Will markets listen to hawkish talk from the Bank of England?

Here are the major questions for markets as a new trading week begins.

Will markets listen to hawkish talk from the Bank of England?

The first UK interest rate rise in a decade is not a “one and done” move, the BoE insists, but that is precisely how the market viewed it. The pound fell and two-year gilt yields dropped, holding below the new base rate, as investors branded the quarter-point rise in overnight borrowing costs to 0.5 per cent as a “dovish hike”.

The BoE fightback began on Friday, with deputy governor Ben Broadbent taking to the airwaves to argue a couple more rate rises were needed to get inflation on track. More communication of this kind is likely to emerge in the coming weeks, but it is a sizeable boulder the BoE must try to push uphill.

That is in part because of concern among some investors last week’s rise may turn out to be a policy mistake. John Wraith, a strategist at UBS, said a slowing economy, Brexit uncertainty and inflation retreating makes another rate rise hard to justify.

The hike “may come to be seen as a mistake unless a range of important data indicators start to improve soon”, Mr Wraith said. However, data on Friday showing a surprise pick-up in services in October offered some hope, but the pound moved only marginally.

“Data surprises are likely to have to be material and consistent to dramatically alter expectations for the probability of a near-term follow-up hike early in 2018,” said Sam Hill, an economist at RBC Capital Markets.

Brexit talks are the more likely to shift sterling this week, along with dollar-related developments.

Still Desperately seeking the Phillips Curve

That is the upshot after Friday’s US employment report, for October, with wage growth flat even as the unemployment rate dropped. There is still one more jobs report before the December meeting of the Federal Reserve. For now bond traders expect another quarter percentage point rise from the Fed, but expect fewer than two rate rises next year. That lags the US central bank’s own projections.

TD Securities analysts say: “While the pace of hikes next year is lower than implied by the Fed dot plot, a continued lack of inflation pressures should skew the market to pricing in fewer hikes.’’

But faith in a tighter jobs market finally spurring inflation does hold sway in some quarters.

“Notwithstanding the low level of CPI inflation, stronger growth is causing markets to reprice US rate expectations to the upside. Yet expectations remain well below the dot plot,” caution analysts at Bank of America Merrill Lynch. “We think further adjustment is needed, pushing yields and the dollar higher into year end.”

While this debate will keep running the upshot remains one of a very slow rate-tightening schedule from the Fed. Such an outcome stands to remain very supportive for markets. So long as money remains easy, already elevated valuations for credit and equities have room to rise further and only heighten concerns that asset prices are in bubble territory.

Further gains for oil and metals?

Industrial commodities from oil, copper and niche metals such as cobalt have been on a tear, buoyed partly by the improving global economy and efforts to limit production.

Given the scale of the gains in some industrial commodities — nickel is up 40 per cent since early July — investors will be required to be more discerning in picking the metals that still have room to move higher.

Commodities strategists caution that the current rally is not an echo of the supercycle in which ravenous demand from China lifted most metals. Meanwhile, with Brent having topped $60 a barrel, attention will soon turn to the meeting of the production cartel Opec at the end of the month for signs of their determination to keep a squeeze on supply.

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