HALISTER1: BOE PREVIEW: Outlook Matters Most as Further Easing Not a Given

BOE PREVIEW: Outlook Matters Most as Further Easing Not a Given

(Bloomberg) -- The BOE is unlikely to ease further at this week’s meeting as data continues to come in stronger than many had feared after the vote to leave the EU, analysts say.
  • With the bank’s governor Mark Carney reiterating his concern last week about the impact of negative rates, FX strategists are split on how the pound will react on Thursday
  • The BOE will publish its decision and minutes of the meeting at noon on Thursday; the next meeting will be November when Inflation Report will also be published; Michael Saunders joins the monetary policy committee, replacing Martin Weale
  • WHEN WILL BOE EASE AGAIN?
  • RATE CUTS
  • RBS economist Ross Walker and Goldman Sachs’s Andrew Benito no longer expect a further rate cut this week and pushed back the timing to November, while BofAML analyst Robert Wood changed his call for a 15bps cut to February 2017 from November previously
  • Barclays economists expect the BOE to refrain from cutting rates but predict a 20bps cut in November
  • MORE QE
  • BNP Paribas expect a 15bps rate cut and GBP50b more QE in November, but with a risk of delay if the data continues to surprise to the upside
  • Goldman analysts expect a cut to 0.10% in November; an extra GBP50b of QE could also be in store but doesn’t think asset purchases will be expanded this year
  • A RADICAL SHIFT
  • Nomura Anna Titareva says wouldn’t rule out the idea that QE could be radically altered or even terminated early in November if the macro situation pans out much better than the Bank forecast
  • HOW TO TRADE IT
  • RATES
  • Deutsche Bank analyst Jack Di-Lizia says headwinds to gilt performance are building and remains short UKT 5Y5Y; says front end may struggle to flatten further so long as BOE continues to credibly argue against negative rates
  • Unlikely front end, SONIA rates will price significantly lower further easing expectations so stay long Nov16 MPC OIS, JPMorgan analysts including Fabio Bassi write
  • BofAML analyst Sebastien Cross favors long 20Y on ASW as QE continues to help cash outperform swaps
  • FX
  • As for the pound, BofAML’s Kamal Sharma says the improvement in data may have taken out the risk of further near-term BOE action but isn’t likely to spur sustained GBP gains; the large short may turn out to be structural after the vote to leave
  • JPM analysts including Paul Meggyesi say any economic relief for GBP to be limited; sterling is doubtless cheap from a long-term perspective but expect it to cheapen further
  • RBS analysts Paul Robson and James Nelligan say MPC doesn’t look set to to be a key driver for sterling as MPC says lower bound for rates is nearby
  • Citigroup analyst Josh O’Byrne sees a 75% chance there’s little change at Thursday’s meeting and GBP will edge lower; if the bank did talk down the case for another cut or if there’s any sign of reluctance to extend gilt purchases, cable could rise around 0.85%
  • BREAKEVENS
  • Nomura’s Anne Karina Asbjorn sees good reasons for the curve to be significantly steeper in 3-6 months but many of those don’t kick in for 1-2 months and the seasonally strong LDI period takes place in the interim
    • Preferred trade in U.K. rates space is long breakevens, via 30Y inflation swaps which can benefit both from rising outright yields and (linker-focused) LDI buying; also favors 3s7s steepeners
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Mark Carney (Bank of England)
Andrew Benito (Goldman Sachs International)
Anna Titareva (Nomura Holdings Inc)
Anne Asbjorn (Nomura Holdings Inc)
Anne Karina Asbjorn (Nomura Holdings Inc)

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