Bank of England Preview

Okay, let's get things underway. Thursday the 1st of November, uh, just an overview of what I'm going to cover. I'm going to focus specifically on the UK, the pound, talk about Brexit, and then we're going to talk about the Bank of England, and then a quick footnote about some of the news from China from overnight because did have some PMI data. So rather than just go into everything, what I can do is do that after the briefing, have an assessment of the broader picture But just given there's quite a lot out on the UK and the pound this morning, I'm going to focus on that predominantly. So first off then, just looking at this decent spike we've had in price action for the pound occurring overnight. This coming after we had the circulation of some of the release of news stories about the, the Brexit Minister Dominic Raab coming out with a letter where he was indicating about a potential deal toward the end of November. We spiked It then materialized at the time that, well, actually, this was an old letter. We reversed. But it seems like the market has kind of reassessed and looked at this as more of a net positive. Then in addition, what came out overnight and which created the next kind of meaningful move to the upside is a Times newspaper report talking about the UK and EU agreeing on access for banks after Brexit. So talking about a deal for the financial services, which is obviously incredibly important in terms of its economic output of the UK, in terms of a contribution. So quite a powerful move to the upside. I mean, if you're looking at Cable, where we were in the overnight session, we were sitting on the pivot level. This was a sub-128 handle, and we, you know, reevaluate things this morning. We're up at a 129-plus type area. So a quite a powerful and strong move to the upside. So let's just quickly talk through what exactly the headlines were and what's happened, starting with the Dominic Raab comments. So British and European officials were talking about progress that they've made in negotiations. Raab predicting a deal on the divorce would be finalized on the 21st of of November. Remember, generally speaking, in terms of the ability to agree upon at least the, the terms of the separation before we go into the transition period, the deadline or the goalposts seem to be moving all the time, i.e., it's getting delayed upon delay upon delay. Didn't happen in October. That's meant that yes, there's an emergency summit happening in November, but we're potentially we're looking at December and beyond. So him saying they could strike a deal by the 21st is obviously a faster conclusion than what the markets have become led to believe over the recent week or two. The question mark here was that his letter to Parliament Brexit Select Committee was sent on the 24th of October, so it isn't you know, bang up to date. It is slightly old, and one thing for sure that I'm sure you appreciate with, with politics, and very much so on the Brexit negotiation, you know, what is said on Monday can be the opposite on Tuesday, then we go back on Wednesday, and by the Friday it's a completely different situation altogether. So the point being is that things can change within 24 hours. So the fact that this is almost a week old you know, is it still valid, is kind of the questions. The other things here, of course, I mean, what I'm looking at here is the timeline of the, the kind of key milestones to be aware of. And the reason why I guess the 21st of November really is quite important is because this is where there's the tabled or penciled in possible one-off summit. And so essentially RAB wants to get it done likely in time for the discussions to happen in Brussels, and then so that they could start moving along in time for the mid-December EU summit. This then gives them the time that's necessary before the official exiting of Article 50 lapsing and going into the transition period on the 29th of March next year. A couple points here, I think, from two things really. One is you've got to trade what you see. And the market certainly has moved higher. And I think there's two different things that are happening here. I think there's a short-term trade opportunity, and the markets have traded this positively because of a couple of things. I think one, I mean, just look at this downward trend of cable over the course of October. I mean, it's been hammered as a currency pair. It's kind of like a similar situation to the chart mapping the S&P over October. But remember what happened to the S&P over the last two days? It's had a really strong rally. You know, what point does it become overly pessimistic to underpriced and you get some people come in? And then you get a few signs of positive news, whether that be ADP, whether that be Facebook shares up, you know, 5% flip. On this case, we've now got an overtly short market in sterling on the pessimism over Brexit, and then all of a sudden you get these flashes of positive headlines. And remember, if the market's overtly positioned, it's short, then that's why consequently you see much bigger spikes in price movement when there's positive news comparative to when there's negative news. Otherwise you're just adding to the short positions. You get way more bang for your buck if it's a positive headline, of which no doubt these two pieces that have come out are. So understandably, I think we