Bank of England Holds Rates but Lowers Growth Forecast


US stocks rebounded from the slide earlier in the trading session on Thursday to close higher as investors looked past coronavirus scares. The World Health Organisation declared the situation a public health emergency but expressed confidence in China’s ability to deal with it. Earnings outperformance by Coca-Cola and Microsoft notably also spurred stocks to recover from the early slump. The DOW led gains, closing 0.43% higher while the S&P and the NASDAQ gained 0.31% and 0.26% respectively. Treasury yields were about flat with 2Y and 10Y USTs closing at 1.4128% and 1.5856% respectively.


The Bank of England voted to hold rates on Thursday noting a post-election improvement in business sentiment. The vote went 7-2 in favour of holding rates with the expectation that inflation would gently rise to the 2% target within three years. The Bank however downgraded its outlook for the economy forecasting growth of 1.1%, a far cry from the 2.8% target set by Chancellor Sajid Javid. The MPC however dropped its expectation of “limited and gradual” rise in interest rates, rhetoric used since 2014. The pound closed higher at $1.3093 while yield on 10Y and 30Y UKTs closed higher at 0.542% and 1.050% respectively.


The French economy unexpectedly contracted in Q4 as protests over pension reform took a toll on production. The 0.1% decline, a first contraction under President Emmanuel Macron’s tenure, came against an expected 0.2% growth and cast doubts over the likelihood of a quick rebound in the overall Eurozone economy. The contraction meant that Eurozone’s second largest economy saw GDP growth of 1.2% in 2019, down from 2018’s 1.7% growth. The euro closed higher at $1.1032 while yield on 10Y and 30Y FRTR closed lower at -0.149% and 0.639% respectively.


Asian markets got a boost from positive economic data from China before paring the early gains as coronavirus concerns came back to the fore. China’s January PMIs met expectations with the manufacturing index dropping slightly to 50.0 from 50.2 in December while nonmanufacturing PMI rose to 54.1 from 53.5. Figures released late Thursday by China showed confirmed cases at 9,692 with 231 deaths. The HANG SENG slid from an early 0.4% gain to close 0.37% in the red while the ASX and the NIKKEI closed 0.13% and 0.99% higher respectively.


The CBRT held onto the previous outlook for Turkey’s inflation in 2020 and 2021 in its latest quarterly report reinforcing confidence that it is managing to keep prices in check despite a slew of cuts in 2019. The central bank kept its projections for 2020 and 2021 inflation at 8.2% and 5.4% respectively noting that small increases in oil prices and labour costs were offset by tax adjustments. Bank Governor Murat Uysal noted that food inflation remains a major driver of price growth and is not forecast to soften anytime soon. Economists now predict a more gradual pace of easing as the bank tries to hold onto its promise for positive real returns to investors; the January rate cut however put real rates in negative territory. The lira closed weaker at 5.9696 to the dollar while TURKEY 47s were flat, trading in the high 96s.


Treasury data released on Wednesday showed that Brazil posted a primary budget balance of 95.1 billion reais ($22.4 billion) marking its best performance since 2014. The performance was on the back of special revenues including repayments to Treasury by public banks as well as an oil auction. The Treasury however noted this, saying the country needs to save an additional 3% of GDP and has been reliant on one-time revenues since 2016. The Economy Ministry estimated that the primary budget deficit for 2019 stood at 1% of GDP, smaller than an initial forecast of 1.8%. The real closed weaker at 4.2472 to the dollar while BRAZIL 50s were higher, trading in the low 103s.


Rising food and energy costs in Zambia saw inflation accelerating for a 10th straight month in January to its highest rate since October 2016. January consumer inflation rose an annual 12.5% from 11.7% in December according to Zambia Statistics Agency; prices rose 1.8% in the month. Drought in the 2018-19 rain season pushed up food prices as well as slashed output at hydropower plants supplying 80% of the national grid; electricity prices as a result shot up an average 113% for all customer classifications effective January 1, 2020. With inflation moving further away from the target 6-8% band, the central bank may have to increase its benchmark rate at its February meeting having raised it 125bps in November to 11.5%. The kwacha closed weaker at 14.8250 to the dollar while ZAMBIN 27s were slightly unchanged, trading in the low 69s.