BOE Officials See No Case for More Stimulus

By Scott Hamilton - Sep 18, 2013 5:18 PM GMT+0800

Matthew Lloyd/Bloomberg

Flowers blossom opposite the Bank of England in London, U.K., on Thursday, Sept. 5, 2013.

Bank of England policy makers voted unanimously to keep policy unchanged this month as an improving economic outlook prompted agreement that no more stimulus was needed.
In a switch from August, when some Monetary Policy Committee members saw a “compelling” case for a loosening of policy, the minutes of the Sept. 3-4 meeting showed that “no member judged that further stimulus was appropriate at present.” The pound rose.
The minutes, published today in London, also showed the panel voted 9-0 to keep the bond-purchase program at 375 billion pounds ($598 billion) and benchmark interest rate at a record-low 0.5 percent.
“Domestically, there were increased signs that the recovery was taking hold,” the BOE said. Recent data “presented an upside risk to the growth profile” published in the central bank’s August Inflation Report.
Britain’s economy has shown increased signs of strengthening, and BOE staff now estimate growth of 0.7 percent this quarter, up from 0.5 percent last month. The MPC, led by Governor Mark Carney, introduced forward guidance last month, pledging to keep interest rates low until the unemployment rate falls to 7 percent. It was 7.7 percent in the three months through July.

Pound Gains

While the MPC forecast last month that the jobless rate won’t reach the threshold until late 2016, investors are betting that it will have to increase its key rate sooner. The MPC noted the “upward movement” in sterling market interest rates and an increase in gilt yields, which it said was partly due to the stronger economy.
The pound extended its gain against the dollar after the minutes were released, rising to $1.5971, the highest since Jan. 18. It was trading at $1.5969 as of 10:07 a.m. London time, up 0.4 percent on the day. The implied rate on the short-sterling contract maturing in December 2014 rose to 0.97 percent from 0.91 percent before the minutes were published.
“The U.K. economy is gaining momentum and the unemployment rate will fall more quickly than the Bank of England predicts,” said James Knightley, an economist at ING Bank NV in London. “Our best guess on the first rate hike remains early 2015 rather than late 2016 as the BOE suggests.”

Different Views

Signs that the BOE is shifting away from adding to stimulus come as U.S. Federal Reserve policy makers meet to discuss their bond-buying program.
The Federal Open Market Committee will probably conclude a two-day meeting today by dialing down monthly Treasury purchases by $5 billion to $40 billion, while maintaining its buying of mortgage-backed securities at $40 billion, according to a Bloomberg News survey of economists. The FOMC has pledged for more than a year to press on with bond buying until achieving substantial labor market gains.
The U.K. central bank’s guidance policy includes three knockouts, two of which are linked to inflation. While the MPC said in the minutes that none of the conditions had been breached in the past month, it noted potential upward near-term pressure on inflation from an increase in oil prices. It added that some of this pressure may be offset by the recent appreciation of sterling.
“Guidance remained in place and no MPC member thought it appropriate to tighten the stance of policy at the current juncture,” the BOE said. “Members had different views about the extent to which a further loosening of the monetary stance might be warranted.”
These differences were in part based on the outlook for slack in the economy, which the BOE said was “difficult to judge.”
The BOE also said that there were “tentative signs” that the degree of spare capacity in companies “might be beginning to diminish.” It added it was still too early to assess how likely it was that the effective supply capacity would increase as demand recovered.

Europe Stocks Rise With Copper as Gold Falls Before Fed

European stocks rose with industrial metals while gold fell to the lowest level in almost six weeks before the Federal Reserve decides whether to slow $85 billion of monthly asset purchases. Oil and the pound advanced.
The Stoxx Europe 600 Index climbed 0.5 percent to 313.39 at 7:15 a.m. in New York. Standard & Poor’s 500 Index (SPA) futures added less than 0.1 percent. Copper climbed 0.4 percent and lead jumped 1.1 percent. West Texas Intermediate oil advanced 0.6 percent and bullion declined for a third day. Treasuries and the Bloomberg U.S. Dollar Index were little changed. Germany’s 10-year bund yield rose four basis points to 2 percent. The pound strengthened to an eight-month high versus the dollar.

