John M. Bland, MBA, co-founder, Global-View.com
Bank Of England Changes Market Expectations For Policy Last Thursday saw global financial markets keenly focused on the latest Bank of England policy decision. A month ago, traders had a 25bp rate hike locked into their market expectations. However just about three weeks ago Bank of England Governor Carney had sent signals to the markets that a hike at this meeting was unlikely due to an unforeseen slowdown in 1Q18 growth. Many in the markets were then feeling that Carney had only postponed a rate hike until August of this year and thus were expecting the BOE to take a hawkish tone after the conference. As expected, the governing council voted to keep rates steady, but market hawks were disappointed by the 7-2 vote in favor of a steady policy for a third straight time. It was felt that a vote of 6-3 could have been a subtle hint that a rate hike would be still on the cards for August. In addition to a “neutral” vote, some were disappointed by the cautious tone of the policy statement and remarks by Governor Carney.
Cautious Carney Mark Carney in post meeting comments, noted that the domestic economy and inflation have been weaker than expected and that the key question for the MPC was whether this weakness was only trasitory. While many haved blamed the winter weather for 1Q18 softness, some worried that more lasting factors might be in play. Carney stated that the U.K. economy simply had not fulfilled the conditions for a rate hike since February and said that Brexit has been a drag on investment. He noted that the drag is persisting, but has not been intensifying. He expects greater uncertainty on consumer spending, and for it to grow at only half the pre-Brexit pace.
One Rate Hike Still Seen This Year The Central bank is sticking to the view that a rate hike is still probable this year. They are predicting (hoping?) that much of the slowdown in Q1 GDP growth will have been temporary and continue to expect a recovery in 2Q18 GDP growth. Unchanged forecasts for 2019 and 2020 meant that the broader view of the economy remains intact. Governor Carney said he expects an interest rate rise this year if there aren't any shocks to the economy, and that it will need modest tightening over the BOE’s forecast period. He indicated that the is not on a pre-set path, in other words we are not “trigger happy”.
Financial markets were not as sanguine as the BOE. After the meeting, they were attaching roughly only a 50% probability to an August rate hike. At this juncture, those odds are looking to be the on the high side to me. What happens next will hinge on future data releases, so expect trading to be highly sensitive to upcoming releases.
GVI Trading. Potential Price Risk Scale
AA: Major, A: High, B: Medium
Tue 15 May 2018
AA 08:30 GB- Employment
A 09:00 DE- ZEW Survey
AA 09:00 EZ- GDP
Wed 16 May 2018
A 09:00 EZ- final HICP
A 12:30 US- House Starts/Permits
A 13:15 US- Industrial Production
A 14:30 US- EIA Crude
Thu 17 May 2018
AA 01:30 AU- Employment
A 13:30 US- Weekly Jobless
A 14:00 US- Leading Indicators
Fri 18 May 2018
A 12:30 CA- CPI/Retail Sales
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