Thursday, February 05, 2009
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....