The resistible force meets the movable object

The big day is finally here, and perhaps finally Mr. Eriksson  Mr. Capello Mr. Carney will earn some of the magnificent sums that have been bestowed upon him by the UK taxpayer.  The signals have been as clear as they get from the BOE that something is cookin'; then again, the standard of clarity in the Old Lady's communications in recent times has been as akin to that of sending messages to Stevie Wonder via semaphore.

Of course, the weakness of sterling has already injected an easing of monetary conditions more potent than anything that Carney could reasonably hope to achieve; the trick here is probably to do enough so as to not unwind the easing that's already occurred.  Quite a task given the inertia that has engulfed the BOE in recent years; call it the resistible force meeting the movable object.

Leaving aside the question of what the BOE should do, today's meeting hinges on the marked deterioration in sentiment that has engulfed the UK, and the concomitant bearish economic forecasts that have resulted.   As noted several weeks ago, we won't actually see hard data for July until the second half of the month.   The survey data, of course, has been dreadful, which is what Carney and co. will presumably hang their hat on.  The great irony in all of this is that the UK economic surprise index has skyrocketed since the Brexit vote, as the tone of much of the recent hard data has been quite solid.


There are essentially three channels with which the BOE could ease policy: interest rates, credit easing, and QE.  Let's look at each in turn.

Interest rates:  It seems very likely indeed that the BOE will cut rates, probably by 25 bps.   The hints have been strong enough that if rates stay on hold, Carney might find his nose morphing into a proboscis, Pinocchio-style.  The impact of such a move on the real economy is likely to be negligible or even negative if it constrains bank margins and therefore the propensity to lend.   That feeds through into...

Credit easing:  The BOE could resurrect the Funding for Lending scheme that was such a stonking mediocrity a few years ago, and is similar to the current program in the Eurozone that has propelled the banking sector there from success to success.  Make loans, get discounted credit from the BOE to  preserve margins.   Simple, right?   Pity about those regulators and the pressure to reduce balance sheet....In any event, while a FLS scheme may not be universally forecast, it is anticipated in a number of quarters.

QE:  With 10 year Gilt yields at 80 bps it's impossible to argue that the level of long term rates is constraining loan demand or economic activity.  Acting to reduce those yields further could have some perverse effects, particularly within the pension industry, which could easily outweigh any perceived benefits (largely signalling, in your author's opinion.)  The market is split 50/50 on this one, with 21 of 44 economists in the Bloomberg survey looking for an expansion of QE.  Among those looking for QE, the median forecast is for an expansion of 50 bio, with the average looking for an increase of 65 bio.

From Macro Man's perch, the most likely outcome is a 25 bp cut, probably accompanied by a FLS rollout so the Bank can "soften the blow" to bank margins.  While QE wouldn't be a total shock, it probably would be close to totally useless for the real economy, so your author suspects that it will be kept in a glass case labeled "Use Only In Case Of Emergency."

What's it mean for sterling?   Well, cable has had a nice little rally over the last week or so...


...but that probably says more about the dollar than about sterling.   After all, GBP/JPY has fulfilled the prediction of weakness based on the historical study of a few weeks ago, and GBP/AUD hasn't rallied notably despite the RBA rate cut.


In the event that Macro Man is right and the BOE holds off on QE, we'll probably see a bit of a squeeze in cable, given that there is something presumably in the price and the market is short.   Should Carney do a Carney (i.e., do nothing), then the squeeze should be very violent indeed.

However, in Macro Man's mind the bear case for sterling isn't really predicated upon the knee jerk monetary policy reaction, but rather the medium term economic impact of Article 50 uncertainty and the potential withdrawal from the single market.  As such, he'd be inclined to sell rallies in sterling after today's announcement (he is flat GBP at the moment).   The pound is, after all, the movable object, and given the likely persistence of uncertainty and a downturn in activity, the medium term path of least resistance remains down.
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Purple Haz
admin
August 4, 2016 at 9:01 AM ×

Good summary - thank you, MM. Given Carney has previously been quite downbeat on the benefits(!) of negative rates, I am inclined to think that it will be 25bps and done. This could provide the conditions for a squeeze in GBP, similar to the euro after the March ECB meeting. I think the need to be seen to be doing 'something' could well mean that QE is expanded to corporate bonds at this meeting, but we shall see...

Overall I like short cable, so would be using any squeeze to add.

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MOOSB
admin
August 4, 2016 at 11:27 AM ×

Sterling is rallying ahead of the BOE's decision..

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Error404
admin
August 4, 2016 at 11:37 AM ×

Although doubtless not intended as such, MMs excellent analysis serves as erudite testimony to the truly monumental cluster**** central bankers have managed to create.

For what it's worth - which is typically very little - I have yet to meet anybody (Brexiteer or Remainder) in my corner of the UK who is as 'uncertain' about economic prospects going forward as our economic lords and masters. Of course, the sample is probably biased by my assiduous avoidance of politicians, central bankers, and purchasing managers.

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checkmate
admin
August 4, 2016 at 11:41 AM ×

Given we already know it's a crowded trade at this juncture we need to consider that if today has all the appearances of a 'once and done' then exactly what's the risk reward left for being short again in the months ahead. I accept that the UK data may be soft ,but has we have seen for years now this taken in isolation is meaningless IF the rest of the world (in terms of major currencies) is just has soft.
Personally , I don't see a lot of profit in having a £ position after this news event unless you want to be part of the squeeze for has long has it lasts. That assumes any longer term strategy as opposed to the undeniable presence of quite a few short term players on this board. Timeframe, timeframe, timeframe.

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Polemic
admin
August 4, 2016 at 11:41 AM ×

Long GBP/TRY is the trade

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Polemic
admin
August 4, 2016 at 11:43 AM ×

and as mt is pricing certainty of rate cut I've bet the other way. tiny downside. big upside.
Always fade CB expectation.

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12yo HFM
admin
August 4, 2016 at 12:30 PM ×

2-4-1 from BoE today. Nice... Confident that central banks will continue ZIRP & QE forever #YOLO
Would love to make some astute comments about FI but man that stuff is hard right? Still reading Fabozzi (on page 16 now tho...) Equities up because... (never gets old huh?) Anywayz keep it real. L8r.

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checkmate
admin
August 4, 2016 at 1:14 PM ×

OK, but if it was as simple has employing low rates to stimulate growth then by now Japan should have been racing ahead. I remain unconvinced that monetary policy is not just shooting blanks by redistributing what is in the economy from one subset of the population to another without actually adding anything at all to GDP. The markets of course DGAF about that because it's about sentiment mostly in the short term and fundamentals later. Which means equities jump and the question actually becomes does it have any follow through?

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August 4, 2016 at 1:25 PM ×

They will stop this shit only when banks will be on the abyss..are you ready for another banks crash?

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Anonymous
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August 4, 2016 at 2:59 PM ×

That was my thought too for a limiting factor, but I don't think it matters at all - irony illustrating how far CB mission-creep has gone. Then again, Japanese banks were all over the press complaining about qe policy just before the "pause."

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Leftback
admin
August 4, 2016 at 3:02 PM ×

What could be more of a wealth transfer to billionaires than BoE buying corporate bonds? Another round goes to the architects of the right-wing coup in Britain.

Now exactly how do Brexit and BoE QE help our hapless "LEAVE" voter in Wigan? You've been bloody well shown! Lord Snooty and his pals Nigel & co. just pulled another fast one on you and now they're having lunch at their club in Mayfair.

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checkmate
admin
August 4, 2016 at 3:52 PM ×

Lb,
You're falling behind the times. Mayfair isn't really what it once was. Full of 27 year olds spoiling my steak by chuntering about 'mega trades' in voices that ensure that most people in Doncaster will not have failed to have heard their commentary. Strangely , I rarely hear any conversation about the one's that didn't work out. I just wish I also knew how to call every shot right then I too could be a 'mega trader'.

