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Market buzz: Carney's inflation chat sends pound higher
1645: After starting in the red, the FTSE 100 has steadily strengthened as the session wore on. It finished at 7,281.57, up 34.8 points or 0.48%.
Here's a closing comment from market analyst Joshua Mahony at IG. "With a morning's worth of disappointing eurozone PMI surveys, we have seen Carney's inflation report testimony drag EURGBP lower despite today's jump in UK unemployment. While Carney's expectation of three rate rises over the next three years will grab the headlines, the fact that the bank aims to be 'nimble' given Brexit uncertainty points towards a strong chance we may never see all three hikes materialise should a preferential deal not be achieved."
Looking towards US monetary considerations, given the impending release of FOMC minutes, he added: "Coming at a time where economic growth and tax-cut fuelled wage jumps are pushing inflation expectations higher, markets will be keeping a keen eye out for a signal of just how tolerant members will be should inflation continue to rise."
1615: Sterling has been a bit choppy since lunch. It briefly turned higher after Bank of England governor Mark Carney and other policymakers suggested that the BoE could raise rates again as early as May. Carney expects there could be three rate rises over the next three years.
With markets pricing in close to an 80% chance of a rate hike in May, Carney refrained from firming up the Bank's path for further hikes but added that financial markets have begun to price interest rate expectations "in line with the underlying data so the expectations are moving with releases such as those today or those a few weeks ago and so they're better able to anticipate what we could do."
You can watch Carney and co answer questions from the Treasury Select Committee online on the parliamentlive.tv website. The BoE also published its annual reports from Carney and deputy governors Ben Broadbent and Andy Haldane.
1510: Activity in the US manufacturing and services industries grew more than expected in February, according to preliminary data released on Wednesday. IHS Markit's flash composite output index rose to 55.9 from 53.8 in January, hitting its highest level in almost two-and-a-half years and beating expectations for a reading of 54.4.
1455: The FTSE 250 is down around 0.3%, with M&A helping to keep things lively. Fidessa was flying high again as it agreed to a £1.4bn takeover by Swiss banking software company Temenos a day after confirming that the two were in talks. Under the terms of the deal, Fidessa shareholders will receive 3,567p in cash for each of their shares. They will also be entitled to a final dividend and a special dividend amounting to 79.7p for 2017. The price represents a premium of around 37% to Fidessa's closing price on 16 February.
1440: The FTSE 100 is on the up but Shire Pharmaceuticals was going the other way. Analysts at Citigroup said it was "screaming long-term value" but lacking short-term catalysts. "We concede a lack of near term catalysts, over and above the Q1 acceptance of the SHP643 (HAE) filing, but with sentiment at all-time lows we struggle to see significant downside," it said.
1408: FT reporting on 'market chatter' regarding possible interest from US rival HCA in taking Mediclinic's 29.9% stake in Spire off its hands. Mediclinic abandoned plans in late November to buy Spire and, under Takeover Panel rules, is barred until May from making another approach.
1334: Fed's Harker reportedly saying two interest rate hikes in 2018 "likely appropriate".
1304: Ahead of the opening bell on Wall Street, futures on the Dow Industrials are pointing to an initial dip of 34.0 points to 24,914.00, a 1.0 fall for the S&P 500 to 2,713.0 and a gain of 8.75 points on the Nasdaq-100. In parallel, the yield on the benchmark two-year US Treasury note is extending Tuesday's rise, adding four basis points to 2.26%.
1237: A report in The Times states that the UK is poised to ask the European Union to extend the Brexit transition period beyond 2020 by as long as it takes to prepare for the future relationship.
A draft negotiating document seen by the paper looks to extend the transition lasting longer than two years, with period's duration "determined simply by how long it will to prepare and implement the new processes and new systems that will underpin the future partnership".
1233: Analysts at Bank of America-Merrill Lynch see an "eventual" correction higher in the US dollar, telling clients today: "Our view is that the main reason of the USD weakness this year is that the FX market is pricing convergence of monetary policies too early. For the next two years we are likely to see further divergence of monetary policies, as inflation diverges in G10 economies.
"[...] Our US economists have argued that US inflation will increase this year, while our European economists have argued that inflation in the Eurozone is likely to disappoint. Our inflation strategist has argued that inflation risks are underpriced in the US, particularly compared with the Eurozone."
1215: The FTSE 100 has edged into positive territory, up 0.08% to 7,252.75 just after midday, with the pound having slipped 0.5% to below $1.32.
Sterling softened in response to this morning's release of the latest UK labour market report, where slower than expected employment growth in December, a tick higher in the unemployment rate and the inability of earnings growth to allow real wages to push higher all contributed to the disappointment.
There was little reaction in the money market, noted Rabobank. "The UK money market is not fully priced for a rate hike in May but, since the hawkish February inflation report from the BoE, the market foresees a substantial risk for a move from the Bank this spring. For months the MPC has been assuming that tight labour market conditions will provide a push higher in inflation. This factor, in addition to its assumption that Brexit will be smooth, could be severely tested in the coming months."
1150: All eyes are on the release of minutes from the US Federal Reserve January policy meeting, which will be read by a market that has almost fully priced in the likelihood of three 25 basis point rate hikes in 2018.
