Taking a step back and observing markets can often feel like you’re observing a circus act. Replacing the exotic animals with bulls, hawks, bears and doves, throw in a few clowns for good measure and here is our act. The nature of the animal determines how the act generally performs, and these animal like instincts can be sporadic. Taking a look back at last week’s BoE rate decision, where the vote 6-3 got markets bullish on the prospect of an August rate hike and a steady path for rates in the coming years.
Markets started to price in 3 hikes from the BoE by the end of 2020, which saw the pound break out of its downward trend and gain against all of its majors. With the fear factor of Brexit put on hold, you got a sense of a forward path for both rates and the pound. That was until we saw the next act take to the stage, where an incredibly hawkish Ian McCafferty, was replaced by a dove in the form of Jonathan Haskel. The initial takeaway from early comments by Haskel, is that he will adopt a cautious approach to rates, and as a result put the above upward trajectory in jeopardy. Later this afternoon the Bank of England chief economist Andrew Haldane, who joined the hawks camp at last week’s committee meeting, will have the opportunity to put in the counter argument.
The game of cat and mouse continues between Trump and China, where yesterday the US President stepped back from his threat on curtailing Chinese investment in the US. This decision should temporarily defuse tensions between the words two largest economies. However with China’s central bank guiding the yuan to its lowest level against the dollar in 6 months, you get the feeling that this will not be the end of the tit for tat.
On the data front, we saw US durable goods orders fall for the second straight month. The May figure fell 0.6%, which was better than the expected -0.9% and a big improvement on the previous months -1.6% reading. This combined with Trump’s comments saw the dollar move back below 1.16 against the euro. While against the pound we saw the 1.3110 level tested.