Daily Market Report - 13/02/2015

The Bank of England said it expects stronger growth on the back of lower oil prices but it sees little need to raise interest rates this year and could even cut them if inflation proves weaker than expected, new forecasts showed on Thursday. BoE Governor Mark Carney said he expected inflation to fall below zero in the coming months due to weak oil, but stressed that this by itself did not mean that the economy had entered deflation.

Inflation would hit the Bank's 2 percent target in about two years' time, the Bank said, sooner than it forecast three months ago. Carney said that its appropriate to return inflation to target as quickly as possible after the effects of energy and food prices movements have abated.

The UK is not experiencing deflation  Carney said in a letter to finance minister George Osborne explaining the difference between inflation - which stood at 0.5 percent in its most recent reading - and the Bank's 2 percent target. However, if global activity weakened and Britain became at risk of a vicious cycle of falling prices, the BoE said it was ready to cut rates, following in the footsteps of other central banks.

The central bank raised its growth forecasts and predicted wages would grow faster, suggesting voters may feel some of the benefit of the recent economic rebound before Britain goes to the polls in May. Average consumer price inflation in the second quarter of this year is likely to fall to a record-low annual rate of zero, the BoE forecast, lower than the 1 percent it forecast in November.

After that the BoE forecasts it will climb steadily to its 2 percent target in two years if it raises interest rates as markets expect. Financial markets did not expect the BoE to start to raise rates from their record-low 0.5 percent until the third quarter of 2016, the BoE said. The fact that the BoE forecasts inflation will marginally overshoot its target if interest rates do not rise until then suggests it may want to raise interest rates slightly earlier. Since the BoE calculated its forecasts, markets have already priced in a somewhat earlier move in early 2016.

The BoE also forecast that lower oil prices would boost growth next year compared with its November forecast. Growth this year is forecast to be its strongest in several years at 2.9 percent. For 2016, the BoE also expects growth of 2.9 percent, up from November's 2.6 percent.

The benefits of growth may also start to be more widely felt, with wages forecast to grow by 3.5 percent this year after rising by just 1.75 percent in 2014.

In the US jobless claims rose by 25,000 to 304,000 in the week ended Feb. 7, higher than forecast, from a revised 279,000 in the prior period.  Sustained demand gives hiring managers reason to retain staff, limiting dismissals. A healthier labour market that includes the biggest three-month gain in payrolls in 17 years will probably keep the Federal Reserve on course to raise interest rates later this year. Estimates for jobless claims ranged from 275,000 to 300,000 after a previously reported 278,000 in the prior week. 

The number of people continuing to receive jobless benefits fell by 51,000 to 2.35 million in the week ended Jan. 31. The unemployment rate among people eligible for benefits held at 1.8 percent during that period.  A sustained low level of firings has coincided with faster job gains. Payrolls climbed by 257,000 in January following increases in December and November that were bigger than initially reported. Employment gains averaged 336,000 during the three months, the strongest since a comparable period ended in November 1997. 

The jobless rate increased to 5.7 percent from 5.6 percent as more than a million Americans streamed into the labour force seeking work. The labour-market improvement has convinced Fed policy makers that they’re nearing a decision to raise their benchmark interest rate, now near zero, for the first time since 2006. 

Key Announcements:
EUR - 10:00 : Flash Eurozone GDP QoQ expected to remain unchanged at 0.2%
USD - 15:00 : US Consumer Sentiment (Feb) expected to slightly higher at 98.2 from 98.1

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