BoE meeting in focus

Chris Scicluna
Emily Nicol

A relatively quiet day in Asia following an ADP- and Clarida-driven US session
Despite news that the ISM services index had hit a record high in July – with business activity surging and the employment index rebounding from a weak June reading – the S&P500 retreated from Wednesday’s record high, albeit only falling 0.5% loss. A very soft ADP employment reading hadn’t helped sentiment earlier on – the estimated 330k gain in private payrolls being less than half the consensus expectation, and perhaps adding to other indications that employers are struggling to fill record vacancies. However, a more important driver was subsequent remarks made by Fed Vice-Chair Clarida during a webinar hosted by the Peterson Institute.

Specifically, Clarida said that the necessary conditions for raising the fed funds target range “will have been met by the end of 2022”, and also said that he was in favour of the Fed announcing a taper of its asset purchases later this year. His reminder that the current policy stance is on borrowed time was consistent with a sell-off in the Treasury market, with the 10Y note rising from just below 1.13% – a point reached after the disappointing ADP data – to a high just above 1.21% post-ISM survey. However, once the dust had settled, the 10Y note fell back to 1.18%, thus closing the US session just a fraction above the previous day’s close. Similar behaviour was observed in the greenback, which sank following the release of the ADP data but closed at session highs on the back of the ISM data and Clarida’s upbeat comments.

US equity futures have moved slightly higher since the close and the 10Y note has traded about a basis point higher too. So, with neither US equities nor bonds materially different to where they were 24 hours earlier, and with there being little in the way of local data, Asia-Pacific markets have had no clear trend today. In Japan, the TOPIX has advanced (up 0.4%) for the first time since Monday, notwithstanding reports that the government will soon be forced to expand emergency restrictions to eight more prefectures. With new cases topping 4,000 in Tokyo yesterday – and a record 14,207 nationwide – this would be a further blow for the already unpopular PM Suga, who is also under fire this week for his proposal that mild virus cases be treated at home.

In China, where investors are now awaiting this weekend’s release of July trade data, however, the CSI300 and Hang Seng have made late losses – with the latter down about 1% – unsettled by reports from state media suggesting that alcohol and e-cigarettes might be next in line for a regulatory hit. Virus cases are also rising in Mainland China, with officials curtailing public transport services in a bid to stop the spread. Australian stocks and bond yields are slightly higher, however, following news of another record trade surplus in June, but with enthusiasm tempered by a record number of new virus cases in New South Wales, including some outside of Sydney.

German factory orders beat expectations in June confirming strong demand for goods; French IP up too with growth in all components including autos; construction PMIs ahead
While yesterday’s services PMIs implied an acceleration in recovery momentum in the euro area at the start of Q3 with Germany leading the way, today’s German factory orders data pointed to firm demand for manufactured items too. In particular, orders rose a much stronger than expected 4.1%M/M in June, more than fully reversing the decline reported in May, to leave them more than 11% higher than their pre-pandemic level. This also left them up almost 4½%Q/Q in Q2. Admittedly, the strength at the end of Q2 in part reflected large one-off orders placed domestically. Indeed, when excluding major items, orders were up a more modest 1.7%M/M in June, although this still left them up 2½%Q/Q in Q2.

Within the detail, domestic orders jumped a hefty 9.6%M/M, while overseas orders were up just 0.4%M/M as orders from countries outside of the euro area slipped back 0.2%M/M while those to the euro area were up 1.3%M/M. The jump in domestic orders was driven by demand for capital goods (up 14.8%M/M), while domestic orders of intermediate and consumer goods also rose (5.0%M/M and 1.2%M/M respectively). Foreign orders for capital goods were also higher (2.1%M/M), but this contrasted with weaker overseas demand for intermediate and consumer goods – the latter more than offsetting the pickup domestically.

Notwithstanding the ongoing recovery in demand, today’s figures again flagged the likelihood that production remained subdued at the end of the second quarter as supply bottlenecks continue to pinch. Certainly, today’s turnover figures raise some downside risks to the consensus expectation of an increase of ½%M/M in tomorrow’s production numbers. In particular, manufacturing turnover fell 1.4%M/M in June, to leave it 6.7% lower than the pre-pandemic level. Of course, with recent growth in orders having far outpaced production, and backlogs of work sky-high, German manufacturing output should return to firm growth as soon as supply bottlenecks – particularly in semiconductors – ease.

This morning’s French production figures broadly aligned with expectations, with output rising ½%M/M in June following of decline of 0.4%M/M previously. Manufacturing production rose a stronger 0.9%M/M in June, supported by a pickup in output of transport equipment (2.3%M/M thanks to growth in both autos and other items) and production of coke and refined petroleum products (8.3%M/M). This notwithstanding, the level of output in the transport sub-sector still remained a long way (some 28%) below the pre-pandemic level, with overall manufacturing output still more than 6% lower than the February-2020 peak. And French manufacturing output was also down 1.4%Q/Q in Q2.

Looking ahead, today’s construction sector PMIs are also likely to report that output growth in the sector remains constrained by material shortages and increased costs. In June, the euro area’s construction activity PMI moved broadly sideways only just above the key-50 mark for the fourth consecutive month.

BoE set to leave policy unchanged with a minority of hawkish voters; updated projections and possible news on the MPC’s exit strategy also to come
The main event in the UK will be BoE’s latest monetary policy announcement at 12.00 (BST). Hawkish noises from two MPC members – Deputy Governor Ramsden and, in particular, external member Saunders – recently suggested that there was a risk that the QE programme might be brought to an early end at this meeting. However, since then, Deputy Governor Broadbent, and external members Haskel and Vlieghe – the latter for whom this will be the final MPC meeting – have suggested that they see no need to tighten policy yet. And so, we expect the asset purchase target to be left unchanged at £895bn, with the full amount to be reached before the end of the year. The MPC will also maintain its forward guidance, stating that it “does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”. The decision not to curtail QE early will reflect the BoE’s updated economic forecasts. While both the near-term profile for GDP and inflation will be revised higher than expected in May, the BoE will likely continue to forecast GDP to slow and inflation to fall back in 2022 to be close to target by the end of the projection horizon.

It is possible – but far from certain – that the BoE will also announce the outcome of its review of its tightening strategy. Up to now, the Bank has stated that it would not start to unwinding quantitative easing before Bank Rate has reached 1.5%. It is possible that the Bank could lower that threshold for Bank Rate, for example to 1.0%, while maintaining rate hikes as the primary tool for tightening policy. Alternatively, it could announce a far more flexible approach, giving itself scope to adjust the mix and sequence of rate hikes and reductions in the stock of purchased assets according to how economic and financial market conditions unfold. Either way, the impact might be to push lower shorter-dated yields but push yields higher further along the curve.

UK car registrations remain weak in July as SMMT revises down full-year expectations again; UK construction PMIs also to come
In terms of data, reports suggest that about 122k new UK cars were registered in July, another soft number representing a drop of 30%Y/Y and 22% from the same month in 2019. Given disruption from the semi-conductor shortage as well as workers’ quarantine, the car manufacturers’ trade association SMMT has revised down its full-year forecast for a third time to 1.82mn, which would be up a little more than 10% from last year but more than 20% down on 2019. Meanwhile, like the manufacturing and services PMIs, the equivalent construction survey – also due today – might well also see the headline activity index fall back from the 24-year high (66.3) recorded in June. 

Trade data and jobless claims ahead in the US today; more corporate reporting too
With investors doubtless now focused on tomorrow’s employment report, today’s US data is unlikely to move markets. Given the widening already reported in the advance release of the goods deficit, Daiwa America’s Mike Moran expects today’s release of full trade data to reveal a deficit of $74.2bn in June, up from $71.2bn in May. The weekly jobless claims report will hold some interest while equity market investors also have more than 40 major corporate earnings reports to digest today, after which around 90% of the S&P500 will have presented their results.

Australia’s trade surplus confirmed to have increased to a record high in June
As had been suggested by the earlier release of preliminary data covering merchandise trade, today Australia reported a record full (goods plus services) trade surplus for June. The surplus of A$10.5bn – bang in line with the consensus estimate – was A$1.2bn larger than last month and A$3.4bn higher than a higher than a year earlier.

In the detail, overall exports increased a further 3.6%M/M and so were up 23.1%Y/Y. Exports of goods increased 3.6%M/M and 30.2%Y/Y, led by a 1.9%M/M and 55.3%Y/Y jump in exports of metal ores. With a travel bubble operating with New Zealand (since suspended) , exports of services increased 3.1%M/M but were still down 11.7%Y/Y and more than 42% below the pre-pandemic peak. Meanwhile, imports increased 0.8%M/M in June and were up 17.2%Y/Y. Imports of consumption goods declined 0.7%M/M but were still up 17.5%Y/Y from last year’s depressed levels. Imports of capital goods increased 7.1%M/M – largely due to industrial transport equipment – and so were up 28.6%Y/Y. Imports of services increased 1.0%M/M and 17.1%Y/Y in June, but given little outbound travel are still running at barely half of the pre-pandemic peak.

Given today’s results, exports increased 6.1%Q/Q in Q2 in nominal terms. A surge in exports prices –13.2%Q/Q for merchandise according to ABS estimates released last month – more than explains the growth in receipts. Nominal imports increased 3.7%Q/Q, with about half of that growth explained by higher prices. So these figures suggest that net exports will subtract from real GDP growth during the quarter. However, more importantly, real national disposable income will still have received a boost from the sharp lift in the terms of trade, thus supporting domestic demand.

In other news, the ABS reported that payroll jobs fell 2.4% in the fortnight to 17 July, not surprisingly led by a 4.4% decline in New South Wales. While other states were also weaker, this largely reflected the timing of school holidays.

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