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Bank of England Raises Rates

Jack Turner, Research Analyst

This week we look at the Bank of England rate rise, the reaction by Sterling and how our portfolios fared. We also update you on three news items for the Eurozone, UK and US, and flag three upcoming data publications.

Bank of England Raises Rates

The Bank of England raised the interest base rate to 0.50% for the first time in over a decade to tackle inflation, which is currently headlining at 3%. In reversing the 0.25% cut made last August as a reaction to the Brexit vote, the Bank however refused to provide a timetable on when the market might expect further rate rises. They instead limited comments to stating that the bank was in “no hurry to raise interest rates again and that further increases will be limited”. If the bank succeeds in taming inflation, it would ease the pinch on household income that the current negative real wage growth has imposed and will only cause borrowing costs to increase slightly.


NEWS

UK UPDATE
The Markit/CIPS purchasing managers' index (PMI) for the service sector rose to 55.6, up from 53.6 in September –the strongest rate in six months. The Markit/CIPS purchasing PMI for the manufacturing sector meanwhile rose to 56.3 in October, up from 56 in September. And the Markit/CIPS PMI for the construction sector was also up to 50.8 over the last month, up from 48.1 in September. The data shows that the sector actually exited a technical recession in October, but optimism in the sector has dipped to its lowest level in five years.

EU UPDATE
The Eurozone economy expanded by 0.6% in Q3, slightly lower than the 0.7% expansion that was recorded in Q2 partially as a result of the slight slowdown in France. Year-on-year, the region’s GDP picked up to 2.5% in Q3, up from the 2.3% increase in Q2. Meanwhile, the Eurozone’s unemployment rate dropped to 8.9%, the first time since 2009 that the rate has fallen below 9%. Inflation also fell –down to 1.4% in October, while core inflation (which excludes food and energy prices) dropped by 0.2% to 0.9%.

US UPDATE
Jerome (Jay) Powell has been named as President Donald Trump’s choice to chair the Federal Reserve (Fed) from February 2018. Powell is expected to continue Janet Yellen’s approach that sees US interest rates slowly normalising, but is seen to be more willing than Yellen to cut back on regulation in the financial sector. He has served on the Fed’s Board of Governors since 2012, and assuming that his appointment is confirmed by the Senate, he will be the 16th chair and the first non-economist appointed since 1978. His challenge lies in unwinding the huge position that the Fed holds in bonds, and transitioning interest rates to heights that may be beyond the comfort level of many investors.


PORTFOLIO ACTIONS
7IM’s allocation to foreign currencies performed well as markets reacted to the Bank of England’s decision by selling the Pound. With traders disappointed that the Bank failed to provide a timeline for any future moves, and some estimates suggesting that rates would not rise more until August 2018, at the earliest, hopes of further tightening dwindled and with them the value of the Pound. While the Pound will probably remain volatile on the back of any progress or lack of it during the Brexit negotiations, our 30% allocation to foreign currencies, which is broadly allocated across a range of currencies, will continue to support portfolios. We also retain our option that will help us should there be any sudden increases in the value of Sterling on the back of any positive news from the negotiations or if any UK economic data surprises on the upside.


THREE ANNOUNCEMENTS DUE THIS WEEK
9 Nov –German Balance of Trade // 10 Nov –US Michigan Consumer Sentiment (Prelim.) // 10 Nov –UK Balance of Trade

SOURCES: BLOOMBERG; EUROSTATS; MARKIT; 7IM.

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