could go a little higher here in cable where would I be looking for the high to come? Well, I think we're pretty much coming up to that point. I think if there were any, uh, speculative traders going long the pound this morning, as I'm going to go into with the Bank of England and the data coming up, I think you're pretty much at the extremity of this move personally. Um, that's that one. I'm looking here on a daily continuation mainly. Here is that September low, and we're coming up to there at the moment, which is just shy of the 130 handle. I up at around the 2963 mark in the futures. So you might be able to squeeze another 20 pips or so out before people will just close out that long position on that speculative trade this morning on the back of that positive news. Point being here for me is that, like I said, there's two things. Trade what you see, and the pound is moving for the reasons just discussed. And I think once we get up then to around that 63 mark, this low here you can see on the left-hand side of the chart, I think that might be the maximum push for how far we'll get out of this news for the time being. The second part here is the bigger picture. So the UK have said that negotiations are 95% complete, but progress remains blocked by, guess what, one issue. Great, we've done a deal, preliminary agreement for allowing the financial services companies. Okay, fine, yes, net positive, short term. We weren't talking about this before, It's new, we react, pound rallies. There's still, though, the problem of how are we going to handle the passage of goods across the border with Ireland after Brexit. So in Dominic Raab's letter, he confirmed the EU now accepts the proposal for keeping the whole UK inside the bloc's customs regime rather than splitting off Northern Ireland. But there's still a disagreement on how and when any backstop measures should come to an end. So this is the most divisive area of why there's such a split and a lack of confidence in Theresa May, because of that exact point. And the DUP still have not accepted the commitment of having the backstop. So yes, there's some short-term positives, and yes, I feel the pound is right to rally right now. Do I think that this is a game changer for Brexit and directionally here on, on the Brexit issue alone? I don't think so. If this was not about the financial services area, but this was a concrete, ironclad resolution to an agreement on the Irish border, you know what, let's start buying that pound because it's going to move like nobody's business to the upside. But that's the key thing, that still hasn't happened. So yes, positive, but beyond this initial move we've seen this morning, I still think the same things are going to hold up these talks. And I don't— you know, you've got to be careful in managing these headlines. One thing here to be absolutely crystal clear: when Britain says they've got 95% of the negotiations done, this isn't 95% of Brexit negotiations. We've not even begun the real crux of the legalities of the trade terms. What they're talking about is the legally binding treaty that that sets out the terms of the separation so we can move into transition to then start discussing Brexit. So, you know, just to make things clear, because I get quite sick of how newspapers sensationalize these things, is my own kind of view. But okay, moving on. One thing for sure I'd be very careful of today, and I'm going to repeat this after I've gone through the Bank of England, but the European Commission so far have declined to comment about this report that's come out in the Times overnight. Now, we've been here too many times before where you get a positive headline and then lo and behold the European Commission come out and go, do you know what, this is absolute nonsense, no, we've not agreed to anything, and then bang, that 100-150 pip move we've seen on the upside gets taken back in a second. So hence the reason why I think these upside levels, uh, people who are trading speculatively these, these kind of short-term moves know the drill. You don't want to be sat there too long when it comes to Brexit headlines because there is a high propensity to get caught out on a spike the other side when a competing news agency might come out with the opposite side of the story. So to be aware of. Okay, now moving on to the Bank of England and a bit of a view for the pound for today. I thought I'd take a slightly different direction, so excuse the kind of blandness of these slides, but literally I've just knocked them up this morning in about 15 minutes. I thought it'd be more prudent to go through it in quite a logical sequence, talking about the Bank of England. So what's on the agenda today? UK data. We do have UK manufacturing PMI coming out later on this morning, in fact in just about, um, 45 minutes' time. How important is UK manufacturing PMI? Well, it is important. Um, typically this would be a tier 1 piece of economic data. But you need to take it in context. There's quite a few things going on today. There's the Brexit headlines, the meaningful impact that's had on the pound this morning. And just think about it, if this data came out— and I've put here the expectation is 53, so, you know, we're nowhere near yet a contractionary territory, so it's not a frightening level. Let's say China is at the moment. The ranges are low at 52, a high of 53.5, neither of which is going