Waiting for the Bank of England's Super Thursday
- US GDP broadly disappointing, but consumer spending not too bad
- Reserve Bank of Australia cuts rates amindst low inflation
- Significant monetary easing from the Bank of England likely this week
- We are hawkish/bullish the UK, GBP relative to both expectations and peers
By Neil Staines
“Life is about timing” — Carl Lewis
Over the weekend, Federal Reserve Bank of New York governor William Dudley said that the “markets put insufficient weight on economy outperforming”, a view that we would agree with, in respect to the US economy.
Ss with many things in life, however, financial markets are all about timing.
The disappointing US GDP release at the end of last week is a case in point. The headline print was very disappointing (lowest since Q1 2010 on a nominal basis), however, with consumer spending running at 4.1%, and final sales at 2.6%, the data are not as bad as they seems, even if, for now at least, the disappointment is weighing on sentiment and the USD.
We are inclined to agree with Dudley that there are many areas in which the US economy can outperform expectations over time. However, in the near term, and for the global economy, the risks remain to the downside.
The global baton of monetary accommodation was picked up by the Reserve Bank of Australia overnight, as they cut their cash rate target 25 basis points to a record low of 1.50% (read more about this in today's Morning Markets). The statement itself contained many sentences that are now becoming the core "off-the-shelf" global monetary policy statement, such as “overall growth is continuing at a moderate pace” and “subdued labour costs mean inflation is likely to be low for some time”.
The RBA did, however, go on to state that the prospects for sustainable growth and for CPI returning to target are improved by the rate cut, suggesting that the RBA may be at or very near the bottom of the rate cutting cycle, ceteris paribus.
“Focus is a matter of deciding what things you are not going to do” — John Carmack
After the BoJ disappointed markets with its wait-and-see approach to further stimulus on Friday (though it did offer minor increases in the ETF purchase and USD lending programmes) all eyes were on the details of Abe’s fiscal stimulus package this morning. However, the theme of disappointment continued.
In reality the disappointment is likely more a function of the market’s desire for ever-further "shock and awe", particularly from arguably the most activist of global central banks/governments, but failure to deliver on some of the more extreme measures such as 50 year bonds (or even perpetuals) outweighed the positives of a package that likely amounts to a 1.3% GDP boost.
This week, GBP is once again the core market focus as Super Thursday makes a return, bringing with it new growth and inflation forecasts for the post-Brexit UK. Expectations of a rate cut are fully priced into the interest rate market (though FX market price action suggests a less than certain conviction). Furthermore, expectations that the QE liquidity taps are about to be reopened show almost as high a level of conviction.
Regular readers of this post will be aware that we are hawkish/bullish the UK and GBP relative to both expectations and its peers (at least ex-US) and while we concede that a significant monetary easing is to be expected from Thursday’s BoE meeting, we would suggest that far from sounding the death knell for GBP, such accommodation could well prove the ideal opportunity to re-engage medium term GBP longs.
“Progress is not created by contented people” — Frank Tyger
Taking a step back from the near term interest rate expectations, driven by the substantial Brexit uncertainties and a clear knee-jerk decline in recent sentiment and activity data (most notably the service sector PMI disappointment), there are a number of indicators that, perhaps against a more conventional backdrop, could well argue against monetary easing at the current juncture.
Firstly and most obviously is the 11% drop in the value of GBP in FX markets. Such a currency devaluation is an implicit loosening of monetary conditions and indeed one that many members of the Eurozone would have gladly welcomed, had they not sacrificed such an important economic counterbalance for the prize of Eurozone membership.
Secondly, government directive and Bank of England emergency liquidity operations have seen the M4 (core) measure of money supply up 8.0% 3m annualised (a sharp jump) in June, with M4 bank lending up 7.3% - money supply figures that in their own right might suggest a rate tightening cycle, not the redoubling of an easing one. If we combine this with the fact that lending to consumers is rising at its fastest pace in 11 years, it is hard to argue from a neutral position that more easing is urgently required.
“An' lea'e us nought but grief an' pain, For promis'd joy!” — Robert Burns
However, the Bank of England is far from being in a neutral position. Having been complicit in forging the expectations of imminent monetary easing, the BoE is now in a position where failure to deliver on promised easing would in fact lead to a significant tightening in monetary conditions (explicitly across interest rate and FX markets).
In our view, it is likely that we get a significant monetary easing from the Bank of England this week (and even a slowing of the pace of austerity – or a fiscal easing – in the Autumn Statement), however, from our point of view this likely provides a medium-term buying opportunity for GBP.
The immediacy with which that opportunity arrives depends on the severity of the easing the BoE see fit to deliver on Thursday. To mirror Dudley’s sentiment, in the medium-term the markets put insufficient weight on the [UK] economy outperforming. The rest is... timing.
— Edited by Clemens Bomsdorf
Neil Staines is head of trading at The ECU Group