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johno
admin
August 4, 2016 at 4:09 PM ×

He did it. Woke up not wanting to trade this crowded thing, but Carney made it irresistible. Big package, and "majority" of MPC looking for another cut. QE can be increased too. +EURGBP.

Love the post 12yo HFM.

Any thoughts out there on NZD? Looks interesting on some crosses. +PLNHUF still looks the best thing out there.

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Anonymous
admin
August 4, 2016 at 4:39 PM ×

They did what they had to to avoid being criticised for not doing enough - weaker gbp, higher stocks, room for another cut, they're sitting pretty right now. Sterling vol to year-end has to be a sale.

Can anyone point me to where any of these cb's discuss how they come up with the size of these packages? Yes we know they canvass dealers for liquidity input and Treasury for the calender, but what is the logic, size-wise?

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northshore
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August 4, 2016 at 4:46 PM ×

@Leftback: Carney today -

"...When you step back and look at the global economy as a whole and what's happening to interest rates in global economy as whole, there are a variety of forces. Some of it's the legacy still of the financial crisis, some of it is broader demographic forces, some of it's the rise of china and other economies; variety of factors which are all pushing down on global interest rates. Globally. And we're faced with the choice that as that equilibrium interest rate goes down, and in fact in many jurisdictions goes negative, we're faced with the choice of either ignoring it, and then running monetary policy too tight and unnecessarily contracting the economy. Unnecessarily. Missing our mandate. Or adjusting with as smart stimulus as possible that is as effective as possible, goes through multiple channels, which doesn't just go through the channel that directly affects the saver, but goes through multiple channels, which doesn't lead to negative interest rates in a way that can support growth. And that's the judgement that we have made today.”

“...The reason we have low interest rates is not because central banks are choosing to have low interest rates. There are much bigger forces which are driving this. And so the question is whether we’re blind to that, and therefore we don’t provide the right amount of stimulus for the underlying economy, or that we take it into account.”

I happen to agree that broader market borrowing/lending appetite is leading CBs, not vice versa. But one then has to question what (aside from wtf they're then doing with contradictory QE, corp purchases and hyper funding for lending) they're actually targeting beyond real/financial asset price inflation?

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Anonymous
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August 4, 2016 at 4:50 PM ×

the 10bn corp ticket isnt a transfer anymore than gov qe already is - it's just a test to see how they get on buying non-gov paper, ahem.

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Anonymous
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August 4, 2016 at 4:57 PM ×

@northshore

weaker currencies are what they're pegging. if they didn't "stimulate" the economy, in a world of weaker growth and revolving currency depreciation, the currency would appreciate.

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Anonymous
admin
August 4, 2016 at 5:29 PM ×

@johno
I don't know wich way you think nzd is interesting, to me it still has a good upside potential to 074/0.75 against dollar and it is a buy if it pullbacks towards 0.71 with nfp tomorrow
rbnz possible cut should have the same effect as rba one...
on the short side aud/nzd seems the best choice to me

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Anonymous
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August 4, 2016 at 5:34 PM ×

Any comments on the RBA rate cut with the banks raising deposit rates to counter it. Need cash?

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northshore
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August 4, 2016 at 6:07 PM ×

@Anon 4:57

I get the currency and trade imbalances angle, although he denied it (he lied). I think nirp/zirp are fine, required even, if that's market driven to clear & allocate resources (with consequent implications for balance sheets, lending, asset prices). But the concurrent monetary choices obviously have other domestic and intra-national consequences. When the gilt curve resembles japan's perhaps they'll have another think about it.