Analysts are divided on the amount by which the Fed will scale back its monthly asset purchases. Among 64 economists surveyed by Bloomberg News, 33 predict it will reduce its buying of Treasuries by $5 billion or less, with 31 forecasting a cut of $10 billion or more. The Federal Open Market Committee concludes a two-day meeting today as data is forecast to show housing starts in the U.S. rose in August from a month earlier.
“The whole environment for growth does seem to have deteriorated slightly since June when the Fed last really spoke to the market,” Lucy MacDonald, chief investment officer for equities at Allianz Global Investors in London, which has the equivalent of about $419 billion under management worldwide, told Mark Barton on Bloomberg Television. “If they don’t do anything at all that may raise questions and people will be more concerned about growth. Clearly we need to have the comfort that the economic recovery is still well underpinned.”

Zodiac Aerospace

The Stoxx 600 rebounded from yesterday’s 0.5 percent decline. Zodiac Aerospace SA (ZC), the world’s largest maker of airline seats, rallied 6.3 percent in Paris trading after full-year sales increased and Bank of America Corp. upgraded its recommendation on the shares.
“Any sort of announcement, whether its zero tapering or $5 billion or $10 billion is going to have an effect on the market,” Nick Maroutsos, the managing director and co-founder of Kapstream Capital Ltd., which oversees about $5 billion, said by phone from Sydney. “What we do know is that it’s going to be a very, very gradual withdrawal of stimulus. We are bullish on equities.”
The gain in S&P 500 futures indicated the U.S. gauge will extend a six-week high. A Commerce Department report at 8:30 a.m. in Washington may show new-home construction climbed for a second month in August. Housing starts rose 2.3 percent to a 917,000 annualized rate, according to the median forecast in a Bloomberg survey of economists.

Emerging Markets

The MSCI Emerging Markets Index slipped 0.4 percent, falling from a three-month high. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong decreased 0.7 percent while the Shanghai Composite Index added 0.3 percent. India’s S&P BSE Sensex jumped 0.8 percent and Russia’s Micex increased 0.3 percent. Malaysia’s ringgit strengthened 0.5 percent versus dollar and India’s rupee gained 0.4 percent.
The S&P GSCI rose 0.2 percent, the first gain in four days. Construction generates about 40 percent of demand for copper, according to the Copper Development Association in New York.
“The U.S. economy is improving marginally, but investors are concerned about” tapering, Matthew Sherwood, who helps oversee about $25 billion as head of markets research in Sydney at Perpetual Investments, said by e-mail.

Shrinking Inventories

WTI jumped to $106.18 a barrel before U.S. government data that may show crude inventories shrank to the lowest level in more than a year. The Energy Information Administration is scheduled to release the report at 10:30 a.m. in Washington.
Gains may be limited as Libya is moving to restore its oil production. Libya, the holder of Africa’s largest oil reserves, is seeking to boost output to 700,000 barrels a day this week from as little as 200,000 barrels, according to state-owned National Oil Corp.
Gold fell as much as 1.4 percent to $1,292.02 an ounce, the lowest since Aug. 8.
The yield on 10-year U.S. government securities was little changed at 2.85 percent, down from a more-than-two-year high of 3.005 percent on Sept. 6. U.S. sovereign securities have fallen 1.1 percent since the end of June, versus a 0.4 percent drop for mortgage bonds, based on Bank of America Merrill Lynch indexes.
The pound gained as much as 0.5 percent to $1.5980 after minutes of the Bank of England’s last meeting showed policy makers voted unanimously to keep policy unchanged this month as an improving economic outlook prompted agreement that no more stimulus was needed. The 10-year gilt yield rose six basis points to 3 percent.
The dollar was little changed at $1.3352 per euro and 0.2 percent weaker at 98.95 yen.
Spain’s 10-year bonds outperformed similar-maturity German debt, reducing the extra yield investors demand to hold the securities to as little as 2.39 percentage points, the least since July 2011.
The cost of insuring against losses on corporate bonds fell to the lowest in almost four months. The Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies decreased one basis point to 93 basis points, the least since May 23.