely to be most heavily affected if regional bank lending dries up and so today’s release will be watched for any indications that is happening. 

With the ECB and Fed monetary policy updates out of the way, several policymakers from both central banks are scheduled to speak today with more to follow later in the week. Their comments will be watched for indications on how universal the support was for last week’s decisions, particularly the Fed’s signal of a possible pause in rate hikes.

MARKETS

US Treasury yields rose sharply yesterday as markets continued to assess what difference Friday’s stronger than expected US labour market report would make to the Fed’s hints that they may pause interest rate hikes from June. In currency markets, sterling rose yesterday against the euro but slipped slightly against a generally stronger US dollar. Nevertheless, sterling is still close to its high for the year versus the greenback as markets speculate on the outcome of Thursday’s Bank of England monetary policy update.