Contours and gradients
- BoE held rates steady, as expected, attention swings to November MPC meeting
- BoE said some near-term indicators have been somewhat stronger than expected
- GBP likely to be increasingly driven by Downing Street and not BoE in near term
- Further UK rate cut still a possibility in December
- Fixed-income sentiment and fluctuations play an increasng role, affecting markets
- Bond yields have resumed higher this week after rebounding from the lows in July
- Expectations growing for BoJ to shift emphasis back to (even more negative) rates
- Steeper yield curves — not just in Japan, but globally — is a key theme ahead
- Implications for FX are continued heightened volatility
“The contour eludes me” — Paul Cezanne
Earlier in the week, we suggested that the chances of further accommodation from the Bank of England this week were “very low indeed”, and that the bank would likely reassess the situation at its November (“Super Thursday”) meeting. At that point, the BoE will be furnished with updated projections from the quarterly inflation report (QIR). While this essentially was the outcome of the BoE's September 15 meeting, there were a number of interesting points to note.
The BoE held rates steady but acknowledged that “a number of indicators of near-term economic activity have been somewhat stronger than expected”, and as a result that the slowdown in the second half of this year “may be less severe” than it had forecast in the August inflation report. However, while acknowledging this, the monetary policy committee clearly stated that there had been “no new information since the August Inflation Report relevant for the longer-term prospects of the UK economy” and that ultimately, the MPC’s view of the “contours of the economic outlook are unchanged”. Furthermore, if the August outlook were reaffirmed by the November QIR, then the “MPC majority expect a rate cut”, the bank said.
This sentiment is at odds with the market's expectations before the meeting, which had edged towards a more hawkish response from the MPC in light of the rebound in composite output expectation indices (and the already significant monetary easing in August). The MPC also clearly pointed out that the impact of the bank's package of measures “led to a greater than anticipated boost to UK asset prices”. In a further defense of the MPC's activism, Governor Mark Carney’s decisive leadership at a time of political and economic instability helped shield the UK economy and restore confidence.
Threadneedle Street to Downing Street
As we discussed earlier in the week, however, the debate (globally, not just in the UK) is increasingly transitioning towards fiscal stimulus, and away from (most specifically non-standard) monetary stimulus. In this regard, ECU global macro team member Charles Goodhart summed up our sentiment in relation to a November rate hike yesterday when he said “it’s clear that policy is shifting from monetary to fiscal. It’s going to be fiscal policy driving the economy. And the MPC are not going to know when they next meet in November” what fiscal plans will be announced in the autumn statement three weeks later.
A further UK rate cut is still a possibility in December in our opinion. However, the trajectory of UK activity and indeed GBP is likely to be increasingly driven from Downing Street and not Threadneedle Street for the near term.
The Bank of England, nicknamed "The Old Lady of Threadneedle Street", shown here ravished by William Pitt the Younger, in a 1797 cartoon against the introduction of paper money.
Image: Wikipedia/public domain
“I’m the worst Bond, according to the internet” — Roger Moore
With very little in the way of economic data for the rest of this week (except for US CPI on Friday), it is worth mentioning the emerging dominance of fixed-income sentiment and the fluctuations thereof as a leader of the broader financial markets. In essence, bond yields have resumed their move higher this week after their rebound from the lows in July (UK referendum aftermath).
Central banks are fearful of the effects of protracted periods of negative rates, and increasingly aware of the dangers of yield curves that are low and flat at the same time. Growing market expectations are that the impending BoJ monetary policy review will shift the emphasis back towards (even more negative) interest rates and away from quantitative easing purchases as the primary monetary policy tool. These interpretations have led to steeper yield curves — not just in Japan, but globally — and this is a theme that we feel will become increasingly dominant going forward.
For now, the bond market correction is fairly orderly (stop-start), and until — or unless — there is a clear trend, the implications for FX are continued heightened volatility rather than trend. However, after a very volatile complex and disjointed year in FX so far, we are increasingly convinced that we are approaching the start of more sustained themes and trends.
— Edited by John Acher
Neil Staines is head of trading at ECU Group