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johno
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August 4, 2016 at 7:07 PM ×

Anon 5:29, thank you for your comments on NZD. I'm seeing it as a short, against AUD and CAD. I wasn't thinking next week's meeting would be a replay of this week's RBA meeting because I expect the RBNZ to guide for further rate cuts (unlike RBA which now seems on hold for a while). New macro-prudential regulations effective Sep 1 should cool the property market, opening the way for the cuts. Admittedly, this isn't my favorite FX view ... NZD real rates are still high and there are attractive yielding assets in the country, so it's tricky to short this in a NIRP world. I'm still running some -EURZAR, so that kind of neutralizes the "carry factor" I'm short through -NZDCAD. Less of an issue for +AUDNZD.

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Anonymous
admin
August 4, 2016 at 7:21 PM ×

Those crazy Swiss. Zhedge has them upping their US equity portfolio by 20bln or 50% this year.

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abee crombie
admin
August 4, 2016 at 8:36 PM ×

US stocks dont go down, EU stocks dont go up. Oil goes down, XLE doesnt. Steel up, autos down... im sure the list goes on and on.. Hope you pick the right spots. When you do you are a genius and your logic is self explanatory (ie 12yr HFM for US Equities and Nico for EZ equities), when you pick the wrong asset, lots of hair pulling

I'm trimming positions here. Wanting to go short but not ready.

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northshore
admin
August 4, 2016 at 8:40 PM ×

@Anon 4:39

Re. Initial BoE perspective in 2009:
http://www.publications.parliament.uk/pa/cm200809/cmselect/cmtreasy/uc376/uc37602.htm
Search for "75 billion"

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Leftback
admin
August 4, 2016 at 9:27 PM ×

We are thinking along the lines of a somewhat stronger dollar (and higher vol) for a short-term trade here.

Expectations for the Fed are now not surprisingly extremely low, yet the initial claims data suggest that the employment numbers released tomorrow may once again be fairly strong, even if the economy is not. A hot number from the BLS (and we will also be watching hourly wages and hours worked especially closely) and then some Fedspeak in its wake would surely have the potential to alter the FX landscape, at least for a few days. September and December are now the only possible meetings for the Fed to move, so there is some potential for volatility to pick up in response to the siren song of the Lorelei Dame Janet, if only to once again be dashed on the rocks in September…..

So in this light, we are giving our favorite strong yen trade a rest for a few days, and instead we are modestly short EURUSD, CADUSD and AUDUSD. Both of the latter have benefited from a squeeze recently that may now have run its course.

Tomorrow morning looks likely to be a busy one. Consensus number for NFP is 185k, so anything over 225k or under 150k headline numbers might move markets, [assuming that these sclerotic markets are in fact still capable of moving….]

See you all tomorrow.

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Sigma
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August 4, 2016 at 10:40 PM ×

>> Expectations for the Fed are now not surprisingly extremely low

Still dreaming of a hike, my friend? 100bp on 5y UST represents a very, very high expectation for the FED, unjustifiably high. One year ago 5y gilts was trading at 120bp and now it is at 15bp.

Yellen marveled at Carney today: a whopping dump in yields and GBP and a massive surge in FTSE. What a strong man - he beats losers from ECB, BoJ, RBA, and the rest. Yellen is not thinking of hikes now, she wants to cut!

Of course, they will massage your ears, my friend, while Gross and Grundlach will invite you to sell USTs. They know that they are going to make a killing next year when FED cuts so they are quietly buying from you now.

Do you remember Gross's call last year that bunds are the short of a lifetime, when bunds were around 70bp? They made a killing by buying bunds from guys like you after bunds yields rallied 100bp in less than one year. Go ahead, now sell them (and me of course) your USTs.

NFP is a non event and the risk is asymmetric to USTs. For good numbers, the initial dump of USTs from algos will be promptly bought by Gross and Co. For bad numbers, you know what will happen.

Btw, I need implied vols to rise otherwise my vol harvesting algo is starving - hard to find decent shorts. Vix was decimated today with flat S&P. VXX lost 30% last month (who would buy this crap anyway?).

