Notes From The August Meeting
Expectations were running extremely high ahead of the August BOE meeting with traders anticipating that the BOE were going to follow through on earlier signals and deliver easing measures. However, opinions were split regarding which measures the BOE were likely to use with some looking for a basic rate cut whilst others forecast ores expansive measures including QE.
To the surprise of many, the BOE eased across a range of channels in August. The headline cash rate at 0.5% was cut to .25%,, 6 of the 9 MPC members voted in favour expanding QE, which will now run at £60bln over the next 6 months, whilst 8 of the 9 voted to launch a corporate bond buying program, which will run at £10bln for the next 18 months and finally all members voted in favour of a term funding program. Alongside these measures, the BOE noted that the majority of MPC members expected to vote for a further cut in the future though Carney noted that he “is not a fan of negative interest rates” and the lower bound for rates is “close to, a little above” zero.
The BOE noted that their economic outlook “has weakened markedly” following Brexit and growth forecasts have been revised lower in 2017 from 2.3% to 0.8% and also in 2018 from 2.3% to 1.8% with business investment and housing investment also expected to fall over the period. Inflation is expected to pickup due to the weaker pound, forecast to be at 2.1% in 2017 and 2.1$ in 2018 with measures intended to ensure that inflation won’t fall below target in the medium term.
Carney referred to the stimulus measures as “exceptional” and says that by acting early the BOE can reduce uncertainty and bolster confidence.
Sterling was immediately down 200 pips against the US Dollar in response to news of the BOE’s easing measures. GBP continued lower over the week following the meeting, bottoming out around 400 pips lower than the pre-BOE rate, before reversing higher to trade back up to the pre-BOE level.
The key driver responsible for this shift in sentiment has been a slew of positive UK data recently which has fuelled an unwinding of BOE easing expectations.
Data since August BOE
- UK July CPI printed 0.6% vs 0.5% expected on the headline reading and 1.3% vs 1.4% on the core.
- UK Manufacturing PMI August printed 53.3 vs 49 expected, Construction PMI printed 49.2 vs 46.5 expected, Services PMI printed 52.9 vs 50 expected with the Composite PMI in August printing 53.6 vs 50.8 expected
- Some weakness was seen in Manufacturing production which printed 0.8% in July vs an expected 1.7% however Industrial production remained form at 2.1% vs 1.9% expected.
- August CPI whilst below expectations at 0.6% vs 0.7% expected on the headline and 1.3% vs 1.4% expected on the core, remains firm and keeps inflation at its highest level since late 2014.
- The first earnings and employment data to account for the post Brexit period was released today and again we saw positive readings with wage growth printing 2.3% vs 2.1% expected and the unemployment rate remaining steady at lows of 4.9%.
A lot of positive surprise among these data sets with UK Manufacturing PMI hitting a 10 month high and the Services PMI recording its biggest month on month rise in the survey’s history. With the UK’s services sector accounting for nearly 80% the UK economy this rise is a strong sign that the UK economy has responded robustly to the Brexit development warding off signs of the “imminent recession” that many forecast.
Another factor that has leant cable support over the last month is that of positioning. Short positions were at record levels into the meeting as investors piled in expecting the BOE to drive GBP even lower. However, as positive data started to filter in post the August meeting, this extreme short positioning started to see some position squaring leading to the bullish move we’ve seen over recent weeks. With Sterling short positioning moving from highs of -94,978k contracts on 23 Aug to the current -89.969k contracts ahead of tomorrow’s meeting. This also marks the first consecutive weekly reduction in shorts since the Brexit vote.
Expectations Ahead of Tomorrow’s Meeting
Despite the Bank of England’s guidance in August that they expected further easing to be announced, the slew of positive data we’ve seen recently has actually spurred an unwinding of market’s easing expectations ahead of the meeting and those comments in August are not thought to reflect the bank’s current view.
With inflation holding steady at the highest levels of the last three years and PMI data sets rebounding strongly in August it seems unlikely that the BOE would look to use up any of their remaining adjustment manoeuvres at this juncture. Remember Carney noted that he is not a fan of negative rates and that the lower bound for interest rates is close to, a little above zero. So with data so far indicating economic strength, the BOE will likely want to keep its powder dry in-case these indicators start to turn lower in the medium term.
This meeting is also restricted in terms of communication channels as it isn’t one of the bank’s quarterly Super Thursday events and so will only see the decision itself and accompanying statement. With this in mind it seems likely that the bank will wait for further data to come in post Brexit and if any adjustments are to be made, most likely November will be the date the bank have in mind.
In sum, expecting the BOE to sound upbeat on recent data and the resilience of the UK economy post Brexit but likely to warn that should data warrant it they stand ready to act. I think the meeting will probably be neutral for GBP with a little upside risk given the still extreme level of GBP shorts. If the BOE fail to provide a catalyst for near term weakness in GBP I think we are going to see a lot more position squaring here fuelling a GBP upside move.
For technical setups ahead of the meeting please see the video below: