Head of Fixed Income Strategy
- The Monetary Policy Committee (MPC) is expected to maintain the Bank rate at 5.25%, monitoring incoming data for future policy guidance.
- A potential shift towards a more dovish stance may be indicated by MPC's voting distribution, with expectations of a vanishing hawkish bias at the May meeting.
- The market anticipates rate cuts totaling 63 basis points by December, potentially beginning in August, with a 38% chance of a rate cut in June.
- Ten-year Gilt yields are likely to remain rangebound until disinflationary trends are confirmed.
The Monetary Policy Committee (MPC) is anticipated to maintain its stance from February, keeping the Bank rate steady at 5.25% while closely monitoring incoming data to guide future monetary policies.
However, a potential shift towards a more dovish outlook may be indicated by the MPC's voting distribution. In February six MPC members opted to maintain rates, while two voted for a hike and one for a cut. It's expected that at this week’s meeting, the hawkish bias might soften further, with Mann remaining the sole advocate for a rate hike, and Dhingra leaning towards a rate cut.
Recent data from the last monetary policy meeting suggests a slight easing in price and wage pressures. The unemployment rate saw a slight uptick from 3.8% in December to 3.9% in January, while wage growth unexpectedly slowed, with the 3-month average earnings dropping to 5.6% from 5.8% in January, contrary to the consensus expectation of 5.7%.
Although February inflation data will be released one day before the BOE meeting, projections continue to indicate strong disinflation momentum, with headline CPI expected to decrease to 3.5% from January's 4%, and core CPI to fall to 4.6% from 5.1%. Consensus forecasts still suggest a drop in inflation to 1.8% in the second quarter of the year, driven by base effects from last spring's energy prices. Concurrently, expectations persist for a modest recovery in the UK economy, supported by expansion in composite and service PMIs. This resilient growth trajectory is likely to enable the BOE to maintain its highest policy rates in sixteen years for an extended period.
It's worth noting that this meeting will not include updated forecasts or a press conference following the MPC statement release, putting the spotlight on the May meeting for economic projection updates.
Market expectations currently reflect a projection of 63 basis points of rate cuts by December this year, potentially commencing in August, with a 40% chance of a rate cut as early as June. Anticipations for a June rate cut may rise further as disinflationary trends intensify, leading to an overall expectation of rate cuts totaling 75 basis points for the year. This scenario supports a moderate extension in duration.
Ten-year Gilt yields may be caught rangebound between 3.95% and 4.25% until the disinflationary trend is confirmed. If ten-year yields break below 3.95%, they will find support next at 3.75%.
18-mar FOMC Preview: dot plot and quantitative tightening in focus.
12-Mar US Treasury auctions on the back of the US CPI might offer critical insights to investors.
07-Mar The Debt Management Office's Gilts Sales Matter More Than The Spring Budget.
05-Mar "Quantitative Tightening" or "Operation Twist" is coming up. What are the implications for bonds?
01-Mar The bond weekly wrap: slower than expected disinflation creates a floor for bond yields.
29-Feb ECB preview: European sovereign bond yields are likely to remain rangebound until the first rate cut.
27-Feb Defense bonds: risks and opportunities amid an uncertain geopolitical and macroeconomic environment.
23-Feb Two-year US Treasury notes offer an appealing entry point.
21-Feb Four reasons why the ECB keeps calm and cuts later.
14 Feb Higher CPI shows that rates volatility will remain elevated.
12 Feb Ultra-long sovereign issuance draws buy-the-dip demand but stakes are high.
06 Feb Technical Update - US 10-year Treasury yields resuming uptrend? US Treasury and Euro Bund futures testing key supports
05 Feb The upcoming 30-year US Treasury auction might rattle markets
30 Jan BOE preview: BoE hold unlikely to last as inflation plummets
29 Jan FOMC preview: the Fed might be on hold, but easing is inevitable.
26 Jan The ECB holds rates: is the bond rally sustainable?
18 Jan The most infamous bond trade: the Austria century bond.
16 Jan European sovereigns: inflation, stagnation and the bumpy road to rate cuts in 2024.
10 Jan US Treasuries: where do we go from here?
09 Jan Quarterly Outlook: bonds on everybody’s lips.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
