Financial market research and analysis

The Bank of England (BoE) will announce its latest monetary policy at noon in London. The MPC will likely maintain the bank rate at the historical low of 0.25% and keep the asset purchases target unchanged at £435 billion. 

Inflation is expected to be the major highlight of today’s MPC meeting. Released earlier this week, UK consumer prices accelerated by 1.2% on year to November; the core inflation rose to 1.4% from 1.3% year-on-year. More expensive oil and higher import prices due to a cheaper pound have been the major factors in the UK’s rising consumer prices.

At the current levels, inflation per se is not alarmingly high for the moment. However, the rising inflationary pressures could rapidly become an issue, if the BoE’s 2% inflation target is breached. Above 3%, the BoE is required to send an open letter to the Chancellor explaining why inflation has deviated so much from the official target.

But we are not there yet. The BoE’s official forecasts point at 2.8% inflation in 2017, and 2.7% in 2018. Therefore, the bank has no motivation in tightening the monetary conditions just yet, especially given that Brexit uncertainties persist and the Fed is already playing more aggressively than anticipated.

Although the BoE’s next move is expected to be a rate hike, this is not expected to happen anytime before 2019, according to the Bloomberg calculation. The pound has bounced 6.5% since the BoE’s November meeting. Hence, Mr. Carney is expected to sound dovish and reiterate a higher tolerance for inflation due to the UK’s need for special support through the Brexit.

The divergence between the Fed and the BoE monetary policy outlooks are supportive of deeper pound depreciation.

US stocks off record highs, banks in demand

US stocks have bounced off the historical high levels. Mining and energy stocks led the sell-off as the Federal Reserve (Fed) increased the Fed funds rate by 25 basis points and delivered a more hawkish than expected policy outlook for 2017.

Big US banks were the principal winners, given that higher interest rates will finally take off multi-year, low rate pressures on revenues and allow the majority of banking institutions to improve their finances. Citi bank already announced its plans to raise its base lending rate to 3.75% from 3.50%, effective from today.

Goldman Sachs (+0.58%), Bank of America (+0.27%), Morgan Stanley (+0.70%) and JP Morgan rallied on the US rate hike, yet JP Morgan (-0.04%) gave back gains on hacking suspects between Russia and Wall Street. Citi Group (-0.57%) and Wells Fargo (-2.04%) finished the session in the red amid being involved in regulatory deficiencies.

European banks led gains at the open. Barclays (+1.44%), Lloyds (+1.23%) were among the leading stocks on the FTSE 100.

US stocks are expected to attempt an upside correction at the US open. The SPX is expected to open 7 points higher at $2260, while the Dow is seen 71 points higher at $19863.