GBP Swaps: BOE warriors attack, but market moves fade

BOE comes out all guns blazing; Market calm

The BOE came out fighting in its war with inflation, surprising people with its deployment of a 50bps hike. The market reaction was mostly pleasingly calm, but will the move work?

After twelve rate hikes in the current cycle, which the BOE has recently been ‘stabilising’ by using just 25bps increments, the decision to reach for a lumpy 50bps move, just a month or two away from expected sharp drops in inflation across Europe, and just as the property market in the UK feels like it may be buckling, might smack of panic.

But the fixed income market knows the MPC would never do that, and it resisted the temptation for whopping Truss-esque swings, instead taking its medicine with admirable calmness as it mulled the MPC's inflation dilemma.

But if the MPC and others were showing some signs of alarm, fixed income was robust. The gilt future closed with unexceptional volumes of around 216K and was +45 ticks.

And in both the nominal gilt and the RPI markets, the immediate moves were quite controlled and they lessened as the day went on. At the 4:15pm close of play, the SONIA curve had put in a decent flattening shift, with Sep23 falling 22 ticks and the Dec24 rallying 5 ticks, as SONIA priced in a BOE rate peak of about 6.15% in Dec23, dropping to a bit above 5.36% in Dec24.

But in gilts, the 2y benchmark closed at 5.05%, just 2bps higher, while 10y was -4bps at 4.36% (having briefly touched 4.45% post-MPC) and 30y was -3bps at 4.48%. Front-end ASWs were hit hard, with the 2y closing 4bps lower at 53.6bps, while 10y was +1.1bps at -6.5bps and the 30y was +1.2bps at -55.7bps.

And over in inflation, RPI swap rates fell most in the 2y sector, -14bps to 4.16%, reflecting the MPC action and generally softer oils and gas prices today. The 10y was -6bps at 3.91% and 30y ended -1bp at 3.43%.

One GBP swapper said today that “the BOE is in a difficult situation and may feel it has no choice but to hike us into recession. The labour market has been normalizing but now job vacancies are rising again. We are in a situation where gilt yields could rise another 100bps from here, which would drive curve-flattening.” The 10s/30s gilt curve did attempt to flatten post-MPC but at the close today it was +1bps at 12bps. In Europe, 10s30s curves flattened with enthusiasm as they pondered the ECB’s own rate path amid talk of a grab for yield before the Summer. 

Anyone after good news today could get a whiff of a happier future in the MPC’s summary published after the meeting. It said “CPI inflation is expected to fall significantly further during the course of the year, in the main reflecting developments in energy prices. Services CPI inflation is projected to remain broadly unchanged in the near term. Core goods CPI inflation is expected to decline later this year, supported developments in cost and price indicators earlier in the supply chain. In particular, annual producer output price inflation has fallen very sharply in recent months. Food price inflation is projected to fall further in coming months.” So… fingers crossed.

RBC: MPC now a prisoner of fortune, and data

Strategists at RBC said this afternoon that while the MPC seemed to think that this would be a one-off move it believes more 50bps moves must now at least be on the table, or in the armory, ready for use.

Citing the MPC Minutes that said overshooting data such as CPI “suggested a 0.5% increase in interest rates was required at this particular meeting,” point to it being a one-off, but RBC said it has now effectively lost the power to make that call.

It contended that “The MPC are now, in effect a hostage to the data. The indication from today is that their reaction function is dependent on the scale of data surprises. There is still no discussion over how much additional tightening they think is required nor where they think terminal is. Should the data continue to surprise versus expectations then it is likely to be the case that the MPC won’t be able to resist following today’s 50bps move with a similar sized increase in August.”

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