Bank of England’s Super Thursday Faces Tough Job Converting Doves: Analysis

Until U.K.’s headline inflation starts to show a meaningful pickup, any Bank of England forecasts for faster price growth this Thursday won’t be enough to push market pricing for a rate liftoff closer to the present, Bloomberg strategist Richard Jones writes.

Manufacturing input and output prices remained in contraction in October, even as the fastest factory output growth in 16 months boosted speculation of an additional vote on the Monetary Policy Committee to raise rates as soon as this week.

Markit manufacturing PMI climbed to 55.5 in October versus estimate of 51.3. Cost pressures, however, remain below the expansion/contraction threshold of 50, with input prices at 39.7 and output prices edging lower to 48.0, Barclays strategists Andrzej Szczepaniak and Apolline Menut wrote in a client note on November 2.

This signals that inflationary weakness remains in the pipeline and bodes ill for expectations of a quick normalization in inflation toward 2 percent, according to Szczepaniak and Menut.

The stickiness of too-low inflation surely cannot be ignored, notwithstanding the narrative from many economists that recent disappointing U.K. data, including weaker 3Q GDP, won’t affect the Bank of England. The latest U.K. EU-harmonized CPI for September came in at -0.1 percent year-on-year.

The pound's recent leg higher may also give some Monetary Policy Committee members pause for thought, especially as sterling strength could be exacerbated if ECB eases monetary policy further.

Other survey evidence, including weaker readings for orders, optimism and reported sales data from the Confederation of British Industry last week, present a challenging domestic economic backdrop for the Bank. Additionally, CBI selling prices data remain near a 6-year low.

MPC-dated Sonia forwards now price the first full 25 basis points BOE rate rise in November 2016. Bank of England's liftoff timing has gradually closed in, moving from the first quarter of 2017 to fourth quarter of 2016. The Fed's FOMC announcement last week was responsible for the bulk of this shift, while U.K.'s PMI data in the past two days also impacts.

The release of the U.S. jobs report on November 6, the day after BOE's Super Thursday, may have a bigger impact on U.K. rate expectations than domestic data and MPC inflation forecasts.

Note: Richard Jones is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own.

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