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What did the Bank of England do?

Jack Turner, Research Analyst

The latest weekly update provides an overview of what happened last week. So we cover the Bank of England’s announcements, UK Purchasing Manager Indexes, stats out of Europe and the latest US job numbers. We also look at how inflation and Trump is affecting the US Dollar.

BANK OF ENGLAND VOTE

Bank of England Vote 

The Bank of England decided to keep the record low interest rates on hold at their August meeting for the 120thtime, with just two of the rate setters voting in favour of a hike this month versus the three that voted for a June rate rise. The decision was in line with market consensus forecasts and due to the Bank downgrading its UK GDP growth forecast to 1.7%, 0.2% lower than the 1.9% previous forecast. Inflation is also predicted to have a bigger impact: it is expected to peak in October at 3% and last longer. Commenting on the decision, Mark Carney, the Bank’s Governor, stated that he expected that there would need to be some tightening of the monetary policy over the next three years, with two rate rises likely to be sufficient.


NEWS
UK ECONOMY STILL GROWING

The UK Purchasing Managers’ Index (PMI) for the service sector rose to 53.8 in July, up from 53.4 in June, and above the market expectations of 53.6. New work growth recovered from June's nine-month low and the pace of job creation was the strongest since January 2016. A pick up in exports helped the PMI for the manufacturing sector to increase to 55.1 in July, up from 54.2 in June and the first increase in three months. Meanwhile, the PMI for the construction sector fell to 51.9 in July. It’s at its lowest level since August 2016 and was substantially below June’s figure of 54.8, although it remains in positive territory with any number above 50 signalling expansion.

EUROPEAN ECONOMY ON TRACK
The Eurozone’s economy expanded by 0.6% in Q2 2017; up from 0.5% in Q1 and up 2.1% compared with a year earlier. It represents the fastest growth since 2011. Headline eurozone inflation meanwhile held steady at 1.3% in July comfortably below the European Central Bank’s target of just below 2%, although core inflation rose slightly to a four-year high of 1.3% versus the 1.2% from the month earlier. The Eurozone composite PMI eased slightly in July, falling to 55.7 from 56.3 in June, with the strongest expansion in Ireland and Spain, followed by Italy, France and Germany.

US ECONOMY STILL SOLID
UK non-farm payrolls rose by 209,000 in July –a number ahead of expectations and helped by hiring in restaurants and bars. June’s data was also revised upwards to an increase of 231,000. At the same time, the unemployment rate fell to 4.3% in July, from 4.4% in June, matching the 16-year low recorded in May. Average hourly earnings held steady at a year-on-year rate of 2.5% in July, while personal income levels were unchanged in June, lower than the 0.3% rise seen in May. However the tight labour market is expected to lead to higher wages as employers have to compere for workers.


PORTFOLIO ACTIONS
In the US, a soft inflation number mid-way through July put doubts in investors’ minds about the health of the economy. The disappointing Consumer Price Index (CPI) reading of 1.6% meant that the CPI reading has now missed consensus expectations on the last four occasions. A September rate rise by the Federal Reserve is now looking less likely, although the markets are still expecting a rise before the year is out. Aside from inflation missing expectations, Trump continues to disappoint on the reform front. His efforts to replace Obamacare have come to naught and his infrastructure spending and tax cuts have not enjoyed any progress. As a result, the US Dollar was one of the poorest performing currencies in July, with the trade weighted Dollar falling by nearly 3.5% against major currencies. We have zero exposure to the Dollar in our portfolios.


THREE ANNOUNCEMENTS DUE THIS WEEK
8 Aug –Germany’s Balance of Trade // 10 Aug –UK Balance of Trade // 11 Aug –US Inflation Rate

SOURCES: BLOOMBERG, FT, REUTERS, 7IM

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