Cable was offered and gilt yields fell after some pretty lacklustre UK inflation data. In summary, inflation was a fair bit weaker than expected in December and this will offer the necessary cover for the Bank of England to cut interest rates this month. I feel this may persuade a couple more on the MPC to cut now, to get ahead of the curve and not allow softer data to fester.
GBPUSD slipped 1.30 but bears are finding support around this region tough to crack. 2yr gilts were bid with yields down a tenth again to 0.441%. The FTSE went in the other direction to firm up 17pts.
Inflation rose just 1.3% against 1.5% in November. Core CPI was a meagre +1.4% last month, vs 1.7% expected. CPI inflation rates are at their lowest since 2016. Prices for hotel rooms and women’s clothing dropped – good news for some.
This gives the Bank of England all the excuse it needs to cut later this month. Coming off the back of those weaker GDP and industrial production numbers, it does not look as though the economy was firing on all cylinders at the tail end of last year. While there may well be a Boris Bounce in the offing, I rather think the die is cast in favour of a rate cut.
As explained on Monday: There is a sense the Bank doesn’t want to get behind the curve of market expectations, and is seeking to get a jump on markets whilst still teeing up the cut. It would be following the Fed’s playbook in cutting early in order to prevent a downturn. This is the key thing to remember – the Bank does not want to let a weaker economy fester. And whilst there is no trade deal with the EU, the MPC has been largely released from the shackles of Brexit uncertainty following the Conservative victory last month. Political risk has hobbled the MPC but this has diminished greatly and now is the window – before a possible clash with the EU in the spring that would make policy changes more political in nature – to get a cut in the bag to juice the economy. Moreover, one can imagine that the Bank had sight of these numbers and wanted to get the first punch in with some dovish comments from policy makers.
Meanwhile, MPC rate setter – and known dove – Michael Saunders has been on the airwaves talking up downside risks to the economic outlook which will necessitate early policy action. Now Saunders is a dove and voted for a cut at the last two MPC meetings but it nonetheless adds to the sense that the Bank is erring towards a cut this month, coming as it does shortly after those dovish comments by Gertjan Vlieghe, as well as jawboning by Carney and Tenreyro that was rather dovish.
Failure to cut now would amount to some significant de facto tightening that the Bank would not wish to see at this juncture. Cut is assured.
Saunders comments summary
Rate cut not now would not be precautionary, economy has capacity to grow faster
Risk management supports rate cut, but case stands without it, QE limited by low gilt yields
Risk management favours prompt and aggressive policy response
Growth could improve and still be sluggish, evidence of post-election bounce is limited
Appropriate to remain expansionary and cut rates further
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Where the CFD or Spot FX Contract is settled in a currency other than your base currency, the value of your return may be affected by its conversion into the base currency. 12. One Click Trading And Immediate Execution. Safecap’s Online Trading System provide immediate transmission of Customer’s Order once Customer enters the notional amount and clicks “Buy/Sell.” This means that there is no opportunity to review the Order after clicking “Buy/Sell” and Market Orders cannot be cancelled. This feature may be different from other trading systems you have used. Customer should utilize the Demo Trading System to become familiar with the Online Trading System before actually trading online with Safecap. Customer acknowledges and agrees that by using Safecap’s Online Trading System, Customer agrees to the one-click system and accepts the risk of this immediate transmission feature. 13. Telephone Orders And Immediate Execution. Market Orders executed through the Safecap Trading Desk are completed when the Safecap telephone operator says “deal” or “done” following Customer’s placing of an Order. Upon such confirmation of the telephone operator, Customer has bought or sold and cannot cancel the Market Order. By placing Market Orders through the Safecap Trading Desk, Customer agrees to such immediate execution and accepts the risk of this immediate execution feature. 14. Safecap Is Not An Adviser Or A Fiduciary To Customer. Where Safecap provides generic market recommendations, such generic recommendations do not constitute a personal recommendation or investment advice and have not considered any of your personal circumstances or your investment objectives, nor is it an offer to buy or sell, or the solicitation of an offer to buy or sell, any Foreign Exchange Contracts or Cross Currency Contracts. 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GTC Orders do not automatically cancel at the end of the Business Day on which they are placed. 2. Limit - An Order (other than a Market Order) to buy or sell the identified market at a specified price. A Limit Order to buy generally will be executed when the Ask Price equals or falls below the Bid Price that you specify in the Limit Order. A Limit Order to sell generally will be executed when the Bid Price equals or exceeds the As Price that you specify in the Limit Order. 3. Market - An Order to buy or sell the identified market at the current market price that Safecap provides either via the Online Trading System or over the telephone through one of the dealers. An Order to buy is executed at the current market Ask Price and an Order to sell is executed at the current market Bid Price. 4. One Cancels the Other (“OCO”)- An Order that is linked to another Order. If one of the Orders is executed, the other will be automatically cancelled. 5. 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