This piece argues that last week’s susprising-hawkish MPC vote and minutes do not represent a dramatic change in the picture for UK monetary policy. The limits to the MPC approach of looking through temporarily above-target inflation, driven by sterling’s post-referendum depreciation, are further from being reached than the minutes-related headlines suggest. So the limited rebounds … More Fade hawkish MPC minutes: contrary to MPC three judgements plus downside risks to UK consumption & net exports
This piece discusses dollar propsects in light of it’s 2017 retracement and the impossible trinity of fiscal expansion, independent US monetary policy and dollar jawboning which the Trump adminstration seems to be pursuing (alongside prospects for US and foreign monetary policy). If Trump eventually delivers a substantial fiscal expansion the impossible trinity seems most likely … More Trump’s impossible trinity likely resolved by dollar strength but potential bumpy ride
This piece previews Thursday’s Bank of England Feburary Inflation Report and MPC minutes, where the key issues will be: (i) how much longer can consumption continue to be the single engine generating UK growth?; and (ii) MPC remain tolerant of prospective above-target inflation? The main points are: MPC will as expected by the market undoubtedly … More February Inflation Report Preview: Focus on Consumers and Inflation Expectations
Recent positive UK data surprises have caused economists to revise up UK growth forecasts and BoE Governor Carney recently hinted that the February Inflation Report would follow suit. Despite that, my argument from last October that UK net exports were likely to disappoint, even with sterling’s sharp depreciation, has proved accurate thus far (Q3 UK … More Poor UK Net Export-Inflation Tradeoffs Following Sterling’s Depreciation
This report analyses the likely FX market implications of the too close to call US election. Overall it seems that markets could, like the Brexit vote, be under-pricing lightening striking. But the dollar could rise irrespective of the result, although more immediately/obviously following a Clinton win, with vulnerable risk-positive currencies likely being most sensitive to … More Could lightning strike twice? FX impacts of US election cliffhanger: Trump win underpriced
I know I’m unloveable, you don’t have to tell me Oh, message received loud and clear, loud and clear The Smiths, Unloveable A month ago I argued (see here) that better near-term UK activity data shouldn’t be interpreted as showing that the UK was out of the woods in it’s difficult Brexit journey. Rather, I … More Sterling becomes unlovable on medium-term Brexit macro worries: further weakness likely
This post previews Wednesday’s highly-uncertain but very important Bank of Japan policy meeting, featuring the Comprehensive Assessment of monetary policy. Overall, there’s a strong risk of BoJ disappointing dovish market expectations thereby generating Yen upside and a bond market sell-off (although the FOMC decision will also impact) and smaller market moves are likely should the BoJ try to … More Yen strength likely with further BoJ ill communication, asymmetric risks
This post previews Janet Yellen’s 26 August Jackson Hole appearance, and the likely market implications. The main points are: Recent FOMC mixed messages – Dudley’s/Fisher’s recent small hawkish drift versus Williamson’s/Bullard’s dovishness, reflecting the difficult issues confronting the Fed – underpin market confusion about Fed policy. Neverthless, markets remain sceptical about the likelihood of further US … More Yellen at Jackson Hole: Don’t Rock the Boat?
This post previews Thursday’s MPC decision and discusses prospects for sterling. The main points are: (i) markets are under-pricing the chances of MPC rate cuts on Thursday and, especially, in August/November. A full 25bp rate cut is not priced by end-year despite Carney’s strong indication of action during the summer. Moreover, immediate action would usefully support … More Markets under-pricing post-Brexit MPC easing: further £ falls as economic weakness trumps recent reduced political uncertainty
Margaret Thatcher’s 1979 election victory speech famously quoted St Francis of Assisi: “Where there is discord may we bring harmony, where there is error may we bring truth, where there is doubt may we bring faith, and where there is despair may we bring hope.” The decision to hold a UK EU membership referendum has … More Brexit vote: where there is harmony may we bring discord (global concerns, UK recession, MPC rate cuts and further £ falls)
Today’s Brexit vote has shaken global financial markets (£/$ touching 30-year lows, safe haven assets like bunds supported while equities have tanked), prompted PM Cameron’s (impending) resignation and caused Mark Carney to stress that £250bn of liquidity is available and appear more open to further monetary easing (backing a little away from the previous “we could … More Brexit signs were there to see if financial markets had been less myopic
This post considers whether sterling’s post-April rally represents an overshoot and dissects the May Inflation Report’s treatment of Brexit-affected asset prices. The main points are: Sterling has, as I expected, continued to closely track betting market Brexit odds, recently down to the low-20%’s from over 40% in April, but has also been supported by the continued … More How fragile is sterling’s recent bounce? Should MPC have also adjusted OIS rates in May?
Tuesday’s IMF warning of the adverse (global) impacts of a Brexit vote, with some effects already apparent, follows concerns in the March MPC minutes (which seem likely to be amplified in Thursday’s April MPC minutes). Unfortunately, neither provided any specific evidence. This post fills that gap, detailing the macro-financial impacts evident thus far, drawing on … More Tracking the macro-financial impacts of Brexit uncertainties: Killing the goose that lays the golden eggs?
Sterling has, as I previously anticipated here and here, continued to depreciate as Brexit uncertainties have become increasingly priced. The TWI is now down 11% since November (GBPJPY down over 19%) while implied volatilities and risk reversals have continued rising. But Brexit effects have more recently been reinforced by renewed concerns about the UK’s current … More Current account and growth concerns add to sterling’s Brexit worries: further weakness ahead
My accompanying post details how the return of EA deflation, EA inflation expectations are in the process of de-achoring plus deteriorating EA and foreign activity mean that the 10 March ECB meeting is shaping up to be make or break for EA prospects and ECB credibility. I argued that the likely downward revisions to the ECB’s … More Trading the ECB: limited EUR weakness and bund rally likely but risks
The early 2016 China-induced financial market volatility, including oil prices hitting twelve-year lows below $30 and sharp equity price falls, reinforces my existing bias to eventual further ECB easing in 2016 (alongside other central banks becoming more dovish e.g. Carney’s comments today, Bullard’s recent concerns about US inflation expectations and others like the Riksbank biased … More ECB under pressure from oil and EUR strength
This will be a key week for determining the strength of the ECB-Fed policy divergence theme (“divergence 2.0”) which has been increasingly occupying markets in recent weeks. While Thursday’s much-awaited ECB meeting tops the billing, it will be sandwiched by two high-profile appearances by Yellen (economic outlook speech on Wednesday, address to the congressional Joint … More Policy Divergence 2.0 increasingly priced but further limited FX action possible
Tomorrow represents a landmark in BoE communication: the MPC decision, MPC minutes and August Inflation Report will be released simultaneously at 12 noon, with the IR press conference starting at 12.45. With a view to the deluge of information to process, I offer some views on what market participants should be paying watching out for, … More Bank of England Super Thursday: Three is the magic number for further GBP strength?