Head of Macroeconomic Research
Summary: We think that the BoE will be on hold this week and will wait for more post-election data to come in before cutting interest rates.
The market is still very divided over the outcome of the BoE meeting today. Market pricing points out to a likelihood of about 58% for a rate cut, but we still stick with our expectation for an unchanged policy rate at 0.75%.
We believe the BoE is data-dependent and will wait for more post-election data to come in before cutting interest rates. The latest data tend to confirm that the UK economy is rebounding in early 2020. January flash Purchasing Managers’ index readings were above consensus. Flash Service PMI was out at 52.9, flash Manufacturing PMI at 49.8 and flash Composite PMI at 52.4. Credit conditions have also improved significantly with availability of secured credit for households reaching the highest level since 2015. We still consider that the UK economy will need more stimulus in the coming months to offset the prolonged contraction in credit push and the five consecutive quarters of contraction in private investment but, as of now, the BoE is in no hurry to step in.
Another argument for postponing the rate cut is that it is the last meeting chaired by Governor Carney before A. Bailey takes over in March. It is likely that Carney will let Bailey make the call once more data will be available regarding the state of the UK economy in the post-Brexit era.
Strategic view: Net longs in the sterling are close to their highest level since Spring 2018 on the back of optimism regarding post-Brexit era and improved data. Further evidence of economic rebound in 2020 could encourage an extension of the stronger GBP trend that started in August 2019. Looking at the cross EUR/GBP, the technical analysis confirms that more downside is possible. The cross is currently evolving under its 50-day moving average and 200-day moving average. A potential retest of December low at 0.8363 is the next main target on the downside. If the BoE still decides to deliver an insurance cut today, the market impact could be short-lived. It would temporarily reinforce the EUR vs the GBP, but it would not fundamentally change our view that a stronger GBP is likely in the coming months.
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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.
