Chief economist update: BOE flips tightening bias to easing

The strong US non-farm payrolls report - employment grew by 224,000 in June, beating expectations for a 160,000 gain and a sharp rebound from the 72,000 added in the previous month - failed to remove or even reduce the odds for a Fed rate cut this month.

The CME FedWatch Tool puts the probability that the US central bank will cut interest rates by 25 bps to 2%-2.25% at the conclusion of its July FOMC meeting at 95.1%. This is backed-up by the Fed's semi-annual Monetary Policy Report noting: "Since the beginning of May, the tenor of incoming information on economic activity, on balance, has become somewhat more downbeat, and uncertainties about the economic outlook have increased."

These are, more or less, the same conditions that appear to have changed the Bank of England's (BOE) tightening bias.

In his speech at the Local Government Association Annual Conference and Exhibition in Bournemouth, BOE governor Mark Carney declared that: "For now, a global trade war and a No Deal Brexit remain growing possibilities not certainties. Monetary policy must address the consequences of such uncertainty for the behaviour of businesses, households and financial markets."

"In some jurisdictions, the impact may warrant a near term policy response as insurance to maintain the expansion."

Swipe left or right through the latest UK economic surveys and indicators and there's no mistaking Carney was alluding to a rate cut.

But here's some Carney, himself, mentioned: "Growth in the second quarter will be considerably weaker, in part due to the absence of that stock building effect and Brexit-related, temporary shutdowns by several major car manufacturers."

"Recent data also raise the possibility that the negative spillovers to the UK from a weaker world economy are increasing and the drag from Brexit uncertainties on underlying growth here could be intensifying. The latest surveys point to no growth in UK output."

The BOE chief's statement is supported by the IHS Markit/CIPS UK Construction Total Activity Index dropping to a decade-low reading of 43.1 in June from 48.6 in the previous month.

According to Markit: "Worrying signals from the survey's forward-looking indicators make it almost impossible to sugarcoat the Construction PMI data in June. In particular, new orders dropped to the largest extent for just over 10 years, while demand for construction products and materials fell at the sharpest pace since the start of 2010."

The IHS Markit/CIPS UK PMI surveys of the manufacturing and services sectors are in no better shape. The manufacturing PMI sank deeper into contraction territory in June from May while the services PMI is heading closer towards contraction.

As such, expectations are growing that the BOE willcut interest rates by November this year.

Read more: USBOEFedMarkitMark CarneyConstruction PMIIHS Markit/CIPS UK Construction Total Activity IndexMonetary Policy ReportNo Deal BrexitBank of EnglandBournemouthCME FedWatch ToolConferenceExhibitionIHS Markit/CIPS UK PMIJuly FOMCLocal Government AssociationSea Change
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