BoE MPC board meeting review – resisting the hawkish temptation

BoE MPC board meeting review – resisting the hawkish temptation                           

• GBP: BoE keeps all policy settings unchanged (Bank Rate at 0.1% unchanged, unanimous, corporate bond purchases unchanged at 20bn, unanimous and Gilts purchases of GBP875bn unchanged but with a 8-1 vote as Andy Haldane dissents, though this is largely inconsequential as he leaves after the next meeting). The MPC however does engage in a technical taper as weekly Gilt purchases are reduced but rates guidance is kept unchanged with the statement - “Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is made in eliminating spare capacity and achieving the 2% inflation target sustainably.”

• GBP: The technical taper sees a slightly steeper-than-expected purchase pace reduction - Gilts purchase pace is reduced from £4.4bn to £3.4bn gross weekly (Citi analysts had expected 3.7bn) until August. The need for a technical taper arises because the £4bn/week in bond purchases implies the £150bn envelope will be exhausted well before year end (December is maturity). So the Bank opts towards a slower pace in keeping with their December guidance that the QE stock would be raised by £150bn by “around the end of 2021”. Indeed, the MPC says as much - "this operational decision should not be interpreted as a change in the stance of monetary policy."

• GBP: Forecasts – UK 2021 GDP growth is revised up from 5% to 7.25%, for 2022 down from 7.25% to 5.75% and 2023 unchanged at 1.25%. UK inflation is forecast to rise slightly above target this year, but reverts to target in the latter part of the horizon (2% in 2022 and 2023) while UK unemployment is forecast to peak at 5.5% in 3Q21.

• GBP: Guidance “live” from November? – Guidance is unchanged that the MPC do “not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.” Since the Bank expects unemployment to peak in 3Q when the government’s furlough scheme ends, the MPC can only start assessing “significant progress” from November. The November MPC meeting will be pivotal - If unemployment overshoots 5.4% and there are signs the rebound is petering out, a £50bn QE extension might be announced by December – Citi analysts base case. However, if the UK economy evolves according to BoE’s plan – potentially an environment of above-target inflation and still-strong growth in 4Q – MPC could start guiding towards a first rate hike.

Australia - another trade flash point with China but US and China move towards a discussion on the phase one trade deal    

• AUD: AUDUSD knee-jerks lower close to 07700 during the Asia session yesterday on a headline that the Chinese NDRC has halted activities under the China-Australia Economic Dialogue, established to promote bilateral trade and investment. The move comes following Australia’s decision last month to cancel agreements between the Belt and Road Initiative and the Victorian state government. The headlines mark yet another escalation in tensions between the two countries, but the action is seen as largely symbolic as there has been very little movement in Australia – China economic dialogue since 2017. As such, these headlines do not mark a halt in China’s key import from Australian - iron ore and the selloff in AUD is short-lived.  

• USD: Bloomberg quotes the South China Morning Post reports overnight that – “U.S.,CHINA MAY HOLD FIRST TALKS TO DISCUSS PHASE ONE DEAL: SCMP”. This follows the South China Morning Post reporting that “top trade negotiators from China and the Biden administration  may hold their first conversation soon to review the phase one trade deal." The last time talks were held were in August 2020. USDCNH is unchanged on the headlines around 6.4715 but if such talks are confirmed, this will likely be an event risk for CNH though in the bigger picture, the Biden administration is likely to remain hawkish on its China policy.                        

Data for the remainder of this week                   

• USD: US nonfarm Payrolls – Citi: 1150k, median: 950k, prior: 916k; Private Payrolls – Citi: 1000k, median: 885k, prior: 780k; Average Hourly Earnings MoM – Citi: 0.1%, median: 0.0%, prior: -0.1%; Average Hourly Earnings YoY – Citi: -0.3%, median: -0.4%, prior: 4.2%; Unemployment Rate – Citi: 5.8%, median: 5.8%, prior: 6.0% - Citi analysts expect 1150k total jobs and 1 million private sector jobs added. The team expects a 0.1%MoM increase in average hourly earnings and the US unemployment rate to fall to 5.8% from 6.0% in March.  Note Citi analysts expect a decisive turn by the Fed toward discussing tapering at or before the June FOMC, perhaps catalyzed by tonight’s release of a strong April jobs report.         

• CAD: Canada Net Change in Employment (Apr) – Citi: -210k, median: NA, prior: 303.1k; Unemployment Rate – Citi: 8.1%, median: NA, prior: 7.5%; Hourly Wages Permanent Employees – Citi: -1.8%, median: NA, prior: 2.0% - Following two months of strong job gains resulting from temporary re-openings, Citi analysts expect job losses of 210k in April. The April employment report will cover the period from mid-March to mid-April when lockdowns were reintroduced.     

• CNH: China Export growth may continue to slow in April  - on the one hand, trade related cargo throughout capacity in China’s major ports (including both imports and exports) grew only 2.5%YoY in the first 10 days of April. On the other, the Baltic Dry Index, a lead indicator for global trade activities, continued to improve. Together with the higher base, Citi analysts expect export growth to decelerate to around 22%YoY. On the import front, Citi analysts envisage import growth to remain as high as 38%YoY in April. As a result, the trade surplus is likely to come at US$30bn.  

This is an extract from the Daily Currency Update, dated May 7, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here - 

 https://asia.citi.com/wealthinsights/citifx-house-views-and-strategy