BoE: Stitch In Time Saves 9

BoE: Stitch In Time Saves 9

Neil Wilson  | Jan 13, 2020 11:18

  • MPC front runs eco data with dovish remarks
  • Window to cut rates in Jan
  • Gilt yields, pound weaker

A stich in time saves nine, and so an early rate cut is just what the nine-strong MPC is about to order. Markets are moving swiftly to price in an interest rate cut by the Bank of England, after MPC rate setter Gertjan Vlieghe set tongues wagging about a possible rate cut by the Bank as early as this month. Some nasty GDP and manufacturing numbers for November seem to have been front run by the MPC.

He said: "I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.” Vlieghe’s comments build on those by governor Mark Carney and rate setter Silvana Tenreyro. Vlieghe is a known dove but the picture that has been constructed over the last week is no accident. Michael Saunders, who voted to cut at the last two meetings of the Bank of England, will be speaking on Wednesday, when we would of course expect him to carry on the rhetoric.

What would constitute ‘significant improvement’ according to Vlieghe is not entirely clear, but today’s GDP and manufacturing numbers only make a cut this month more likely – the numbers certainly don’t add up to a pickup by any measure.

GDP –0.3% vs 0% expected

Manufacturing production –1.7% vs –0.2 expected

Industrial production –1.2% vs 0% expected

GDP declined by 0.3% in November against a flat reading expected, although in the three months to Nov the economy grew a little more than expected. Worth remembering that this data is backward looking and before the Tory victory, but this only adds to the sense that the BoE has a neat window of opportunity to cut this month.

As I explained in the morning note, there is a sense the Bank doesn’t want to get behind the curve of market expectations, and is seeking to get a jump on markets whilst still teeing up the cut. It would be following the Fed’s playbook in cutting early in order to prevent a downturn. This is the key thing to remember – the Bank does not want to let a weaker economy fester.

And whilst there is no trade deal with the EU, the MPC has been largely released from the shackles of Brexit uncertainty following the Conservative victory last month. Political risk has hobbled the MPC but this has diminished greatly and now is the window – before a possible clash with the EU in the spring that would make policy changes more political in nature – to get a cut in the bag to juice the economy.

Moreover, one can imagine that the Bank had sight of these numbers and wanted to get the first punch in with some dovish comments from policy makers.

The pound softened markedly and gilt yields declined in rapid fashion, with markets now pricing a 50% chance of a rate cut this month, which is up from around 5% as recently as Friday.

GBP/USD is struggling to cling to the 1.30 round number support, sinking as low as 1.29650. With the 23% Fib level at 1.3140 having been taken out, a move to the 38.2% level at 1.2920 is possible should 1.30 fail to hold by the close today. I did think that, on balance, there is a good chance the bulls defend this level today but the weak GDP and manufacturing numbers make it look very tricky.

Utilities rose to the top of the FTSE after Vlieghe’s comments combined with the softer eco data sent UK gilt yields tumbling. The policy-sensitive 2yr gilts dropped a tenth to 0.482%, while 10yr gilts declined to 0.752%. Bond proxies Centrica (LON:CNA), United Utilities (LON:UU) and Severn Trent (LON:SVT) all rose over 2% as a result to top the leadersboard as the FTSE made broad but slim gains.

Neil Wilson

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