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LGT Navigator: Bank of England postpones interest rate turnaround, surprising markets

November 5, 2021

The British central bank left its key interest rate unchanged at a record low, but at the same time signaled an interest rate turnaround soon to counter rising inflationary pressure. After the Federal Reserve announced the beginning of the end of its quantitative measures, as expected, many market participants had assumed that the Bank of England would go even further with a first interest rate hike.

Bank of England postpones interest rate turnaround, surprising markets
Bank of England

Contrary to expectations, the Bank of England kept its key interest rate unchanged at +0.1%. However, central bank chief Andrew Bailey stated that an initial interest rate tightening is to be expected in the coming months against the backdrop of increasing inflationary pressure. Within the nine-member monetary policy body, however, the current interest rate decision was controversial, with two members voting for an immediate rate hike. The council also disagreed on ending bond purchases. Three central bankers voted in favor of an earlier start of the tapering, i.e. the reduction of the securities program.

Equity markets cope well with Fed tapering

On the New York Stock Exchange, the stock indices trended close to the recently reached record levels. However, investors seem to have “digested” the monetary policy decision of the Federal Reserve well. The Dow Jones Industrial closed almost unchanged at 36'124.23 points (-0.09%), while the broad S&P 500 was again up +0.42% to 4'680.06 points. Under pressure were some stocks from the banking sector. Technology stocks, on the other hand, benefited from the fact that the interest rate level will remain at a record low level for some time after the starting signal for tapering. As a result, the indices on the Nasdaq rose yesterday by about one percent.

US labor market report in focus – stronger employment growth expected

The latest data from the US labor market is eagerly awaited today. After job growth disappointed in September with an increase of 194'000 non-farm payrolls (the weakest monthly increase since September 2020), a much stronger increase in employment of around 450'000 jobs is now expected in October.

In a hopeful sign, weekly initial jobless claims figures released yesterday showed a 14'000 drop in claims to 269'000, the lowest level since March 2020.

Sharp rise in labor costs adds to inflationary pressures in the US

Nonfarm productivity in the US fell sharply in the third quarter of 2021. Compared with the previous quarter, the productivity rate fell by an annualized -5% – the sharpest decline since Q2 1982. Economists had expected a much smaller decline of -3.2%. In Q2, productivity had still risen by +2.4% (annualized) quarter-on-quarter. Unit labor costs increased more than expected by +8.2% in the reporting period (consensus +7.4%; Q1 +1.1%) – an interesting aspect regarding current inflation expectations. The further development of inflation is undoubtedly also in the focus of central banks.

Euro area business sentiment continues to deteriorate

In October, the assessment of companies in the European private sector surveyed by the market research company IHS Markit deteriorated for the third month in a row. The Purchasing Managers' Index fell by two points compared with the previous month to 54.2 points, the lowest value in six months. Sentiment clouded over in both industry and the service sector.

Economic Indicators November 5

MEZ Country Indicator Last period
08:00 GE Industrial Production (September, m/m) -4.0%
08:45 FR Industrial Production (September, m/m) +1.0%
10:00 IT Retail Sales (September, y/y) +1.9%
11:00 EZ Retail Sales (September, y/y) +3.1%
13:30 US Non-Farm Payrolls (October) +194,000
13:30 US Unemplomyent Rate (October) +4.8%
13:30 US Average Hourly Earnings (October, y/y) +4.6%


Earnings Calender November 8

Country Company Period
GE Henkel Q3 Sales
US PayPal Q3


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