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Thursday May 9 2024 10:09
7 min
Shares in London are flat early doors ahead of the Bank of England, with the FTSE 100 index just about eking out a tiny new all-time high at the open where it’s camping out around 8,355. No one expects a move on rates today from the Bank’s Monetary Policy Committee but recent strength in the stock market suggests a cut around the corner.
US stocks were mixed on Wednesday with the Dow rallying and the S&P 500 flat as a pancake. Tesla moved lower on reports it’s facing securities and wire fraud investigations – I’d think the move ought to be bigger. Uber and Arm Holdings were among the tech names to fall hard after hours on disappointing earnings scores.
Yields rose overnight with the 10-year Treasury back to 4.5%. Japanese govt bond yields rose to ten-year highs with minutes from the last Bank of Japan meeting showing policymakers were hawkish despite the rather more nuanced tone struck by Governor Ueda.
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The Bank of England is expected to leave rates on hold today but signal a cut in the summer. Signs that the labour market softening is easing may be a worry, and wages are still moving higher at a rare old clip.
Inflation forecasts are going to be key, and these seem set to be revised downwards for two and three years ahead. Below-target inflation over the forecast horizon would be a signal that the BoE thinks the medium-term outlook is supportive of cuts.
Although the stickiness of services inflation in April, which remained stubbornly high at 6.0%, the Bank of England seems confident that inflation is coming down. In the last quarterly Monetary Policy Report in February CPI inflation was projected to be 2.3% in two years’ time and 1.9% in three years.
Messaging is likely to shift further towards a cutting bias – whether or not there is an explicit green light for August is up for debate. This would only chime with market pricing but could be seen as a modest surprise since the Bank of England has been playing its cards close to its chest of late.
A green light for June would be a dovish surprise. Nevertheless, Deutsche Bank expects the Monetary Policy Committee to “set the stage for a June rate cut”, whilst HSBC also forecasts the first rate cut to come next month. Andrew Bailey speaks after the decision, with chief economist Huw Pill to tidy up any mess a few hours later.
The split of the vote is unlikely to be the most important signal – MPC members have been openly at odds. I think Ramsden follows Dinghra with a vote to cut today though, seeing a 7-2 split vs the 8-1 split last time.
Deputy governor Ramsden said last month that he did not need to see much more evidence of falling UK inflation to vote for a rate cut as inflation could stick around the 2% target for the next three years.
The problem for the BoE to cut as soon as we would all like is that whilst excess demand in the economy has declined a lot, and energy prices are a lot better, potential supply growth is very limited. Potential supply determines the level of output the economy can sustain without generating excessive inflationary pressures.
And it’s a problem for the economy, not just how far we can stretch our incomes. “Over the past year, businesses have responded to the weakness in demand by retaining their existing employees, while using them less intensively,” the Bank said in February.
But the good news is that the Bank sees improvement — potential supply growth is expected to pick up to around 1.25% per year in 2025 and 2026, which was more than forecast a year before, albeit below historic trends.
So, markets will be paying close attention to what the Bank thinks about supply growth. The movement appears to build the case for a rate cut sooner than later: “Although potential supply growth is expected to be relatively subdued, particularly in the near term, the outlook for demand is weaker”, read the BoE’s February Policy Report.
GBP to USD trades a little above yesterday’s weekly low ahead of the meeting. Yields were higher as global sovereigns fell; the 2-year gilt was at 4.334%, with the 10yr at 4.168%. Bloomberg issued an interesting report about the Bank of England making waves in money markets with its bond sales — something the BoE will be considering.
USDJPY was higher again despite the hawkish noises. Real wages were down 2.5% in March – the 24thconsecutive decline which will constrain any hawkishness from the BoJ.
And oil prices were firmer after US inventories showed a draw as refiners ramped up activity. Inventories fell by 1.4m barrels. Some stronger-than-expected trade data from China was also a positive. Exports rose 1.5% in dollar terms vs the 7.5% decline in March, whilst imports rose 8.4%.
When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.
Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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