Bank of England exceeds expectations but overal, pessimism persists
After the Bank of England disappointed markets in the July monetary policy meeting, last week’s announcement exceeded expectations. While it was anticipated that interest rates would be cut to 0.25%, the announcement of a £60bn expansion of quantitative easing with an additional £10bn in purchases of corporate bonds and £100bn made available through the Term Funding Scheme. These announcements were well received by markets with equities rising and gilt yields falling. However, the real benefit of these policies is debatable as they are targeting an increase in the supply of debt, rather than increasing demand in the economy. While the bank has secured the confidence of investors that it will do anything to support the solvency of the financial sector, its tools for fixing an economy hit by a political shock are limited. Along with these policy announcements, growth predictions were slashed, and the expected unemployment rate marginally increased, as expected.
More positive news came from the US, with the economy adding a better than expected 255,000 jobs in July, much higher than the 175,000 predicted. The unemployment rate continued to remain at a favourable 4.9%. While this data has been lumpy over the last quarter the longer term trend continues, and shorter term fears of slowing economic growth have receded. The Federal Reserve have once again signalled that they are on target to implement another interest rate rise by the end of the year. However, previous experience would indicate that any weakening in the data, including that which is short term or small in magnitude, may be an excuse for them to postpone.
Over the weekend it was rumoured that Chinese firm Anbang were looking to make a bid for British hotel giant Intercontinental Hotels, the owner of Holiday Inn. While more concrete information regarding a deal is yet to emerge, this is an indication that British assets, even ones which are heavily domestically focussed, remain attractive for overseas buyers.
|UK 10 Year Gilt Yield||0.703||0.654||-0.049||-6.97%|
German Q2 GDP will be announced on Friday along with US retail sales and PPI inflation.