Thursday, February 05, 2009

On Brittania

It's central bank day in Europe today- can you feel the excitement? While Macro Man's bon ami Jean-Claude Trichet has told him not to expect anything from the ECB today, the announcement from the Bank of England could prove interesting.

Today's decision will be taken with the benefit of the Bank's quarterly inflation report, which common sense would suggest will contain significant forecast revisions from the previous November effort. To be sure, the growth outlook seems to have deteriorated, but will the inflation trajectory be adjusted upward after the sharp weakness in sterling?

The UK press has been trying to search for "green shoots" of recovery amidst the doom and gloom, along the lines of the recent modest uptick in global PMIs. This morning provided a somewhat startlign example of the green shoot phenomenon, as the Halifax house price index somehow printed a monthly uptick of 1.9% in January, the best result in two years.
Rumours that Alistair Darling now calculates the index himself remain unconfirmed.

In any event, the UK markets appeared to be poised for a bit of motion. Finxed income markets are pricing 50 bps of easing today; while that's a pretty good base case, there should be considerable uncertainty around the decision. If the terminal rate is going to be, say, 0.50% (there seems to be some resistance to take rates to zero), there's an argument to be made that you might as well get there as soon as possible and cut 1% today.

On the other hand, you might say that the Bank is operationally far from being able to purse QE, so they need to drag out cuts for as long as possible...which could argue for a 25-er.

If they were to cut by less than expected, might that provide a boost for sterling, which is perched on the edge of a technical breakout against the euro? (And just in time for Macro Man's annual ski holiday, too- how thoughtful!)
The real action, however, could be at the front end of the short sterling curve. Although it has sold off over the past few days, March sterling is pricing in a 43 bp decline in LIBOR over the next six weeks or so. While anything is of course possible, Macro Man reckons LIBOR would struggle to get there in the event of a half-point cut, let alone if the Bank does less than that.
Moreover, the sterling curve is only pricing in a modest reduction in LIBOR over the six months after March. Any suuggestion from the Bank today that there may be rate cuts in Q2 should provide a handsome opportunity to benefit from trades that are short front March and long other 2009 contracts.

Finally, Macro Man finds himself constiutionally unable to discuss the UK without pointing out some cack-handed government policy initiative, or at the very least evidence that the country is going to hell in a handbasket.

Today's nugget is the story that Ed Balls' solution to ensuring that Britain educates its children in the best way possible is....to enroll 16 years as assistant teachers. And here was Macro Man, thinking that 16-year olds might still have something to learn! Good luck with that, Ed....

23 comments:

Anonymous said...

how do you get march sterling is pricing in 34bps fall in libor? isnt it more than that?

vlade said...

repectfully disagree. I think there's a plenty of 16 year old who would run the country better than Gordon - or at least no worse.

Damcanu said...

Yippee I feel so much better that my house went up by 1.9% last month.

Not much good to me though, my 4 bed semi has been up for sale for exactly a year and I've had two viewings.

At least my tracker mortgage is going down nearly every month and hopefully again today, thank-you Mr King & Co.

Macro Man said...

Doh! I get it by being tired and doing poor mental arithmetic. Its 43 bps...2.14 spot LIBOR - 1.71 = 43 bps. Mea culpa.

Yohay said...

Well, your ski vacation will be cheaper now: the pound is rising after the (expected) rate cut.

Damcanu said...

MM, sorry to be stickler but if your 'On Brittania' refers to this once fine United Kingdom, then I think it should be Britannia.

Or have I missed some sort of p*ss take, a bit like Gordon's upside down Union Jack flag ?

Macro Man said...

I knew it looked funny... :(

I could probably spin some story that I deliberately misseplled a la Gordo, but unlike him, I can say the following:

I blew it (again).

Anonymous said...

Where is MM CDS trading after booking family ski holiday ??!!! Hear the snow is good, so enjoy, especially with the little MM's

Anonymous said...

why is the dollar and gold rallying at the same time? is this sustainable?

Macro Man said...

MM Industries runs a low-leverage balance sheet, so hopefully CDS is quite tight!

GermanTrader said...

"Rumours that Alistair Darling now calculates the index himself remain unconfirmed." *g* It's a really unbelievable number when you see Case-Shiller and NAHB. At least it's a rise in low volume trading.

Macro Man said...

Maybe Kaka bought a 30-bedroom house in Chesire expecting his transfer to Man City to go through? Only explanation I can come up with!

PureGuesswork said...

Interesting how the traditional forex market view of interest rates differentials has been -- for the moment, at least -- turned on its head. In the course of a few hours on a day when the euro/gbp interest rate differential increased by 50 bps, the eurfell against the gbp by over 100 pips.

Damcanu said...

No, MM it's your old forward Bellamy. Some builder has sold him two rows of over-priced terrace houses in a run down area of Manchester.

One ill-advised over-paid footballer has doubled the UK's housing turnover for the month of Jan.

Macro Man said...

Oh yes, Craig Bellamy....in a league full of unpleasant people, he might take the cake as the worst of the lot. Somehow, it makes me feel like the world is a better place if he has been fleeced by a dodgy Chesire estate agent.

Separately, I heard a stat that GM made exactly one car last month in the US. Can anyone confirm/deny?

Anonymous said...

ok nothing at all to do with the above, but perhaps a reader here can bring light on a technical question bothering me...What is the difference between a bullish wedge and a bearish triangle.

A bullish wedge is a descending pattern with lower lows and lower highs, with the slope of upper line typically steeper. A bearish triangle is a descending pattern with equal lows and lower lows.

Its a bit of a mystery to me why equal lows are bearish, and lower lows are bullish

Macro Man said...

A bullish wedge means you shoulda bought it; a bearish triangle means you shoulda sold it.

;)

bull charger said...

naz assuming leadership.
i can see a few reasons - dram prices are up 40% in last month (partly on qimonda going bust - less supply), strong b/sheets, rotn from banks and maybe a bit of govtmental spend.

this is a bit more evidence of reflation. i am slightly struck by the bearish focus on cds etc here yet credit has improved - tbills, junk bond spreads.

i know bdiy is illiquid and down a lot - but it is up 15% for the 2nd consecutive day.

bhp said iron ore inventories were low in china and that china was now starting to restock. look at performance of cyclicals such as bhp or fcx in last week...

i realise nothing goes down in a straight line and that the economic data hasn't shown consistent improvement but i thought it might be worth having an open mind about the reflation trade - especially now people are a bit wary of it post the failure of the trade in january...

Anonymous said...

equities are simply refusing to sell off despite horrific economic data .. there is no one left to sell, market is going to be pushed up easily if we get anything resembling good news .. you just gotta hit them where it hurts the most, and that seems to point up for now

MW said...

I need to remember not to eat while reading your blog --- the Darling and Balls comments nearly made me choke with laughter...

Anonymous said...

"A bullish wedge means you shoulda bought it; a bearish triangle means you shoulda sold it."

And if one confuses the two, one's portfolio suffers a "wedgie"...

;-)

old trader

Anonymous said...

A true Steelers fan spells favourite "favorite!" Here we go Steelers.. Here we go!

Axin said...

Ever though of skiing in Japan? GBP/JPY technically is on the way back up to 160 minimum.