BOE: Bailey comments dovish; place emphasis on employer NIC impact on labour mkt
Jul-14 05:40
- Governor Bailey conducted an interview with The Times which was published late last night (around 22:20BST). His main points were that "gradual and careful" were still used in the guidance despite him believing more rate cuts would be required to help with communications given that inflation is above target.
- There was also more explicit language than he has used in the past about the impact of employers' NICs on the labour market - suggesting that this was opening up slack.
- We aren't sure how much to read into the quote about if slack opened up "more quickly, that would lead us to a different conclusion." This is undoubtedly a dovish statement - but it's not really clarified as to whether that means that cuts could be accelerated in his view or whether that means there could be a lower terminal rate.
- We would read it as potentially a lower terminal rate (rather than an increase in the pace of cuts) - because if Bailey is still concerned about the communication challenges of cutting with inflation above target, it's unlikely we will see inflation not notably above target until 2026 - by which point if we get quarterly cuts, Bank Rate would be much closer to neutral that it may then be seen as less desirable to accelerate the pace.
Key quotes from The Times:
- “I think the path [for interest rates] is down. I really do believe the path is downward. But we continue to use the words ‘gradual and careful’ because … some people say to me ‘why are you cutting when inflation’s above target?’”
- The Times reported that he added (but doesn't make clear if this is explicitly discussing August or not): “If we saw the slack opening up much more quickly, that would lead us to a different conclusion.”
- “I think we’re getting more consistently the story that [businesses], if you take the national insurance change, are adjusting via the labour market. I don’t think we’re getting to a tipping point in the sense that it’s becoming a sort of flood.”
- On QT: “Even if QT isn’t the cause of [rising yields], how that change interacts with QT. It’s not just monetary policy. We also have to look at market functioning. That is a relevant consideration in our decision-making,”
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US FISCAL: Available Extraordinary Measures Pick Up Ahead Of Tax Date
Jun-13 20:42
Treasury had $144B in "extraordinary measures" available to keep the government financed as of June 11 per a release Friday. That is up from $84B a week earlier and the highest since April 28.
- However, TGA cash continues to fall, to $309B latest (lowest since early April) Combined with a pullback in Treasury cash ($376B), keeping the total resources available to avert an "x-date" in the summer at around $450B .
- There will be another uptick in Treasury cash in the coming days, and it's likely Treasury allowed some of the extraordinary measures to be rebuilt (ie not exercised) in anticipation of more cash coming in.
- This is likely to be the last major uplift before the summer at which point x-date speculation will pick up if Congress hasn't passed a debt limit increase by then.
FED: Two Cuts Priced This Year Headed Into FOMC Week
Jun-13 20:28
As we head into the June Fed meeting week, market pricing is reflective of the FOMC’s messaging (that we describe in our preview):
- The next cut is only fully priced by the October FOMC meeting, with September seeing a roughly 80% implied probability of bringing the next 25bp reduction.
- Exactly 50bp of cuts are priced through end-2025, implying two Q4 cuts.
- That’s a shift from just after the May meeting, after which the next cut was fully priced by September, and there were closer to three cuts priced for the rest of the year.
- Overall cuts are seen backloaded this year (after 15bp in September, 29bp of cuts priced in Q4 - Oct/Dec combined), but falls off in Q1 (just 21bp cuts priced, 9bp of cuts priced for January and 12bp for March)
FED: Summary Of Economic Projections: Higher 2025 Inflation, Weaker Growth
Jun-13 20:21
The MNI Markets Team’s expectations for the updated Economic Projections are below.
- As of the May meeting, the Federal Reserve staff – whose outlook tends to be broadly shared by the median Committee member – revised their forecasts for growth weaker in 2025 and 2026, “as announced trade policies implied a larger drag on real activity relative to the policies that the staff had assumed in their previous forecast. Trade policies were also expected to lead to slower productivity growth and therefore to reduce potential GDP growth over the next few years. With the drag on demand expected to start earlier and to be larger than the supply response, the output gap was projected to widen significantly over the forecast period. The labor market was expected to weaken substantially, with the unemployment rate forecast moving above the staff's estimate of its natural rate by the end of this year and remaining above the natural rate through 2027."
- On inflation, "The staff's inflation projection was higher than the one prepared for the March meeting. Tariffs were expected to boost inflation markedly this year and to provide a smaller boost in 2026; after that, inflation was projected to decline to 2 percent by 2027."
- Our expectations for these changes fall somewhere in between those projections and the March SEP – a slightly higher unemployment rate, substantially higher inflation in 2025 but to a lesser extent in 2026, and weaker GDP growth this year. Longer-run variables should be unchanged.
MNI Markets Team Expectations For June 2025 Summary Of Economic Projections Medians
