BOE hikes 50bps and hints at peak; Gilts yo-yo then build on gains
While some strategists were willing to take a punt on a 25bps rate hike by the Bank of England’s MPC today, market pricing put a 50bps hike as around a 80-90% probability, and so it has come to pass, via a 7-2 vote in favour of the hike, albeit with the pair of dissenters voting for 'no change'. SONIAs rallied strongly and the implied peak for the BOE's Bank Rate is now about 4.35% in Jun23 or perhaps May23, with rates seen falling to 4.10% by the Dec23 meeting.
An MPC statement accompanying the announcement of the 50bps hike conceded that thanks to falling energy price inflation “Global consumer price inflation appeared to have peaked,” but was careful not to be too optimistic about the outlook for home grown inflation.
The MPC statement said that “the labour market had remained tight and domestic price and wage pressures had been stronger than expected, suggesting risks of greater persistence in underlying inflation. Measures of inflation expectations were still at elevated levels. The risks to the inflation outlook in the medium term were both large and asymmetric, with a skew towards greater persistence.”
“The MPC,” it added, “would continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services inflation. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”
The first reaction by the GBP fixed income market to the initial headlines - and the 50bps move - was for gilts to give back some of their pre-MPC gains. Immediately prior to the midday announcement the curve had bull-steepened, with 2y yields -14bps, 10y -12.5bps and 30y -8.5bps.
In its immediate aftermath the 10y gilt yield spiked to 8bps to 3.25%, before swiftly rallying back to reach 3.10%, -19.5bps on the day. Similar patterns were seen in 2y (which jumped 8bps before rallying back to 3.195%, -19.5bps on the day) and 30y, where a 6bps spike was followed by a continuation of the earlier rally, taking it 15bps lower on the day to 3.56%. A similar pattern was seen in SONIA futures, with the Jun24 contract currently strongest and now 24 ticks higher. Volumes in the whites, which are up to 16 ticks higher, are almost 90K
In short, for all the BOE’s talk of the ongoing inflation threat, the market seems to have decided that this is a case of ‘one and done’ in terms of 2023 hiking activity from the MPC. BOE Governor Bailey warned that it’s “too early to declare victory over inflation,” but the market’s moves today reflect more his additional observation that “since the November MPC we have seen the first signs that inflation has turned the corner.”
While the moves today in nominal gilts are large, about half of the movement was made prior to the MPC news. 10s/30s is steeper again at 45.2bps (+4.6) as the front end out to 10y leads the BOE-driven gains, while 2s/10s is a touch flatter at -12.0bps (-1.2) and 30s/50s is little-changed
Linkers have kept up with the nominal rally at the front end but lagged further out with breakevens +2bps in 5y and 10y, but -4bps to -6bps at the long end.