Goldman had a conviction going into Thursday’s Bank of England announcement. Here’s what the bank’s FX team put out this morning:
“Today, the Bank of England holds its monetary policy meeting, which we expect to be the catalyst for a further downward move in the currency. As we explained in yesterday’s Global Markets Daily, the sizeable short Cable position should not be seen as a factor against our 3-month forecast of 1.20. Short Sterling positioning is a momentum (not contrarian) signal. And, if the Bank of England is dovish, as we expect, investors will continue to short the currency, while they reprice the size and scope of conventional and unconventional incoming monetary policy easing.”
Hopefully, clients read the disclaimer (“Investors should consider this report as only a single factor in making their investment decision”) because the word was “hold.” Here’s what happened to sterling:
So what gives with the BoE’s “hawkish” hold? Well, let’s let them explain. Here are the operative excerpts from the statement:
“The MPC is committed to taking whatever action is needed to support growth and to return inflation to the target over an appropriate horizon. To that end, most members of the Committee expect monetary policy to be loosened in August. The Committee discussed various easing options and combinations thereof. The exact extent of any additional stimulus measures will be based on the Committee’s updated forecast, and their composition will take account of any interactions with the financial system.”
“Against that backdrop, at its meeting ending on 13 July, the majority of MPC members judged it appropriate to leave the stance of monetary policy unchanged at present.”
So basically, they don’t have any idea how the UK electorate’s decision to leave the EU is going to ultimately affect the economy and/or the financial system and they need a bit more time to try and figure that out until they move. Golf clap for them. It takes some real guts in today’s environment to resist the urge to pull the easing trigger.
Now you’d think that would be enough to derail equities which are being strung along carrot-stick style by the expectation of further easing. But you’d be wrong:
Ironically, risk seems to like the dovish forward guidance (i.e. the “...to that end, most members of the Committee expect monetary policy to be loosened in August” part of the statement) even more than they would have liked an actual cut.
They’ll be no selling of the news today because there’s no news to sell. Only more “hopium,” as it were.
In Europe the story was pretty much the same. The FTSE fell a bit on the announcement but risk still has the green light - literally:
And while Goldman might have been caught flat-footed (or perhaps the prop desk was long GBP), Deutsche Bank wasn’t. Here’s what they had to say early on Thursday:
“We think the BoE should hold off from easing policy at today's meeting. While that is also our central view of what the BoE will do, there are clear risks for an announcement of looser policy at midday today. Why do we think the Bank should/will refrain from easing until next month? First, there is little in the way of surveys – and no official data – that point to the economic impact of Brexit as yet. Mixed retail news and weaker (but still around-average) confidence do not, in our view, constitute sufficient news to be confident about calibrating a monetary response. Second, financial market moves since June 23 are growth-positive. GBP is down 10%, 10Y gilt yields have fallen 60bps, high quality non-financial corporate spreads are tighter, and equities are up. Third, the Bank does not need to wait for long until its next meeting – just three weeks.”
Nailed it.
And, just as we finish this post, the opening bell sounds on Wall Street. No surprise: new record highs.