London Quick Take - 18 Sep - Europe lower but Wall St set to extend post-Fed gains after oil and yields fall, BoJ hikes rates

Stocks in Europe fell back after Thursday's rally as lower bond yields and a decline in oil prices boosted sentiment and the Fed's rate hike acted as a bit of a clearing event for risk. Wall Street ended the day firmly higher with the S&P 500 reclaiming its 50-day moving average. The rally is probably half down to the Fed showing a commitment to beat inflation and easing doubts about its credibility, and half about a pullback in oil prices.  

The Nasdaq 100 also finished up 1.7% to recapture its 50-day line and Dow was up 0.6%, with lower Treasury yields the key factor. Futures are higher with Wall St set to extend gains with the 10yr Treasury yield dipping below 4.95%. Semiconductors led the Thursday rally, with the Philadelphia Semiconductor Index up 3.1% and Nvidia gaining 2.5% after CEO Jensen Huang said chip sales could double next year, while Coinbase rose 5.8% after regulators opened a pathway for tokenised US equities. Triple witching today with $2tn in notional value in options tied to US stocks maturing...market often ends lower on such days. 

The Bank of Japan hiked interest rates as expected but left yen bulls disappointed. Although it guided for more rate increases the 7-2 split vote pushed the yen lower, with the dissenters the two policymakers appointed by the Prime Minister.  

Oil is lower for a third session with Brent back to below $103 on easing supply disruption worries. Saudi Arabia said it can reroute crude via ship-to-ship transfers near Oman’s Sohar to offset a key pipeline shutdown, cutting tankers’ exposure to Iranian attacks. It expects to restore about half of the East-West pipeline’s capacity within days and full flows in six weeks. Ship-to-ship transfers in the Gulf of Oman have risen to 2.7 million bpd from 1.5 million bpd in August. There is no sign that the situation can resolve itself but there are signs that supply chains can adapt, easing the pressure on prices. 

BoE twists and holds: The Bank of England left rates on hold at 3.75% with a 6-3 vote split as expected. The BoE also trimmed QT to a pace of £46bn a year, down from £70bn currently with £20bn of this in the form of gilt sales alongside maturing debt. 

 
Notably, the overhaul of the QT programme will see it pause all gilt sales until April 2027 while it consults with the government on selling gilts direct to the Debt Management Office at market prices, instead of holding its own auctions, which could further ease some of the upwards pressure on yields. It's having "robust" discussions with government still on this - seems they cannot yet agree. But it's also stopped selling ultra-long gilts, keeping around £120 billion of bonds that mature in 2049 or later on its balance sheet, whilst unwinding shorter maturities. After facing a lot of criticism for its active gilt sales, which made it an outlier among central banks in terms of executing QT, it looks like the BoE is finding ways to reduce pressure on the long end without abandoning the policy altogether. Members of the Monetary Policy Committee may be mindful of the 20-40bps impact QT has on long-end yields. Note also that we've just entered the OBR's forecasting period for the Budget, so the Chancellor will be thankful for rates to fall. The showed up at the long end with 30yr yields down 12bps to 5.74% after hitting a 28-year high of 5.95% just last week. The decision to pause all gilt sales until April also reflects the Bank is worried about volatility around the ongoing Iran war and US midterms. 
 
GBPUSD broke down further to make new lows since 30 July to test old support/resistance level at 1.33360 with sterling offered on a dovish reading from the statement, while gilt yields were lower with the 10yr backing off about 8bps. There has been a slightly dovish read from this one with markets pricing out some of the aggressive tightening that had been seen in the curve. Why? Well apart from the measures to adjust gilt sales (which may be less material in their effect than the signal it sends), the doves continue to hold sway and none was persuaded to turn hawk. However, it does look like governor Andrew Bailey and rate setter Clare Lombardelli are moving closer to a hike if energy prices remain high, which would tilt things in favour of a November hike. If the Middle East conflict continues “the case for raising Bank Rate is building” (Lombardelli) and “it is likely policy may have to tighten” (Bailey). Similarly, Dave Ramsden said were "upside pressures on the inflation outlook to continue to build, there could be a case for increasing bank rate”. Sarah Breeden noted that if inflation risks crystallise it would be “increasingly appropriate for Bank Rate to respond”. 

The decision to hold rates is entirely consistent with its recent messaging. It's also consistent with inflation so far remaining entirely a supply shock story. Inflation is elevated but not alarmingly so, growth is mediocre, and the economy does not resemble the overheating conditions of 2022. The hurdle for another rate hike remains high, which means markets still appear to be pricing too much tightening risk and too little probability that the next move is ultimately lower rather than higher. Nevertheless, the BoE warned that inflation would hit 4% early next year and that policy would have to tighten "if the conflict in the Middle East persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases". 

Why the Fed can relax about hiking rates: US jobless claims fell by 10,000 to 196,000 last week, near July’s 60‑year low and below the 208,000 forecast. Continuing claims dropped to 1.73 million, the lowest since January 2024, highlighting labour market resilience.