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Don't write off the outlook for the construction sector purely on the basis of June's grim Markit/CIPS survey.
In our view, the chances of a no-deal Brexit on October 31 have not surged just because Boris Johnson has become Prime Minister and is gesticulating wildly at the Despatch Box.
The MPC surprised markets and ourselves yesterday by the extent to which it abandoned its previous stance and is now emphasising inflation over growth risks.
On the face of it, markets' newfound view that the MPC's next move is more likely to be a rate cut than a hike was supported by May's Markit/CIPS PMIs.
The sharp fall in markets' expectations for Bank Rate over the last month has partly reflected the perceived increase in the chance of a no-deal Brexit. Betting markets are pricing-in around a 30% chance of a no-deal departure before the end of this year, up from 10% shortly after the first Brexit deadline was missed.
U.K. activity data have consistently surprised to the downside over the last month.
The MPC's unanimous decision to keep Bank Rate at 0.75% and the minutes of its meeting left little impression on markets, which still see a higher chance of the MPC cutting Bank Rate within the next 12 months than raising it.
The pound can't get a break. Sterling fell to just $1.24 yesterday, its lowest level against the dollar since March 2017, bar the momentary "flash crash" in January.
Interest rate expectations continued to fall sharply last week.
We are pushing back our forecast for the next rise in Bank Rate to May 2020, from the tail-end of this year.
The MPC will have to issue fresh, dovish guidance in order to satisfy markets on Thursday, which now think the Committee is more likely to cut than raise Bank Rate within the next six months.
Investors have concluded from June's Markit/CIPS PMIs and Governor Carney's speech on Tuesday that the chance of the MPC cutting Bank Rate before the end of this year now is about 50%, rising to 55% by the time of Mr. Carney's final meeting at the end of January.
December's consumer prices figures, released tomorrow, look set to show CPI inflation ticked up to 0.2% from 0.1% in November, despite the renewed collapse in oil prices. The further fall in energy prices this year means that the inflation print won't reach 1% until May's figures are published in June. But Governor Carney has emphasised that core price pressures will motivate the first rate hike--a focus he likely will reiterate in a speech on Tuesday-- meaning that a May lift-off is still on the table.
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