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Carney to Ignore Inflation Jump as November Rate Cut Seen

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Mark Carney
  • Carney to Ignore Inflation Jump as November Rate Cut Seen

Days after the Bank of England governor said he’ll tolerate faster price gains in his efforts to support the economy, more than 70 percent economists said the Monetary Policy Committee will cut the benchmark rate to a record-low 0.1 percent on Nov. 3. The panel, which will keep its quantitative-easing program running as planned, will present new economic projections the same day.

The pound’s 18 percent drop since the Brexit vote is creating a dilemma for policy makers because it’s fueling faster inflation. As BOE staff crunch numbers and prepare the crucial new quarterly forecasts, they’ll have to take into account the impact of the currency move and leave Carney to decide on the right time for more easing.

“It’s going to be a pretty close call,” said Victoria Clarke, an economist at Investec in London who currently predicts a cut but plans to review the forecast in the coming weeks. “It’s an incredibly difficult one this time around, particularly with sterling having moved that much further.”

The economists’ forecasts are increasingly at odds with the money markets, which show traders see just a 5 percent probability of a reduction next month, down from 17 percent after the BOE’s September policy meeting.

The pound’s depreciation took it to a three-decade low earlier this month, pushing up consumer prices. The inflation rate rose to an annual 1 percent in September, the fastest pace since 2014, data today showed. U.K. government bonds are also falling, pushing the 10-year yield to its highest level since the Brexit referendum result.

Adding to the complexity is a better-than-expected economic backdrop since June, which could prompt officials to raise their growth forecasts. Staff have already lifted their third-quarter GDP estimate, and policy makers Michael Saunders and Kristin Forbes have said that the outlook may not be as weak as the central bank predicted in August.

“Presentationally, it’s difficult to revise growth and inflation forecasts higher and ease policy,” said Jason Simpson, a London-based fixed-income strategist at Societe Generale SA. “There is also the added complication that cutting rates while the market does not expect it risks further weakness in the currency.”

Deputy Governor Jon Cunliffe said this month that the November Inflation Report will be a “very important forecast round.”

Higher Prices

Shoppers are already seeing tangible effects of price gains, with Apple raising the cost its iPhone 7 by 11 percent in the U.K. and Unilever and Tesco having a public dispute over pricing.

Economists in the monthly survey see inflation at an average 1.2 percent this quarter, unchanged from last the previous survey. Forecasts for 2017 and 2018 are at 2.2 percent and 2.3 percent, the latter slightly raised from September.

Such a small overshoot of the BOE’s 2 percent target would make life easier for policy makers, who’ve had to defend the August stimulus package that included a rate cut and asset purchases because of the economy’s signs of strength.

“If we had wanted to ensure that we set policy — the level of interest rates — in such a way as to ensure there was no chance of it rising above target, then we would have had to have set tighter policy,” Broadbent said in a BBC interview on Monday. “That would have meant lower economic growth and that would have increased the chances of unemployment going up.”

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Gold

Gold Prices Rise as Soft Dollar Supports Safe-haven Appeal

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gold bars - Investors King

Gold prices firmed on Monday, propped up by a subdued dollar and slight retreat in the U.S. Treasury yields, with investors gearing up for a week of speeches from U.S. Federal Reserve policymakers for cues on the central bank’s rate hike path.

Spot gold was up 0.5% at $1,759.06 per ounce, as of 0400 GMT, while U.S. gold futures were up 0.4% at $1,759.00.

While the dollar index softened, the benchmark 10-year Treasury yields eased after hitting their highest since early-July. A weaker dollar offered support to gold prices, making bullion cheaper for holders of other currencies.

“Gold is still looking slightly precarious where it is right now, and it’s probably bouncing off key technical level around $1,750,” IG Market analyst Kyle Rodda said.

“Gold remains an yield story and that yield story is very much tied back to the tapering story.”

A slew of Fed officials are due to speak this week including Chairman Jerome Powell, who will testify this week before Congress on the central bank’s policy response to the pandemic.

“There’ll be a lot of questions being put to Fed speakers about what the dot plots implied last week and weather there is higher risk of heightened inflation going forward and that rate hikes could be coming in the first half of 2022,” Rodda added.

A pair of Federal Reserve policymakers said on Friday they felt the U.S. economy is already in good enough shape for the central bank to begin to withdraw support for the economy.

Gold is often considered a hedge against higher inflation, but a Fed rate hike would increase the opportunity cost of holding gold, which pays no interest.

Investors also kept a close watch on developments in debt-laden property giant China Evergrande saga as the firm missed a payment on offshore bonds last week, with further payment due this week.

Holdings of SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, increased 0.1% to 993.52 tonnes on Friday from 992.65 tonnes in the prior session.

Silver rose 0.9% to $22.61 per ounce.

Platinum climbed 1.3% to $994.91, while palladium gained 0.7% to $1,985.32.

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Crude Oil

Brent Crude Oil Near $80 Per Barrel Amid Supply Constraints

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Brent crude oil - Investors King

Oil prices rose for a fifth straight day on Monday with Brent heading for $80 amid supply concerns as parts of the world sees demand pick up with the easing of pandemic conditions.

Brent crude was up $1.14 or 1.5% at $79.23 a barrel by 0208 GMT, having risen a third consecutive week through Friday. U.S. Oil added $1.11 or 1.5% to $75.09, its highest since July, after rising for a fifth straight week last week.

“Supply tightness continues to draw on inventories across all regions,” ANZ Research said in a note.

Rising gas prices as also helping drive oil higher as the liquid becomes relatively cheaper for power generation, ANZ analysts said in the note.

Caught short by the demand rebound, members of the Organization of the Petroleum Exporting Countries and their allies, known as OPEC+, have had difficulty raising output as under-investment or maintenance delays persist from the pandemic.

China’s first public sale of state oil reserves has barely acted to cap gains as PetroChina and Hengli Petrochemical bought four cargoes totalling about 4.43 million barrels.

India’s oil imports hit a three-month peak in August, rebounding from nearly one-year lows reached in July, as refiners in the second-biggest importer of crude stocked up in anticipation of higher demand.

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Crude Oil

Oil Holds Near Highest Since 2018 With Global Markets Tightening

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Crude Oil - Investors King

Oil held steady near the highest close since 2018, with the global energy crunch set to increase demand for crude as stockpiles fall from the U.S. to China.

Futures in London headed for a third weekly gain. Global onshore crude stocks sank by almost 21 million barrels last week, led by China, according to data analytics firm Kayrros, while U.S. inventories are near a three-year low. The surge in natural gas prices is expected to force some consumers to switch to oil, tightening the market further ahead of the northern hemisphere winter.

China on Friday sold oil to Hengli Petrochemical Co. and a unit of PetroChina Co. in the first auction of crude from its strategic reserves said traders with the knowledge of the matter. Grades sold included Oman, Upper Zakum and Forties.

Oil has rallied recently after a period of Covid-induced demand uncertainty, with some of the world’s largest traders and banks predicting prices may climb further amid the energy crisis. Global crude consumption could rise by an additional 370,000 barrels a day if natural gas costs stay high, according to the Organization of Petroleum Exporting Countries.

“Underpinning the latest bout of price strength is a tightening supply backdrop,” said Stephen Brennock, an analyst at PVM Oil Associates Ltd.

Various underlying oil market gauges are also pointing to a strengthening market. The key spread between Brent futures for December and a year later is near $7, the strongest since 2019. That’s a sign traders are positive about the market outlook.

At the same time, the premium options traders are paying for bearish put options is the smallest since January 2020, another indication that traders are less concerned about a pullback in prices.

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