Markets until recently were looking to the Bank of England to raise interest rates next month, with the probability of a hike to 0.75% in May estimated at over 90%. However a surprise fall in inflation has cast doubt over whether the Bank will go ahead with this heavily signalled hike. Bank governor Mark Carney has said that a rate rise is “likely” this year, but any increases will be gradual. As such we have seen the probability of a hike drop to 50% in May and markets are now anticipating the first hike may not materialise until the last quarter of 2018.
According to figures published by the Office for National Statistics in April the proportion of the labour force out of work fell to a four-decade low of 4.2% in February (the lowest level since 1975). Sterling seems to have strengthened notably over the course of the last year as the risks of a hard Brexit appear to have diminished along with the US dollar weakening. US President Donald Trump has talked down the greenback with some of his top advisers believing a weak dollar will help US manufacturers, a key electoral target for the Trump Administration.
Concerns over a trade war with China have calmed down as the Chinese President has sounded more amenable to trade liberalisation and promised to cut import tariffs. Market focus has been on geopolitical issues, while safe havens returned to favour with the price of gold rallying and oil hitting a three-year high in April. Following the Fed minutes from its last MPC meeting investors seem to be concerned about more hawkish views and the impact of higher-than-expected interest rate rises.
The ECB minutes seemed to suggest that markets shouldn’t run ahead of themselves with rate hike expectations. They stated that the asset purchase programme will be halved this year and possibly come to an end sooner rather than later. However, continuing monetary policy will be dependent on financial conditions and remain supportive of the economy over the medium term. Officials also expressed concerns over the appreciation of the euro, which could hamper economic progress. Recent data has disappointed investors – with industrial production missing estimates – amid growing concerns that economic growth may be slowing.
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