The Bank of England’s ‘intrinsically dovish hold’ sharply contrasted with broader market trends

Markets

The Bank of England’s ‘intrinsically dovish hold’ sharply contrasted with broader market trends since the Fed’s message that interest rates will be ‘higher for (very much) longer’. In the close 5-4 vote, governor Bailey’s MPC after kept the policy rate unchanged at 5.25%. Softer than expected August CPI data published on Wednesday (headline 6.7%, core 6.2%) convinced the majority for MPC members that enough policy tightening has been put in place to further facilitate the disinflationary process. Slower than expected growth can amplify early signs of some cooling in the labour market. The BoE maintained its conditional commitment that ‘further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures’. However a comment from BoE governor Bailey after the meeting (“cutting interest rates would be very, very premature”) was a better implicit pointer of the direction the BoE is contemplating from now. UK yields already made most of the dovish repositioning on Wednesday after the CPI data. After some intraday volatility around the BoE decision, UK yields mostly followed the broader trends rising between 2.5 bps (2-y) and 9 bps (10-y). Sterling evidently paid the price. EUR/GBP briefly spiked to just below the 0.87 barrier (close 0.867). On other markets, the higher for (much) longer repositioning continued, with especially the long end of the curve hard hit. The 2-y US yield eased slightly (3.2 bps) but the 10-y (6.75 bps) surpassed the 4.5% barrier for the first time since 2007, mainly driven by a further rise in the real yield (10-y + 6.6 bps at 2,11%). The 30-y even jumped an astonishing 12.8 bps. Yield rises in Europe/Germany remained more modest (10-y + 3.5 bps). Given the widening interest rate differential and the rise in the US real yield, gains in the dollar could have been bigger. At 105.39, DXY closed well off the intraday top. EUR/USD temporary dropped below the 1.0635 support area but also closed at 1.066. USD/JPY even closed at 147.6 after touching 148.45 earlier in the session. Some squaring of positions ahead of today’s BOJ meeting was in play. Higher (real) yields caused big damage on equity markets (S&P -1.64%, Nasdaq -1.82%, Euro Stoxx 50 -1.48%). At 4330, the S&P is testing key support (4335/4328) as do many other indices.

The BoJ left its policy unchanged this morning even as national inflation data suggested persistent above target inflation (CPI ex fresh food 3.1%, core 4.3%). The 10-y Japanese government bond yield (0.75%) is holding near its recent top. USD/JPY returns to the 148 area. Regional equities are holding up rather well given the WS sell-off. Later today, US and EMU PMI’s will give a new update on regional activity. The EMU composite PMI is seen bottoming (46.5) after a protracted decline. For the US, markets will look for confirmation on recent eco resilience. We don’t expect the data to provide much of a trigger to reverse the strong uptrend in yields. Yesterday’s USD performance was a bit disappointing, but we still see more upside with a sustained break of EUR/USD below the 1.0635/17 area.

News and views

UK-based Growth for Knowledge’s (GfK) consumer confidence indicator jumped from -25 to -21, its best level since January 2021 whereas consensus expected a slight deterioration to -26 in September. UK consumers turned less pessimistic on both the economic situation (-24 from -30) and their personal finances (-2 from -3) in the next 12 months. They also believe that the climate for major purchases has improved (-20 from -24). Saving intentions were unchanged (27) at the best level since April 2008. GfK added that this month’s improved headline score is good news, but it’s important to note many households are still struggling with the cost-of-living crisis and that economic conditions are tough. The financial mood of the nation is still negative.

The Turkish central bank raised its policy rate yesterday as expected by 500 bps, from 25% to 30%. Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved. Higher-than-expected inflation readings in July and August (59% Y/Y) imply that year-end inflation will be close to the upper bound of the CBRT’s forecasts (>60%) with additional upside inflation risks coming from strong domestic demand, sticky services inflation, higher oil prices and the ongoing deterioration in inflation expectations. The Turkish lire holds steady just below EUR/TRY 29..

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