02 Feb 2018
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BoE POLICY OUTLOOK BoE Gov' Carney has revised his guidance (on Jun 28th) via a significant alteration to his Mansion House narrative - the turn on a sixpence. As we said at the time of his MH blind-sided guidance, it didn't cut ice with our view that the UK rates structure is too low/benign. Carney has a track record of trying too hard to fine-tune expectations, and unlike his US CB counterpart hasn't mastered the art (or had the experience) of warming markets up for big policy changes. He essentially ignored the far tighter than expected Jun '5-3' vote, and then comments in successive days via Forbes and most notably from the chief economist, Haldane. The latter a previous dove now turned. However, the forum in Sintra, has seemingly made amends and now the market has the bit between its teeth and via pricing models there is risk of 2017 tightening whereas most didn't see the risk until 2019 (post Brexit). Voting dynamics now are very interesting for the Aug 'super-meeting', McCafferty and Saunders are likely to cast a similar vote in Aug, but now Haldane could make up for now left Forbes (dramatically hawkish in her final speech) - who is actually replaced by the relatively unknown newcomer Tenreyro. The newby heralds from the LSE and she has held dovish views before and was anti-Brexit. Irrespective of a 5-4, steady vote, risk/reward favours far more curve steepening as the odds of moves in Aug and Nov have soared. While Aug is just 23%, Nov has crept over 50%. Implied probabilities should increase further as meetings draw nearer especially if data is aligned. We maintain our (Jun 23rd) shout for the 10-year to hit 1.30% and can't see much to stand in the way of 1.50% - looks feasible before the Nov meeting.
What to look for in August's guidance:
In Jun minutes. policy makers stated that Q1 GDP is expected to be revised up to 0.3% (looked suspect at the time) with further improvement in Q2, to 0.4% q/q. Cited; export surveys/investment intentions running above average, acknowledgment of 'surprise' low wages given historic norms and inflation to come, over 3% (already 2.9%) and a view that continued employment growth could suggest spare capacity and inflation tolerance is being eroded faster - Carney also admitted this and we also remember his line that Brexit didn't tie the MPC's hands. BANK RATE 0.25%, LAST MOVE -25 BP AUG 2016, NEXT MEET AUG 3 2017
IGM FX and Rates, IGM Credit
By Marcus Dewsnap 20 Nov 2017
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