ISEQ climbs

The ISEQ is a little higher this morning at 4,220, up 12 points as markets await US data today which has the potential to determine the extent and speed of Fed withdrawal from current intervention levels.

Davy Stockbrokers looks at the UK money markets and how recent activity may lead to higher interest rates there:

With forward guidance something of a damp squib thus far, further good news on the economy today may reinforce the view that interest rates will rise before the MPC expects in 2016. Halifax house prices are expected to have risen 0.9pc in July, with the annual growth rate surging to 4.6pc.

The 10-year gilt yield rose above 3pc yesterday for the first time since 2011, helped by the move in treasuries after better-than-expected US data.

With markets expecting a rate rise by 2015, Carney now faces an uphill battle to quell expectations. Last week, we discussed the current slack in the labour market and relatively low levels of productivity in the UK. Since 2008, labour productivity has declined by 4.5pc in the UK compared to a 0.3pc rise in the euro-zone.

The anomaly of employment rising through 2012 while output actually fell exacerbated the loss of productivity over that period. The MPC has banked on firms ramping up productivity rather than hiring more workers in formulating its conservative unemployment expectations. This is a sound assumption, particularly with 27pc of the workforce currently in part-time positions. So unemployment may not fall below the 7pc threshold before 2016, but inflation could outdo expectations.

Carney’s explicit statement on the unemployment threshold ‘knockouts’ was well intentioned but has provided a boon to those who expect rates to rise before 2016 as the economy picks up. That ‘knockout’ is that the MPC will disregard the unemployment threshold if inflation is expected remain more than 0.5 percentage point above target in the medium term.

The MPC has built in flexibility to its medium-term outlook with an 18-24 month range for inflation expectations, but the governor may have been minded to follow President Draghi’s ‘less is more’ approach to forward guidance according to Davy Stockbrokers.