IGM Credit, IGM FX and Rates
03 Aug 2020
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BoE/UK INSIGHT A bolt from the blue on successive days as the BoE/MPC left no doubt that there has been a behind-the-scenes policy shift. Publicly, the BoE/MPC left Bank rate steady at 0.25% at the conclusion of the Sep meeting by a mostly expected 7-2 vote though there was significant risk for 6-3 - this following the ramp up in inflation to a 5-year high 2.9%. The CPI topped estimates as did all the other inflation metrics and prompted the more hawkish minutes warning that rates could be tightened in coming months. Several macro reasons cited, but capacity being eroded at a quicker rate than some expected the most telling. There was little reference to Brexit and while growth was seen staying where it is in the s/term, the MPC now seems more concerned that stimulus taken (last year plus other measures) may be stimulating too much. Shock number two came via previous dove Vlieghe who compounded the hawkish slant by stating that rates would need to go up more than once if the economy evolved as expected. He also thought the equilibrium rate is now higher than he thought. All this marked a sea change and divergence from Aug's message - via the QIR, mins and from Gov Carney. Gilt yields had seen recent lows revisited (just below 1%) but punched on to reach 1.25% after the BoE surprise. In Aug's QIR f/c 2017 GDP was trimmed to 1.7% from 1.9%, and 2018 by a similar amount as well, and lowered future wages to 3%. BoE's resident dissenters were Saunders and McCafferty (for the 3rd month), Hitherto guidance indicated the first hike in Q3 2018, 2nd by H1 2020, but obviously these estimates are now confound to the history books. While the MPC had stated that it didn't want to pin itself to the market's assumptions, clearly the new guidance was intended to send a clear and changed message. We suspect a knife-edge vote in Nov as some members will want to see more data and the Gov will prefer a unanimous verdict to lift rates for what would be the first time in a decade. November hike chances (via WIRP) are now at 64% vs 35% shortly after Aug's QIR, As a result we affirm our UK 10 YR Gilt target for 1.50% in Q4 and next year we wouldn't be surprised to see a 1.50-1.90% range. AB
[BoE POLICY OUTLOOK . BANK RATE 0.25%, LAST MOVE -25 BP AUG 2016, NEXT MEET NOV 2 2017]
IGM Credit, IGM FX and Rates
By Tim Cheung 03 Aug 2020
Xinhua News Agency reported the Politburo held a meeting on the economy on 30 July (Thursday). The CCP also held a meeting with non-CCP political parties and non-political representatives. President Xi chaired both meetings. Compared to the meeting held on 17 April, we note some changes in wording were made to the remarks on monetary and fiscal policies in the 30 July meeting. 30 July meeting (as per Xinhua News Agency): - "While requiring full implementation of macro policies, the meeting called for pursuing a more proactive and effective fiscal policy that delivers solid outcomes, and a more flexible and appropriate monetary policy that targets sound results, according to the meeting". 17 April Meeting (as per Xinhua News Agency): - "Monetary policies should be more flexible and balanced and instruments such as reserve requirement ratio cuts, interest rate reductions and reloans should be fully leveraged to ensure reasonable and sufficient liquidity and a lower interest rate in the loan market, the meeting said, stressing the need to channel capital into the real economy, especially medium-sized, small and micro enterprises".
Topics Industry News