BOE: MPR forecasts to be staff proposals not "best collective judgment" of MPC
May-09 08:46
- Nothing on the immediate monpol outlook in Bailey's speech but this is a key change to how the BOE produces forecasts in the MPR: "We will maintain a baseline projection, based on a staff proposal, one that a majority of the MPC agrees is a reasonable baseline, rather than one that meets an elusive notion of the MPC’s ‘best collective judgement’. And we will use scenarios as vehicles for exploring risks around the baseline and accommodating differences of views on the Committee."
- The other highlights from the speech are around how the scenarios should be interpreted (the rest of this part is very similar to Lombardelli's comments yesterday.
- "These scenarios are meant to convey more than mere upside and downside risks to inflation. By setting out the mechanisms behind them, they explore why inflation may take a different path. And from a policy perspective, it matters whether inflation differs from the baseline because of demand or supply. Even if the difference in inflation is of a similar magnitude on the downside and on the upside, the size of the required monetary policy response might not be. A demand-driven downside scenario is likely to require a larger monetary policy response than a supply-driven upside scenario, simply because there is more of a trade-off to balance when inflation and activity move in different directions. These are nuances that an articulation of the mechanisms behind the scenarios can help us bring out and clarify in our communication."
- "But the choice of these two scenarios – proposed by Bank staff – should not be taken to mean that MPC members, individually or collectively, put a larger weight on a downside risk to inflation from demand and an upside risk in inflation from supply than the opposite constellation with an upside risk from demand and a downside risk from supply. Nor should it be taken to mean that inflation risk is skewed in one direction or the other, or that we see the risks to the path for Bank Rate to be skewed. The scenarios are only two examples from many possible paths the economy could take. That is important to emphasise."
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EGBS: BTPs Underperform As Vol Uptick Weighs On Carry Vehicles
Apr-09 08:45
Estoxx 50 futures are off session lows but remain 2.8% below yesterday’s settlement levels, prompting a widening in 10-year EGB spreads to Bunds. BTPs underperform, with the spread to Bunds 7.5bps wider at 130bps (down from an earlier high of 132bps). The ratchet higher in EUR 3m10y swaption vol is likely factoring in here. BTPs are a popular vehicle for carry traders in the EGB complex, and the increase in margin requirements driven by heightened vol can contribute to unwinds in leveraged carry plays.
- Italy is also more exposed to US tariffs than some of its EU peers, and the Government has been lobbying hard with the bloc to limit an escalation of trade tensions with the US.
- Together with France and Ireland, Italy successfully lobbied to remove retaliatory tariffs on US bourbon, wine and dairy imports in a package that will be voted on by the EC today. Meanwhile, Bloomberg reported yesterday that PM Giorgia Meloni will visit Washington, D.C., as early as next week in an effort to press the Trump administration to offer concessions on tariffs.
- The 10-year OAT/Bund spread is 3.5bps wider at 79bps, down from Monday’s intraday multi-month high of 82bps.
- This morning, Budget Minister Montchalin said that France will try and reduce its budget by E5bln to contain debt growth. This E5bln will be “cancelled, postponed or redirected”, with a portion going to “essential defence spending”.
Figure 1: 10-year BTP/Bund Spread vs 3m10y Swaption Vol
EQUITIES: Deutsche Bank Call Option
Apr-09 08:39
DBK (20th June) 19c, bought for 1.17 in 9k.
SWAPS: UK Spreads Little Changed To Lower
Apr-09 08:33
Gilt swap spreads are little changed to lower, proving a more sensitive to moves in U.S. peers than the German equivalents.
- 2-Year swap spreads widened in early trade, but have quickly faded towards late Wednesday levels, as the dovish move in the front end of the SONIA strip is fully accounted for on both sides of the spread and with 2-Year yields off session lows.
- Further out the curve, swap spreads are ~0.5-1.5bp lower vs. late Wednesday levels, but off early session lows, roughly replicating moves in outright bonds.
