Is Carney really to blame for the market’s wobble over Bank of England hikes?

Since cable’s collapse from 1.43, and the fall in economic indicators like GDP and inflation, Carney has been likened to a “sensitive boyfriend” and “unreliable boyfriend”. He’s been accused again of making a mistake in “supposedly” being super hawkish about rate hikes and calling the economy wrong.

I think he’s been a bit hard done by this time and that really, the histrionics are coming from the other party in this relationship. This spouse is the unsteady, always demanding, prone to mood swings and unreasonable expectations. A partner who always wants more and will throw a hissy fit when it doesn’t look like it’s going to get it.There is only one party to blame for the high expectations around this May meeting, and there’s only one party who’s thrown the proverbial toys out the pram since. The old ball and chain in this relationship is the market.

Here’s why.

Back at the Feb BOE meeting and inflation report, the minutes had a line that said;

“The Committee judges that, were the economy to evolve broadly inline with the Feb inflation report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report…”

During the presser, Carney went on to explain the comments further, although as you can see from the vid here, he struggled to put the right language together so as not to make matters worse.What followed were some further nursing of those thoughts by other BOE members but the real underlying message from the BOE has been consistent yet completely ignored.

The BOE has been saying that inflation would fall back from 3% and although they’re off with their timing by a few months, they can be afforded some room on that;

March 2018 MPC: “CPI inflation fell from 3.0% in January to 2.7% in February. Inflation is expected to ease further in the short term although to remain above the 2% target”

They’ve also been cautious on the economy saying;

Feb 2018 MPC: “Household consumption growth is expected to remain relatively subdued, reflecting weak real income growth.  GDP growth is expected to average around 1¾% over the forecast, a slightly faster pace than was projected in November despite the updated projections being conditioned on the higher market-implied path for interest rates and stronger exchange rate prevailing in financial markets at the time of the forecast.”

The first big standout is that the line on hikes happening earlier from the Feb minutes, was omitted from the March minutes. The paragraph in the minutes changed from this in Feb;

“The Committee judges that, were the economy to evolve broadly inline with the Feb inflation report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November report…”

To this in March;

“As in February, the best collective judgement of the MPC remained that, given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon.”

So why was that ignored by the market that went of to make those highs in cable?

Secondly, the Q1 GDP report puts y/y growth bang on what they’ve been forecasting.

Thirdly, when you read back over the statements and minutes of the last two meetings, there is absolutely no signal that rate hikes would be coming as soon as a month or two away, far sooner than what most in the market had been previously predicting as early 2019. In fact, there is absolutely nothing hawkish in the last two meetings other than a message that rates might rise sooner “IF” the overall economy develops as they expect over the coming months. That’s a bloody big “IF” in there.

Yes, we’ve seen the vote change but it’s not surprising to see a vote for hikes by arch hawk McCafferty (who has a record for short-term thinking by voting for hikes and then reversing that decision shortly after).

The long and short is that there has been nothing from the BOE to put May in the frame and it’s been purely all about the market winding itself up and then bursting its own bubble. Fundamentally, I didn’t understand much of why GBPUSD rose to 1.4300, much less why it’s dropped back 800+ pips. The BOE stance has been the same throughout. The economic trend has been the same throughout.

All that said, this is what makes up 99% of trading, the expectation of something happening. The market went too far in expecting a hike, and it’s gone too far reversing those expectations. The evidence from the economy shows the UK doesn’t need a hike. We’ve had a soft quarter and there’s worrying signs of a proper slowdown. On the other side, the pull back in inflation is likely to be temporary as prices are going up in many sectors. I only need to monitor one indicator and that’s the ‘Wife: Do-you-know-how-much-that-last-shop-cost? indicator’. Energy bills are going up, pump prices are going up but we’re also seeing a definite passthrough into other non-energy price streams. Inflation has always been a big battle for the BOE and one where it’s usually powerless to affect it with rates. But, still they try.

So, for this meeting, rates aren’t staying on hold because the BOE has had a change of heart, because there was no heart to change. Rates aren’t going up because the economy doesn’t warrant a hike right now, just as it hasn’t for the last 6 months. If the BOE do do the unthinkable and hike, that just confirms that they want the extra rate margin if the economy does falter further.

It’s easy to get caught up in the noise and we’ve all done it over this episode. We’ve all moaned that Carney is pulling another stunt or that the pound is facing impending doom. I’ve done it too but when you take the time to step back and look at everything in a clear light, things can look a little different.

What’s the Trade for the BOE then?

Nothing in the analysis above changes how the market is thinking. It’s still going to want to know (and judge) whether the BOE is hawkish or not. It’s now even starting to get itself excited about a possible hike in August (WTF did that come from?). It’s going to roll with Carney’s comments and what it will interpret as any reversals, like the prior BBC interview where he said that the BOE would be considering other meetings. It doesn’t matter which way Carney turns, he’s likely to be met with further GBP selling unless he does pin a tail on a donkey for a hike. The likelihood is that we see the quid suffer again but because we’ve come so far already on a mix of BOE selling and USD buying, how much further we fall is unknown. That doesn’t all mean the pound can’t rise but on the evidence in front of us, it’s going to take a lot to see it happen and 0.1% growth in the 1st quarter is not indicative of an immediate hike.

My main line of thinking for trading this one is that if we get any repeat of talk about raising rates sooner than expected, the quid will go up but it will be more cautious this time. If Carney isn’t hawkish on the basis of the current data, the pound will fall further. If he utters anything remotely close to thoughts of cutting rates, we’ll be dropping like a stone. The first thing to watch for will be the vote. If either Saunders or McCafferty turn tail this quickly we’ll get our first indication of a dovish message coming. For me, the price direction isn’t clear. We’re facing what the market expects, what the data is telling us, and what Carney will say. That’s three opposing forces. If I had a gun held to my head, I’d say we see cable lower after the BOE but in reality, this will be one to play by ear rather than steaming in with a positional view into it.

I’ll have to look at the levels closer to the meeting to see what the actual trading picture is like because with so much going on right now, I’m certainly not going to plan any trades or look at the closer levels this far out, and with so much stuff moving markets at the moment.

Ryan Littlestone

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