Trading with point and figure

12180 had two touches so far. I'm betting on a third and break through

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1) The decision - Unsurprisingly and as expected Base Rate was held at 0.25% and the total Gilt APF (QE) at £435 Bln and Corporate Bonds at £10 Bln, with the £10.1 Bln proceeds of the redemption of 8.75% 2017 & 1.0% 2017 to be reinvested via buybacks starting 4 September, size £1.125 Bln across the usual maturity bands (3 to 7 yr, 7-15 yr, over 15 yr). The Bank also announced that the Term Funding Scheme will terminate in February 2018, and is expected to reach a total just above the original estimate of £100 Bln. This has been flagged for quite some time, and is consistent with the FPC moves to rein in lending, and BoE warnings that banks need to ensure that recently rather lax lending standards are tightened. In effect, this stresses that the BoE will rely short-term, on macro-prudential measures (as far as it can) to rein in lending, rather than the very blunt instrument of interest rates. That said, last August's decision to cut Base Rate and institute another round of QE, still looks to have been an overreaction, which with the wisdom of hindsight was unnecessary, and significantly contributed to GBP weakness and the consumer credit boom, even if the BoE will continue to deny this and indeed, claim that the much better than many had expected outturn was down to its swift policy response.

2) The forecast revisions had very few surprises:

a) CPI: Q4 2017 2.8% - unchanged - expected to peak at 3.0% in October 2017
Q4 2018 raised to 2.5% vs. May 2.4%
Q4 2019 2.2% - unchanged

b) GDP: 2017 cut to 1.7% from 1.9%
2018 cut to 1.6% from 1.7%
2019 unchanged at 1.7%

c) Labour market forecasts % (prior forecasts in brackets)
2017 2018 2019 2020
LFS unemployment rate 4.4 (4.7) 4.5 (4.7) 4.5 (4.6) 4.4
Real post-tax household income -0.5 (-0.25) 0.75 (0.5) 1.0 (1.25)
Employment 1.0 (0.5) 0.5 (0.75) 0.75 (0.75)
Average weekly earnings 2.0 (2.0) 3.0 (3.5) 3.25 (3.75)

As has been the case for quite some time, the forecast adjustments are more a function of, or rather response to recent incoming data, rather than offering any real insights into the outlook for the economy. By cutting its Unemployment forecasts, while downgrading its forecasts for real household incomes and average weekly earnings, the BoE is hardly painting a particularly rosy picture of labour market prospects, though probably realistic. The CPI forecasts were left unchanged, in no small part, because adjustments in either direction would have sent a signal that they do not want to send. However, we continue to expect that the peak in CPI in H2 2017 will around 3.5% rather than the 3.0% that the BoE is currently projecting, on a combination of adverse base effects, as well as the rise in utility and communications prices (cf. British Gas and Virgin Media this week) and increased food price pressures, as signalled by the latest FAO Food Price data (see http://www.fao.org/worldfoodsituation/foodpricesindex/en/ ), which will be exacerbated by the GBP's weakness vs. EUR. This will in coming months lead to renewed chatter about a "serious discussion" about the policy outlook ahead of the Q4 Inflation Report.

3) Policy outlook - Probably the most notable aspects were that the BoE retains an asymmetric bias in terms of the trade-off between reining in inflation, while not materially damaging growth and labour demand, as per the emphasis on "the MPC’s remit specifies that, in exceptional circumstances, the Committee must balance any trade-off between the speed at which it intends to return inflation sustainably to the target and the support that monetary policy provides to jobs and activity." This is wholly unsurprising. They were also at pains to reiterate that "Monetary policy cannot prevent either the necessary real adjustment as the United Kingdom moves towards its new international trading arrangements or the weaker real income growth that is likely to accompany that adjustment over the next few years. Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth."

Unsurprisingly they also noted that "if the economy follows a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections." But perhaps most notable was Carney's observation that even modest changes to the growth outlook would have consequence for monetary policy, implicitly suggesting that if growth proves to be even a little stronger than expected, then the MPC would have to react. Indeed Carney was keen to suggest that the policy outlook is in fact very uncertain: "I don't think its appropriate for me to tie the hands of the committee by expanding on our view as a committee, particularly with respect to timing. To recap as clearly as I can in terms of our perspective, we have been operating in exceptional circumstances, we will be for some time, because of the extraordinary nature of the Brexit process and what that has done to all aspects of the economy relevant to the inflation target. Those exceptional circumstances have meant that we can take a judgement if we think its appropriate to take a little longer to bring inflation back to target." As such Mr Carney will continue to be adjudged to be an 'unreliable boyfriend' by many market participants

That said, he may not feel that uncomfortable with this, when one goes back to a speech he made at Jackson Hole in 2009. He opined "How central banks communicate can influence the degree to which low, stable, and predictable inflation fosters excess credit growth. It is important that markets understand how a central bank formulates policy, but that does not equate to perfect foresight. Differences in judgment and the fundamental uncertainties surrounding the economic outlook should mean occasional differences in view. These should be particularly marked during turning points in the economic cycle. As the review of liquidity cycles suggests, wider “markets” in expected economic outcomes (which would mean greater short-term volatility) could promote long-term financial stability."

Aug 2017 MPC minutes:
http://www.bankofengland.co.uk/publications/minutes/Documents/mpc/pdf/2017/aug.pdf

Q3 2017 BoE Inflation Report:
http://www.bankofengland.co.uk/publications/Documents/inflationreport/2017/aug.pdf


.........................................................................

Marc Ostwald
Global Strategist
 
dow and dax rangebound....ideal for taking horizontal counts
should be some breakouts fomorra
dax poss to pump 12180
dow...goin either way

Inzi....maybe your 12180 is goin to be suuport
 
tomorra
we look at supp for cable
rez for eurgbp
supp for gbpjpy
ditto gbpcad

gbp got hammered today...we watch for the pullback
 
bulls in...just


mvrqq1.png
 
- US labour report to rule the roost, very disappointing Japan wages,
solid Australian Retail Sales and robust German Orders are digested;
further rash of earnings also due

- US Payrolls: whisper modestly above consensus despite ADP miss, revisions
expected to be net positive

- US Unemployment Rate seen dipping back to low, Underemployment and
Participation rates in focus

- US Average Hourly Earnings: solid monthly gain seen, but base effects
to see y/y rate dip, likely reinforcing market scepticism on Fed


from Marc Ostwald
 
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