The release of the Bank of England minutes on Wednesday caused a modest rise in sterling as the wording reinforced Mark Carney’s comments suggesting the Bank may be closer to raising rates in the coming months. Economists currently predict early 2016 for the first rate rise. The recent rise in hourly earnings data leads MPC members to believe that inflationary pressures will pick up.
Wage inflation should, based on economic theory, lead to a broader rise in inflationary pressures. The dilemma the Bank will not want to face is a rise in inflationary pressures and no increase or worse a dip in the overall UK economy.
Rising wages should be as a result of a strengthening economy, as employers are feeling more confident about profit outlook. In theory the pay increases find their way back into the economy via greater consumer spending, leading to an increase in economic activity. As in the UK there has been a modest improvement in wage inflation in the US, so far retail sales data continues to disappoint.
Studying the gilt yield curve, two year yields (most sensitive to changes in sentiment) have risen slightly in the past week, post Mark Carney’s comments and Wednesday’s minutes. Further out ten year yields if anything has fallen slightly.
Both the Federal Reserve and the Bank of England are most likely desperate to raise rates. Raising rates is a vindication that measures that have been taken to stimulate growth have worked. It also allows them the luxury of being able to cut them again at some stage in the future.
Equity markets boosted by the relief rally on the back of Greece passing yet more measures to remain on course to meet its creditors demands, has once again faded. The oil price along with all other commodity prices continues to fall; gold investors are now also starting to feel the impact. The oil price fell to a three month low on Thursday, as the current oversupply shows no sign of abating. Even the dividend yields on the oil majors appear to be offering investors little in the way of protection.
Sentiment remains very bearish on the commodity markets at present, and as the majors seem keen to continue to maintain production to squeeze out the marginal players, this negative sentiment may continue for a while yet. Weaker oil prices do have some benefits to developed economies helping stimulate economic activity.
Second quarter reporting season continued this week, after a positive start particularly by the banking sector last week this week has seen a broad base of companies report. On Thursday General Motors rose 4% as the CEO painted a rosy picture for demand for cars. General Motors beat analyst expectations on earnings, but failed to meet revenue expectations.