There is increased chatter that the Bank of England will cut interest rates this month as the UK economy shows signs of fatigue. Yesterday’s weak inflation data provided the latest clue and now the market has become the most aggressive since 2016 on an imminent rate reduction, pricing in a more than 60% chance after comments from Governor Mark Carney and Bank of England member Michael Saunders hinting towards an interest rate cut. Next week’s purchasing managers indexes will be a key indicator to see how the economy is doing. The pound has been suffering this month after a flurry of dovish statements from BOE policy makers who seem to have been waiting for a Brexit resolution before following other major Central Banks’ trend. Sterling enjoyed a boost after the election produced a majority government and it is already one of the better-performing big stock markets in Europe early in the new year. Further weakness in the currency should provide more support for the dollar-earning companies that dominate the FTSE 100 Index. From a technical perspective, positive Brexit news could see the GBPUSD quickly move past $1.31 and even to $1.32, but on the flip side, we could see immediate support pegged in the $1.29 region.
The Bank of Japan is expected to keep monetary policy steady next week and nudge up its economic growth forecast as the U.S.-China trade deal and de-escalation in Middle East tensions take some pressure off the central bank for more stimulus. BOJ Governor Haruhiko Kuroda will likely voice his resolve to keep monetary policy ultra-loose as the economy continues to feel the strain from the trade war and October’s sales tax hike. At the two-day rate review next week, the BOJ is set to keep its short-term interest rate target at -0.1%. It is also seen maintaining a guidance that commits to keeping rates at current low levels, or even to cut them further, until risks keeping it from achieving its 2% inflation goal subside. In a quarterly review of its forecasts, the BOJ is seen slightly revising up its growth projection for the fiscal year starting in April, helped by a boost from the government’s stimulus package. Under the October projections, the BOJ expects the economy to expand 0.7% in fiscal 2020 and 1% the following year. Japan’s economy ground to a near halt in July-September and is likely to have contracted in the final quarter of last year as the U.S.-China trade war knocked exports. BOJ officials hope the government’s $122 billion fiscal package and robust capital expenditure will offset the hit from soft global demand and supply chain disruptions from last year’s typhoons that continue to weigh on factory output. Policymakers are also more optimistic than late last year as technology firms clear inventory. The BOJ now estimates core consumer inflation to hit 1.1% in fiscal 2020 and 1.5% the following year.
US share market indexes have hit new highs, with the Dow Jones Industrial Average, closing above 29,000 for the first time. The S&P 500 also closed at a new high, gaining 0.2% to end at 3,289, while the Nasdaq held steady at 9,258. The gains came as the US and China signed a deal aimed at easing tensions between the two economic giants. Shares have enjoyed weeks of steady rises, during which markets seemed to largely ignore bad news. The three major US indexes rose about 30% in 2019, recording their best year since 2013 despite average earnings growth estimated at a far more modest 1%. Just a few months ago, fears of a recession were the talk of Wall Street and the Federal Reserve lowered rates in an effort to shore up the US economy.
Oil prices rose bounced back buoyed by the long-anticipated signing of an initial Sino-U.S. trade deal that sets the stage for a jump in Chinese purchases of American energy products, while U.S. crude inventories fell more than expected. Brent is trading at $63.77 a barrel while U.S. crude was up by 19 cents, at $58 a barrel. Under the so-called Phase 1 deal to call a truce in a trade war between the world’s two biggest economies, China committed to buying over $50 billion more of U.S. oil, liquefied natural gas and other energy products over two years. Trade sources said China could struggle to meet the target and gains in oil are likely to be limited ahead of more detail on how the commitments will be achieved.