to create a dramatic concern, I think, for policymakers. If this was outlying, let's say we get a breach of the lower or upper bound, if you are going to trade it, I would say most people will be approaching this as a quick in-out type trade, not looking to hold it for any type of long duration. Risk of a Brexit headline and focus ultimately on the Bank of England midday. So remember, the Bank of England is the main event today for the pound. Other than any updates we get on this Brexit situation. So if you already know that, and if the market participants collectively are thinking in that way, well then, as you can imagine, it's self-fulfilling, and the impact on UK manufacturing PMI is relatively tame. What I wouldn't want any of the new traders to do is get caught up using ammunition trading on something which isn't really the main event, and you could end up just getting chopped up in some volatility ahead of what arguably is the better opportunity later. Later then, remember, the Bank of England is a twofold event. You have midday for the actual Bank of England rate announcement, the minutes, the core inflation report. Then you get the press conference with Mark Carney and the members of his MPC. So that's the order of, of what's coming out. Okay, the order of play. As I said, this is a two-part announcement, and so there are different focal points of each part. Kind of like with the ECB, you get the rate announcement statement, then you get the press conference with Draghi. It's a similar type of drill, just slightly different times. So at 12 o'clock, you're gonna get a whole cluster of information. You're gonna get the rate announcement, you're gonna get the vote split, you're gonna get the minutes, and you're gonna get the quarterly inflation report. So if you think about it, all of this— the accredited members of the press already have this information. So what they do is, right on the stroke of 12 o'clock, if you had a Bloomberg terminal, you'd see a big dump of commentary pertaining to all of that information. So as you can imagine, the market response is very fast, very volatile, can be very difficult. You could get chopped up quite quickly in those first few seconds or minutes. Better to interpret what it is that's happened and then make a decision accordingly if the opportunity should so arise. Then it's about not having a fear that you've missed out, because actually the press conference with Mark Carney today I think could be very interesting because he's got to explain what is arguably a pretty impossible job for a central bank to do in this present situation, which is Well, Mark Carney, explain to me what you're going to do in policy over the next 2 years. I mean, the range of possibilities is wide, to put it mildly, because of the uncertainty over do we get a deal, smooth Brexit, or do we get the worst case, no deal, or all the other options in between. And so what he's going to be questioned on, how upbeat or downbeat he's going to be is going to be quite key to the event today. Okay, this is— it's not all bad news actually, because if there wasn't Brexit, actually the Bank of England would be probably hiking interest rates. Obviously Brexit though is the massive barrier. But let me talk about why the hawks might be fairly vocal in a meeting. And this is exhibit one, and what I'm looking at here is weekly earnings ex-bonus. And what you can see here is we printed at 3.1%. This is the highest wage growth we've had in Britain, pay growth rising at the most in almost a decade. So actually, if you think about what defined 2017, was a negative real wage growth. Inflation was up at 3, 3.1%, whereas wages were way down on that, meaning that ultimately consumers are getting poorer over time. Which leads to a lack of confidence, diminishing savings and spending power. Demand falls, inflation falls. We're now getting to a slight opposite of this. Wages are rising, best pace they've had in 10 years. This could be a byproduct of the tightening of the labor force, very low unemployment rates in the, in the UK. But inflation is much lower. So we're in a decent gap now of real wage growth. Not negative in that sense. So if that makes sense, then people are going to have a better amount of income coming in. Demand should, in a normal situation, rise and inflation go up. Bank of England should be hiking rates under these types of conditions. So that's exhibit 1. Exhibit 2 is UK economies perform really well, actually. And if you look at GDP and what we've been printing, the UK economy is on course for its best calendar quarter in almost 2 years, despite some of the weak, weaker than expected performance we had in August. One thing I would say, though, there's a little bit of an anomaly to the data here because you've had a couple of things. Remember Harry and Meghan? Remember the World Cup? And, you know, we made it to the semifinals. Remember the incredible hot summer that we had? These are all net positives for economic growth, which kind of counteracted some of the overall negativity that we had. But growth has been pretty strong. So, you know, if you were, if you were Michael Saunders in this meeting— and let me show you, if you're unfamiliar with who Michael Saunders is, let me just refresh your memory. Here he is, this chap down here, right on the right-hand side. He is the most hawkish member of the Bank of England. So of all the