Risk-parity is back in force - indeed why to sell if there are so many buyers and money around and the leverage will juice up however small carry?

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washedup
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August 4, 2016 at 11:12 PM ×

@sigma - pretty sure bund yields had just turned negative when gross made the sell call last year, after which it proceeded to go to 70 bps before turning back around - of course ur rt in that its not been a stellar trade for bears if they kept it all along, but nowhere as painful as you seem to imagine.
Additionally, since you think there is an elaborate plot to weaken UST's ahead of buying them, you may want to check the history of how often the market does what these stalwarts want it to. If I were them and I liked treasuries, I'd just go buy some, and trust me there are some for sale every day at a price.

@LB I think sigma is capturing the sentiment of the market quite correctly in that no one ever expects any rate hikes ever, including myself. This as the atlanta fed nowcasts 3.7% for Q3. I think for the 10y to sell off JGBs and bunds would need to sell off, and thats that - anything optimistic regarding US prospects just seems destined to flatten 2's/10's and maybe create a very weak rally in the dollar (if that).


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Anonymous
admin
August 5, 2016 at 12:02 AM ×

@northshore
great link. thanks!

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Leftback
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August 5, 2016 at 12:37 AM ×

LOL. One tends to worry when there are so many people who are so sure that certain things are going to (or not going to) happen. Sigma is misrepresenting both my intelligence level and my position on US fixed income. Let's keep it respectful, eh?

Historically, as most regular MM readers will be aware, we have been long USTs, often when others were bearish (e.g. at a 4% 10y in 2010, you can look it up). Currently and recently we have found USTs to be essentially untradeable, and so have been neutral. Now if you look back on the charts for the last 2-3 months, you'll find we didn't miss out much there. In addition, we are not in fundamental disagreement on the projection for future US yields. In the deflationary environment that we are experiencing, it is quite likely that lower yields lie ahead, but perhaps not right at this moment.

No Fed rate hike this year is indeed possible, or even probable. We are not in any way dependent on this happening, but we do like to bet modestly against overwhelming consensus, as for example last week when we went long yen into the BoJ meeting and profited handsomely from the resulting squeeze that generated a 3¥ surge.

Look, you can arguably rule out a September hike, but it is not possible to rule out associated movements in the USD and in equities and commodities that might reflect an increased probability of a rate hike in the future. Remember this, younger punters, in this your moment of all-knowing and arrogant omnipotence: that central banks will almost always end up FOLLOWING the markets, despite their recent fantasies of being able to control all of them, all of the time. Forget this truism, and you may repent at your leisure.

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Anonymous
admin
August 5, 2016 at 12:54 AM ×

@Sigma, I wouldn't overstate the ftse or cable moves. It's not like ftse is stronger, or cable weaker, than they were last week.

What new experiments will arise from Jackson's arse at the end of the month?

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outside trading
admin
August 5, 2016 at 6:18 AM ×

Still seeing more dollar weakness to come
(I made the euro 1.125 call, but as you know past results are not....)

I faded rba targeting 7680/7730 area, will cut it before nfp as we are so close to the target and I expect a bit of dollar strenght to come from those levels but as I explain for nzd it's a fade for me if it happens.

My favorite dollar long would still be against cad around 1.29 with oil at 43$ ideally

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checkmate
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August 5, 2016 at 8:49 AM ×

"and a massive surge in FTSE."
1 1/2%, "massive". What can I say, if this is your idea of "massive" we have a significant communication issue.

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TraderJim
admin
August 5, 2016 at 6:01 PM ×

on NZD...

RBNZ in interim update 21 July
"The high exchange rate is adding further pressure to the dairy and manufacturing sectors and, together with weak global inflation, is holding down tradable goods inflation. This makes it difficult for the Bank to meet its inflation objective. A decline in the exchange rate is needed"

"Monetary policy will continue to be accommodative. At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range."

Trying to jaw down the FX at least




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