"However, the recent spike in inflation as measured by the latest CPI and average hourly earnings releases has begun to impact expectations going forward," said market analyst David Morrison, senior market strategist at GKFX.
"There is growing feeling that the Fed may be in danger of falling behind the curve when it comes to tightening monetary policy. Therefore, there's growing speculation that tonight's minutes may indicate a shift towards raising rates by a full percentage point this year - something yet to be priced in by markets. If so, this would come on top of the plan to tighten monetary policy by mechanistically reducing the US central bank's balance sheet. This would be consistent with the Fed's mandate of maintaining price stability at a time when the Trump administration is providing dollops of fiscal stimulus in the form of tax cuts, regulatory reform and proposed infrastructure spending. This is all potentially inflationary, not least as it is unfunded so adds to the deficit and so weighs on the dollar."
1120: After a relatively quiet start to the morning and the week, with the bank holiday in the US and Canada contributing to this, market analyst Craig Erlam at Oanda said the FOMC minutes that will be released at 1900 GMT "will likely be the standout event from a US perspective, particularly as the statement caused quite a stir at the end of January".
He went on: "The sell-off in the markets may have come a couple of days later but part of the initial trigger was a more hawkish sounding Fed, with the jobs report then being the straw that broke the camel's back two days later. While the minutes may not generate quite the same response, traders will likely monitor what they say very closely for signs that policy makers are now leaning more towards three to four rate hikes this year, rather than two or three."
RBC Capital Markets agreed the FOMC minutes "should garner a great deal of attention[...] Given the market's obsession with inflation, we think the odds that the minutes are interpreted as reinforcing this narrative of a firming inflationary backdrop are high. The tweaks to the press statement were significant enough that the minutes are likely to read hawkish overall."
RBC said that, given the recent change towards more more hawkish language, it seems "entirely reasonable" that the Fed is leading up to a more forceful tone on rate hikes as the year progresses. "We think there is a high probability that the Fed moves the dots to 4 hikes in 2018 (from 3) near-term and that the minutes could be another step in reinforcing this."
1010: The latest labour market data "reduce the odds" of a hike in interest rates as soon as May, said economist Sam Tombs at Pantheon Macroeconomics, though they "aren't a decisive blow to the chances of a May rate hike", with two more reports to be published before then.
Unemployment rose for the first time in nearly two years despite a solid 88K, or 0.3%, quarterly rise in employment, because 134K people entered the workforce. "The rise in unemployment, then, looks like a blip, although it will still instil some caution on the MPC."
With wage growth continuing to strengthen modestly, with month-to-month growth in wages excluding bonuses averaging 2.9% in the second half of last year, up from the 2.4% average of the first half, and surveys indicating that pay settlements have picked up at the start of this year, "it won't be long before the headline rate of year-over-year growth in wages climbs to 3%", Tombs said.
With productivity growth also recovering and a decline in consumer confidence over the last six months, Tombs suggests "few individuals will take a risk on a new job, easing the pressure on firms to pay more to retain staff. Accordingly, we continue to doubt that wage growth will recover fast enough to compel the MPC to hike rates again as soon as May."
0950: Data from the Office for National Statistics shows the unemployment rate rose to 4.4% for the three months to December from 4.3% a month earlier, where it was expected to remain. This was the first increase in the unemployment rate in nearly two years.
The ONS also revealed a 88,000 increase in employment change in the period, which was half the 165,000 expected, but that it was a rise in the participation rate that pushed the unemployment rate up.
0916: Shares in the AA have skidded off the road - down 22% to a new all-time low below 90p. The roadside assistance group slashed its dividend and warned profits would be lower as new digitally-focused chief executive Simon Breakwell, a former Expedia and Uber executive, makes a swerve down a new strategic route. The FTSE 250 company will pour more investment to support a significant move into 'connected car' technology and insurance, though this will result in profits falling as much as 15% in the current financial year.
Breakwell aims to "embed" the AA app as members' core tool and roll-out the company's Connected Car product to tens of thousands of existing customers, target new, younger customer groups to grow, broaden the insurance footprint, integrate digital products and data and "take the AA from a company helping when you break down to one actually predicting when you might break down in the first place".
0910: Analysts at Morgan Stanley said Lloyds guidance for costs to fall below £8bn signals a big reduction in charges for PPI and other one-offs. They upgraded their forecast for 2020 earnings per share by 11% and pencilled in £1bn of buybacks a year, implying a dividend yield of 7%. The buyback "should more than compensate" for the profit miss and investors' "focus should be on the strategy plan".
Lloyds shares are up 2% to 69.23p.
0830: Wednesday's London open report finds stocks trading slightly lower, taking their cue from Wall Street as investors looked ahead to key UK jobs data. At 0825 GMT, the FTSE 100 was down 0.1% to 7,237.34, while the pound was flat against the euro at 1.1341 and down 0.1% versus the dollar at 1.3976.
Results from Lloyds and Glencore were a bright spot. Despite missing expectations on full-year profit, Lloyds shares are up as the bank announced a £1bn share buyback and increased its annual dividend by a fifth.
Commodities giant Glencore gained after it declared a $2.9bn dividend to be paid out in two instalment of $0.2 in 2018 as its much-improved balance sheet left directors feeling more confident about the future.