economic inputs that he will be monitoring, for him, he would be probably largely basing his argument on the two things that I just discussed with you: the impending inflation threat that could materialize from this, uh, tipped sign or indicator of rising pay, and also just a general strength of the economic growth of the country. Uh, Andrew Haldane is probably the next most hawkish, but I'd say there's a pretty clear gap between these two where then all the rest are kind of clustered to the left and center in that respect. Okay, going back to my, my kind of slides here for a second. So that was Exhibit 2. Big problem though, of course, is why the hawks will lose the argument. Remember, expectation is that it will be unanimous 9-nil. None of those faces of the 9 MPC members that I just showed you are expected to vote for a rate hike. Could they? Well, actually, the vote composition has changed slightly. You'll remember whenever there was dissenters, there were 2 dissenters. There was Michael Saunders, the guy we just looked at, and there was Ian McCafferty. But McCafferty is gone and Haskell is in, and Haskell is not a McCafferty, i.e., he's not as hawkish. So if you were going to get a dissenter, I think the likely probability of that would be an 8-1, i.e., Saunders going solo. If that is the case, and that's not expected, you might get an initial fast money blip and that's it. I would not be looking for any sustainable move on the back of that, not unless the balance of power lies with the associated comments from the minutes and the QIR. If they're also not as dovish as markets might believe could be the case, well then sure, this could add to the continuation of the move. But overall, base case, we're looking for 9-nil. Why the hawks will lose the argument? Well, here's a couple of different things. Markets are not pricing in another Bank of England rate hike until 2020, so for the reasons of and unexpectedly it's so impossible to gauge, you know, the future path of interest rates on the back of an economy where it's highly subject to what happens on the political side with Brexit, which is totally out of the hands of the Bank of England. So as you can imagine, this means is that markets have priced in a fairly cautious manner. The bleak outlook— this is arguably the main part of the QIR that you need to be paying attention to. That's because we will get the projections for growth and inflation. And for growth, a number of economists who were surveyed in the last week by Bloomberg— no one's really looking for too much movement for 2018, but for 2019 and 2020, actually, you can see there are some economists expecting those growth forecasts to be cut. The question here is, that's fine, there's not been a deal as yet, and so Brexit continues to remain a looming uncertainty. So if Mark Carney is slightly downbeat and downgrades growth prospects, I think that's fine. The market can handle that. I actually think there might be a slight risk of, well, if we're all expecting dovish noises today, what if he's only slightly dovish? You know, what about that deal when a market, as we've seen, has a, you know, has an ability to spike up to the upside given its short positioning quite violently. So I do think there could be a slight risk here about a not hawkish but maybe just slightly not so dovish as maybe markets have been led to believe situation. If that does occur, I think possibly a little bit further upside could materialize in the pound. And if we can breach that beginning of the month low that we had in October, uh, that does open up a little bit of space on the upside back to the 130 handle. Okay, wrapping up the Bank of England expectations. When we try— and I kind of work with some of the newer guys, um, in response to— you're going to hear a lot of information coming out at 12 o'clock. What's really important is to pick out the hierarchy of what is and isn't important. To basically remove the noise and just focus on what is ultimately going to move the pound. And interest rates are, in terms of the rate decision in itself, is a non-event. Even though that is the first thing that gets called and the first piece of information come out, interest rates are not going to change today, and so no one's focusing on it. The thing that we are looking at is the vote split, but again, I would say more likely than not it will be 9-nil. The balance here is on point 3 and point 4, which is really key for how the market will react. And it's going to be very hard to hit market and be aggressive because you're going to need a little bit of time to digest and make sense of the language and also what the outlook suggests. Very different, the QIR, from the Summary of Economic Projections from the Fed, because the Fed have dot plots, so it makes it nice and easy to see the rate trajectory over time. With the Bank of England, they produce what's called a fan chart, but they don't have a dot plot for interest rates. They only provide you with inflation and growth, and from that you need to ascertain the path of rates over time. So it takes a little bit more time than the, the kind of Fed situation. I would be expecting the reference to rate hikes to be maintained at limited and gradual. As I said, there are parts here to suggest that rates should go up at some point should there be a smooth Brexit, but the Bank of England, I think, will want to commit to that but