BOE’s Carney says no rate hike, Pound duly slumps

The Governor of the Bank of England has spoken: now is not the time to hike interest rates because inflation pressures remain subdued. That could upset the three MPC members, including outgoing member Kristen Forbes, who voted for a rate hike last week. We mentioned after last week’s meeting that we didn’t think it was likely that a rate hike was on the horizon, after all, the split could end up 6-2 at the next meeting, if newcomer Silvana Tenreyo, decides to vote with Carney.

BOE willing to look through high CPI

This morning’s comments are important because they suggest that the Bank of England will look through the period of high inflation, headline CPI is running at 2.9%, blaming the rise on the sharp drop in sterling last year. This could spell more woe for the UK consumer, if the BOE is not going to take action to bring down prices, this could keep the squeeze on pay packets for some time.

What will it take for Carney to hike rates?

He wants to see more economic rebalancing away from reliance on the consumer. He also wants to see stronger investment levels and better levels of trade. Since UK exports tumbled 1.6% in the first quarter of this year, it could take some time before the conditions are met for Carney to hike rates.

Sterling in a spin after Carney

Carney’s comments have sent sterling into a tumble as the BOE Governor makes it clear that the UK central bank won’t follow the Fed by hiking rates any time soon. GBP/USD has fallen below 1.2700, towards the bottom of its recent range, and we are watching key support at 1.2632 – the 100-day sma – a break below here could see back to 1.2550 – the 200-day sma – and a major support level. In the very short term we are looking at 1.2650 – the bottom of the range from the last 10-days - if we break below here it would be a short-term bearish development.

Pound dives, while FTSE 100 gets a lift

The inverse relationship between the FTSE 100 and the pound, means that as Carney talks down the pound, the FTSE 100 climbs. The UK index is now only 40 points below its record high from earlier this month. UK bond yields have also fallen sharply on the back of Carney’s comments, and the 10-year UK yields briefly dipped below 1%, the lowest level for a week. This has pushed down UK yield spreads with the US, Europe and Japan, although these spreads remain above the level reached after the shock UK election result earlier this month. This quick bond analysis suggests that the pound could weaken today, but that Carney’s comments are no game changer and GBP/USD could remain range bound at least in the short term.

The market’s expectation for UK interest rates are barely changed on the back of Carney’s comments, the market still expects a mere 34% chance of a rate hike by the end of next year…

Chancellor’s Brexit talk no game changer

Chancellor Phillip Hammond was also talking at Mansion House this morning, laying out his vision for Brexit. It wasn’t too enlightening, and didn’t tell us anything we didn’t know already. Unless a high-ranking government minister says that the UK will fight to stay in the single market or in the Customs Union, then Brexit headlines at this early stage of the negotiations are unlikely to impact UK asset prices.
Tech stocks still vulnerable

Elsewhere, global stocks have bounced back sharply post the wobble in the Nasdaq last week. The German Dax has made a record high this morning and the FTSE 100 is 40 points below its record high after Carney’s commentary that rates should not be raised at this stage. The FTSE 100 has shrugged off news that 4 individuals are facing fraud charges at Barclays Bank, which relates to a loan from Qatar during the financial crisis. The market is viewing this news as something that happened in the past, and is thus not relevant for Barclays’ current share price.

We continue to think that US tech stocks looks vulnerable, although the Nasdaq has risen in recent sessions, big hitters like Apple and Amazon remain well below their pre-sell off highs. Last week’s tech stock weakness was a shake out after some tech stocks had rallied too far, too fast in recent months. However, investors aren’t willing to pile in and buy tech yet, suggesting that there could be a further sell off to come before investors feel like they are picking up a tech bargain. Today we will be keeping a close eye on Nasdaq shares to see if the tech sector comes under selling pressure once again.