Bored of hearing the word “tapering”? Welcome to the words “forward guidance”…
So the ‘rock star’ central bank governor, Mark Carney, gave his second press conference in his new appointment as Bank of England governor. And the waiting media, particularly the UK media, continues to behave as if they’re love struck teenagers watching One Direction from the mosh pit, assuming there is a mosh pit at synthetic teeny bopper ‘pop group’ concerts.
As reports circulated regarding the supposed “sensible approach” – giving the markets, analysts and commentators policy directive in advance that will last for years, we think the assembled love struck media missed a trick, (or perhaps two) and a gap in the polished rhetoric Mark Carney delivered…
Unemployment link
Firstly tying his forward guidance to the level of unemployment is nothing new, neither is it unique. Traders will point to the fact the Ben Bernanke introduced such a policy at the start of 2013. Bernanke has gone on record as stating that the USA Fed will not stop their monetary easing until unemployment levels of 6.5% are reached. At the time of introduction that represents a full percentage point from where unemployment was. Estimates suggest that in order to achieve such a level USA employment will need to reach the levels pre the Great Recession, arguably an impossible task. However, Mark Carney has simply tied the Bank of England to achieving a 7% unemployment level without any monetary stimulus. This begs the question; “how will he achieve his government’s aim without the tools to do so”?
Job recovery without stimulus?
He’s obligated, through his forward guidance, to keep base rates at 0.5% for years, surely he doesn’t expect that is enough to encourage growth? So far the UK has witnessed a ‘jobless recovery’, a neat euphemism for asset prices rising exponentially, but the feel good trickle down effect not reaching ‘joe six-pack’ on Main Street. Underemployment is a massive issue in the UK currently. Another point is worth mentioning, if Carney expects the base rate to last for years by association he expects the UK recovery to be incredibly painfully slow. Either that or he has a trick up his sleeve and he’ll press the rate setting committee of the BoE – the MPC, to increase monetary stimulus beyond the £375 billion already in play.
But let’s be clear, most analysts, those not seduced by the governor’s style, will know that there is zero chance of the UK achieving 7% unemployment by only keeping interest rates at 0.5%. It’s simply not enough and with a 1.41% fall in the FTSE the markets have just delivered a message, for those clued up enough to get it.
Market overview
The UK FTSE and Germany’s DAX diverged from the rest of the European indices by closing down 1.41% and 0.47% down respectively. The CAC closed up 0.15%, the IBEX closed up 0.52%, the MIB up 0.93% and the PSI closed up 0.41%.
The USA markets suffered another day of moderate falls; the DJIA closed down 0.31% at 15,470, the SPX closed down 0.38% and the NASDAQ down 0.32%.
Commodities
ICE WTI oil closed down 1.01% at $104.24 per barrel, NYMEX natural closed down a significant 2.14% at $3.25 per therm. COMEX gold closed up 0.22% at $1285.30 per ounce, whilst silver on COMEX closed down 0.08% at $19.51 per ounce.
Equity index futures
Focusing attention on equity index futures the main markets are scheduled for a fall on opening. At the time of writing the DJIA is down 0.21%, SPX down 0.34% and the NASDAQ down 0.06%. The UK FTSE equity index future is currently down 1.05% and the DAX future down 0.52%.
Forex
The yen added 1.4 percent to 96.33 per dollar late in the New York session, the strongest level since June 20th. Japan’s currency climbed 1.2 percent to 128.47 per euro. The euro added 0.2 percent to $1.3336 after touching $1.3345, matching the six-week high set July 31th. The yen rose to a seven-week high versus the dollar amid bets the Bank of Japan at its policy meeting will refrain from adding to stimulus that’s helped weaken the currency by over 11 percent this year.
Sterling added 0.9 percent to $1.5489 after dropping by as much as 0.9 percent. It rose 0.7 percent to 86.10 pence per euro after depreciating to 87.70 pence on Aug 1st, the weakest level since March 12th.
The Canadian loonie depreciated 0.4 percent to C$1.0423 per U.S. dollar late in the Toronto session. It touched C$1.0445, the weakest level since July 11th. Canada’s dollar slid to the lowest in almost four weeks as commodities fell for a fourth day and stocks slumped due to bets the Federal Reserve may slow quantitative-easing stimulus in the nation’s biggest trade partner. Canada’s dollar has fallen by 2.3 percent in the past three months versus nine developed-nation peers tracked by Bloomberg’s Correlation-Weighted Index. The currencies of Australia and New Zealand slid 11 percent and 3.8 percent. The greenback rose 2 percent.
The Aussie weakened 0.2 percent to 89.64 U.S. cents late in the Sydney session from yesterday, when it touched 90.05, the highest since July 31st. New Zealand’s dollar advanced 0.2 percent to 79.13 U.S. cents after climbing 1 percent yesterday. Australia’s currency fell 1.1 percent to 86.88 yen, whilst the kiwi dropped 0.7 percent to 76.66 yen. Australia’s dollar fell versus most of its major counterparts ahead of the report forecasting that unemployment rate rose to the highest in four years.
The euro strengthened after the Economy Ministry in Berlin said German industrial production rose. Output increased 2.4 percent from May, when it dropped 0.8 percent. Economists forecast a gain of 0.3 percent.
High impact news events and fundamental policy decisions that could affect sentiment on Thursday August 8th.
The trade balance for China will be published in the overnight/early morning session, whilst Japan’s BOJ press conference takes place. USA jobs claims are expected to come in at 336K, a slight increase on the 326K previously. However, given the very poor NFP print many analysts eyes will be peering at this latest unemployment number for clues as to whether or not the last NFP print was simply a ‘one off’ rogue statistic.
