Recap : Rates, BoE


How much farther the move in yields? Let’s go over the backdrop. The carry from being short is still punitive. Positioning & expectations are still offsides, and it looks like momentum traders are joining the party. And the housing data continues to disappoint. Barclay’s noted the wide divergence between the NAHB survey and actual housing starts, which tangentially supports the idea of lower trend growth:

Catalyst wise, next Wednesday Yellen and Dudley speak and the Fed Minutes are released, so a hawkish turn there could trigger a move. But there is little to reason to believe that a surprise will happen. (and even if there is one that is not corroborated by the others, the impact will be muted) The ECB has essentially pre-committed to easing at the next meeting, which suggests that the rally can continue until then.

Having said that, the longer term drivers continue to turn, so we should not forget that the rally, at least through the intermediate part of the curve, is on borrowed time. Technically speaking, 2.47 is a key level on the 10y that has held since last June, so a bounce or at least some stabilization here looks likely. Finally note that the US economic surprise index has been moving higher for over a month now, though it remains below zero:

Separately, yesterday’s BoE Inflation Report was interesting. I noted in February that the BoE changed its metric for measuring the output gap in a way that essentially allowed them to do whatever they want, forward guidance & transparency be damned. This report continues that trend. The solid GDP growth and a sharp drop in unemployment over the past 3 months meant that most indicators of capacity utilization and labor market slack have tightened. (see below) But despite this, the BoE continues to argue that slack is at 1-1.5%, unchanged from February.

My own models for the BoE reaction function suggests that, if the BoE reaction function was unchanged from the last cycle, policy rates would likely have been ~100bps (!) higher by now. But obviously, its reaction function HAS changed, and probably in a way that they haven’t even figured out themselves. One thing is certain, however – as an open economy that is closely tied to the global economy, the BoE is very mindful of the impact of the currency rate. As a result, current market pricing for a first hike in 1Q 2015 doesn’t look terribly wrong, but the risk seems skewed to a later hike.

Finally, I noted previously that the low vol environment is likely to stay, and that it should be seen as a reason to be contrarian. GS wrote about the topic as well yesterday, and the most interesting part was this chart showing that despite low levels of Gamma, Vega remains well above prior cycle lows:


  • Philly Fed declined to 15.4 in May vs 14 exp and 16.6 prev
  • US Empire Mfg jumped to 19 vs 6 exp. This was the highest print since 2010.
  • Jobless Claims declined to 297k last week vs 320k exp and 321k prev
  • NAHB declined to 45 vs 49 exp and 47 prev
  • US Capacity Utilization decreased in April to 78.6% vs 79.1% exp and 79.2% prev
  • US Core CPI rose to 1.8% vs 1.7% exp and prev
  • EU GDP was stable at 0.2% QoQ vs 0.4% exp. German GDP was strong, while France and Italy was weak.
  • New Zealand PMI declined to 55.2 vs 58.4 prev
  • The ECB survey of professional forecasters cut inflations forecasts. 2014 to +0.9% from +1.1%. 2015 to +1.3% from +1.4%. 2015 to +1.5% from +1.7%. Longer term forecasts were revised down by 0.03% to 1.84%. The reductions are slightly less than the market was expecting.

  • Japan Q1 GDP grew at a 3-year high of 5.9% on annual basis, as consumers rushed to make advance purchases before the Apr 1st start of higher sales tax and businesses invested
  • Fed paper: We find that that short- and long-term unemployment exert equal downward pressure on price inflation.

Upcoming Data:

  • Fri: ECB’s Coeure Speaks, US Housing Starts, U Michigan Confidence,
  • Mon: RBA Minutes
  • Tue: UK CPI, Japan Trade Balance
  • Wed: BoE Minutes, UK Retail Sales, Dudley Speaks, Yellen Speaks, Fed Minutes, EU Consumer Confidence, Japan PMI, China HSBC PMI
  • Thu: EU PMI, UK GDP, Turkey CBRT, Canada Retail Sales, US Jobless Claims, Existing Home Sales, South Africa SARB