also keep options on the table to be flexible, if you like, to the fluid situation of the Brexit negotiations. So the way They've been terming that, and the way I would expect it to be maintained is that rates are going to rise, but we're not going to set a time, and we're going to just say they're going to rise a limited amount and in a very gradual fashion. It's kind of saying we're going to tighten, but in a very, very kind of slow Yellen-esque way. And then the outlook on GDP is key. Hierarchy of market focus— this is my last slide to wrap this up. Focus is not on UK manufacturing today. So So don't get, you know, don't get caught up, don't get, you know, in a messy situation. If it's an outright, you know, beat or miss, sure, but be realistic about your expectations here on the trade. Be careful, point 2, for any further Brexit comments given overnight news. Now it's been quite quiet on the Brexit front this week, but this latest comment from Dominic Raab's letter to the Times article has really fired the Brexit debate back up. And so I would not be surprised in the slightest if at some point today we will hear another newspaper, another financial newswire, a government politician make a comment on the latest state of play. The risk being that we are in a positive response so far, the risk being that they come out and reverse that and refute what's been claimed. Point 3, no one cares about the rate announcement as rates are not expected to change. Point 4, vote split expected 9-0. If 8 won, there could be definitely a spike in the short term to the upside, but any more sustainable move will be dependent on the associated commentary from the minutes and the data in the QIR. Focus on the Bank of England's interpretation of Brexit impact on the economy. This is really what's quite key. If I was looking at the minutes I want to know about what's the, what's the feeling and the sentiment amongst the monetary policy committee. And then 6, don't forget, at half past 12, we've got an hour-long, roughly, press conference. He'll read out an initial introductory statement. He'll then do a Q&A. And remember the Q&A format, much like Draghi, first questions are the most important, and then basically it tails off in the likelihood of it becoming more market-moving. So the press conference, I feel, today could be quite key. And so you're going to have good conditions potentially for market movement all the way up from 12 through probably to 1:30 this afternoon when we get to the US cash equity open. Remember, slightly earlier with the clock change. Okay, that's it. Bank of England, that's enough. We'll go back to that a bit later. Just quickly, we did have the Chinese PMIs overnight. Bloomberg commenting here that Asia's factories are flashing amber as trade wars start to bite. Taiwan's PMI fell, Thailand the lowest since November 2016, so on. But the most important country of all that we're monitoring, China, the smaller private Caixin manufacturing PMI nudged higher to 50.1 from 50. There was a risk here that that could have dipped into contractory territory, and that didn't happen. So if anything, that's a slightly neutral to minor positive headline. The other thing that's been quite evident in recent days— this came out overnight, and I do think that this is quite important for short-term market sentiment to readdress the overall building of a negative sentiment globally, because part of the concerns on trade wars is an economic slowdown in China and the repercussions that could have on the global economy. But China, if we saw their regulatory body, uh, the CSRC, came out with some new changes at the beginning of the week. And now overnight, we've had the government come out and say China is likely to rely on fiscal stimulus measures for the economy. So the Politburo, which is basically the main powers of China— this is right at the top— they've pledged more preemptive and prompt actions are ahead. More tax cuts, bond selling, triple R cuts, credit easing expected. As long as China make these quite far-reaching commitments and they defend this kind of 7 against the dollar and the yuan, then I think that this uncertainty or concern on China can be contained for the moment. And if that happens, the market sentiment starts to shift and things like Apple's earnings, let's say, come out positive in reaction later on tonight, then this sets us up for a little bit of renewed risk-on, considering how risk-off October had been. All right, so that is it. I'm not going to go through anything else at this point. I will jump back on throughout the morning and afternoon. I'll, I'll be here throughout the Bank of England, so on. Um, just a reminder, um, for any of those who are interested, I will be doing a live session on YouTube at 5:30 this evening. So if you've left the office, that's absolutely fine. You can actually access that chat on your mobile phone where you can listen live and ask me questions. So I'm going to be talking about a bit of a wrap-up review of the Bank of England, going to talk about Apple's earnings coming up, and going to talk about non-farm payrolls. So, uh, happy for you to join me at 5:30 if if you just go to our YouTube channel. Okay guys, that's it. Good luck for Bank of England, and, uh, Sam's posting some charts in the chat room now. Do have a look at those from a technical setup across the various different instruments. Thank you.