By Michael BrownSenior Research Strategist at Pepperstone
DIGEST – The BoE sprung a hawkish surprise on Thursday, while the remainder of the day’s G10 central bank decisions were largely as expected, though markets at large remained choppy, with geopolitical events still in focus.
WHERE WE STAND – Where the hell do I start this morning?!
I guess yesterday’s central bank decisions are as good a place as any, not least considering the degree of carnage that the BoE unleashed.
The MPC stood pat on Bank Rate, as expected, albeit in a much more hawkish than anticipated 9-0 vote among MPC members, in what marked the first unanimous decision since all the way back in September 2021. At the same time, the accompanying policy statement ditched the explicit easing bias, while a couple of policymakers even touted the potential for rate hikes in their paragraphs in the minutes.
All this was undoubtedly a hawkish shock to the market – as shown by the 2 big figure rally in cable, and even more so by the 30bp jump in the 2-year Gilt yield – but I can’t help thinking that the MPC are on the verge of making a terrible policy mistake here. Despite Governor Bailey doing a degree of damage control shortly after the release, cautioning against drawing ‘strong conclusions’ about the potential for rate hikes, it does seem that many on the MPC are still pre-occupied with the idea of potential second-round inflation effects, the potential for which is rather low, given the parlous state of the labour market.
It increasingly looks the case that, if the MPC don’t have the confidence to cut by the time of the next meeting in April, they may not cut again all year, thus running policy far too tight, amplifying the negative demand shock that the economy must grapple with, and ultimately running the risk of undershooting the 2% inflation aim over the medium-term.
Away from Threadneedle Street, things were somewhat more predictable. The ECB maintained the deposit rate at 2.00%, with President Lagarde describing policy as ‘well-positioned’, even as subsequent sources stories alluded to the possibility of a hike being discussed at the April meeting, though I still see that as a low probability outcome. The SNB and Riksbank also kept all policy settings unchanged, with the former again expressing a willingness to prop up the Swissie if necessary.
Markets, it’s safe to say, were far from predictable, with it proving a choppy and rather risk-averse day across the board, though that risk aversion did fade as the day went on, not only as crude pulled back sharply from intraday highs, but also once European desks had left for the day. Again, it’s interesting how, even three weeks into conflict in the Middle East, there are differing views as to how things are progressing on each side of the pond.
Although stocks on Wall St closed, as near as makes no different, flat on the day, I still see ample reason for caution in the short-term, given not only the prevailing degree of uncertainty, but also with energy infrastructure apparently now a target for kinetic action, damage to which would clearly prolong the duration of any macroeconomic impact from the present situation. That said, from a market perspective, I continue to see relatively slim chance of this being a longer-run bearish inflection point, given solid fundamentals which remain in place, so the present dip does present a buying opportunity as/when geopolitical noise dies down.
One final thing I’d flag this morning, while I go and hide out in the buck as a safe-haven again, is the massive widening that we’ve seen in the Brent-WTI spread.
This has blown out to about $13 over the last day or so, the widest since 2015, in what is a reflection not only of the surge in physical demand and ongoing Brent supply constraints, but also possibly a sign that market participants are increasingly worried about the potential for a US crude export ban. I stress that, as of now, there are no concrete indications that that could be on the cards, and that the Admin appear to have ruled out such a possibility, though with the Jones Act having been suspended, and in light of some of Trump’s rhetoric on Hormuz, such a move still wouldn’t exactly be a complete surprise. Obviously, if it were to happen, demand for Brent would shoot through the roof, and we may be seeing this ‘front-run’ to a degree at present.
LOOK AHEAD – Thank goodness it’s finally Friday, and the end of another very long week!
The data docket is light today, with only UK borrowing stats, and January’s Canadian retail sales report of note, though neither is likely to be especially market-moving. Nor, incidentally, are remarks that we will likely get from Fed Governor Miran explaining his dissenting vote, or the usual round of ECB speakers that we see post-decision.
Instead, focus will remain squarely on geopolitical developments, with there again being a high likelihood that participants seek to take down risk levels as we move into the weekend, and also a high risk of a sizeable gap – likely higher in crude, lower in risk assets – as the new trading week gets underway on Sunday night, assuming no material de-escalation occurs over the weekend.
Still, that’s a matter for next week; the most pressing issue once that data is out of the way, and books are appropriately squared up, is instead likely to be finding a watering hole in which to see out the week with a cold beverage or three.
