Markets Tread Water As Threadneedle Street Descends Into Shambles

WHERE WE STAND – Death, taxes, and the BoE tying themselves in knots at every opportunity. Life’s three certainties.

I jest, slightly, but yesterday’s MPC decision saw policymakers very nearly end up holding Bank Rate steady, despite five policymakers voting in favour of a rate reduction.

While we did, eventually, see the ‘Old Lady’ deliver the 25bp cut that had been expected, this only occurred after the vote was re-run, for the first time since the inception of the MPC, which saw external member Taylor switch his call for a 50bp cut, to being in favour of a 25bp move, in order to avoid Bank Rate remaining unchanged. Quite how the Governor would’ve explained that they didn’t cut because someone wanted a bigger reduction than the one Mr Bailey wanted to make would’ve been interesting to watch.

Anyway, while the 5-4 vote was much more hawkish than had been expected, the statement read a little more dovish. Though the MPC reiterated that further cuts will be made ‘gradually and carefully’, they removed reference to policy needing to remain ‘restrictive for sufficiently long’, potentially a nod towards Bank Rate nearing something akin to a neutral level.

Amid all that nonsense, the Bank’s latest forecasts leaned hawkish – higher near-term inflation, a lower peak in unemployment (4.9% vs. 5.0% prior), and a faster pace of economic growth. I suppose, though, given their track record, these projections are about as useful as a chocolate teapot. Plus, they’re already redundant, given that they were based on a market curve significantly different to that now seen, given the hawkish post-MPC repricing.

Where does all that shake out? Well, cutting through some of the noise, we clearly now have a higher bar for further rate cuts, especially with Dep Gov Lombardelli & Chief Economist Pill having been in the hawkish dissent camp yesterday. That said, the direction of travel for rates clearly remains a downwards one, while the ‘gradual and careful’ guidance implies a continuation of the present quarterly easing pace, and I remain of the view that a 25bp cut will probably be delivered in November, it’s clear that the MPC’s numerous hawks will take plenty of convincing that further loosening is indeed required.

For the quid, the BoE’s hawkish surprised provided a knee-jerk boost, though this isn’t a rally that I’d expect to be especially long-lasting. The outlook for UK Plc remains a downbeat one, especially ahead of a likely significant fiscal tightening in the autumn, with tighter monetary policy on top of that likely serving to only accelerate the significant labour market weakness that we are already seeing. GBP rallies look like a fade to me.

Whatever, I won’t go on another rant about the UK – much to everyone’s relief, I’m sure!

Instead, I’ll change gears and head Stateside. Folk seemed to get very excited yesterday after some Bloomberg reports indicated that President Trump’s team view Fed Governor Waller as the favourite candidate in the race to replace Powell as Fed Chair. While this would be a market-positive outcome, as Waller is by far the most orthodox and conventional of the candidates said to be in the running for the job, I think we all need to hold our horses here. In fact, I’d wager that the ‘favourite’ for the job will probably change at least ten times between now, and the official announcement.

Speaking of hiring, or lack of, yesterday’s US jobless claims stats again pointed to a labour market that is in stasis, with the pace of hiring remaining sluggish, but the pace of firing also not picking up considerably. While the July jobs report was, quite obviously, concerning, the >90% implied probability of a September Fed cut still feels overdone, especially when we could be looking at core CPI printing north of 3% next week.

Markets, it must be said, didn’t seem especially bothered by any of that, nor were participants especially fazed by comments from Commerce Sec. Lutnick alluding to the likelihood of the US-China trade truce being extended for another 90 days. That, almost certainly, was priced in long ago.

As such, it proved not to be the most exhilarating day for financial markets yesterday.

Equities rallied early doors, before those gains fizzled out, seeing major Wall St benchmarks end proceedings pretty much flat. That sort of price action, especially with the Nasdaq giving up an intraday gain of well over 1%, does make me feel a bit better about my waning conviction in the bull case for stocks which, for those unfamiliar, stems from shakiness in the underlying economy, an apparent ramping up of trade rhetoric, and typically poor seasonality at this time of year.

Treasuries, meanwhile, were choppy, with a bit of curve flattening seen as the aforementioned Waller news broke, though benchmarks fundamentally remain pretty rangebound. This seems unlikely to change any time soon; but, I suppose, I should be content that at least something is respecting the unwritten rules of ‘summer markets’ right now.

In the same way I struggle to be anything but short the long-end for the time being, I struggle to see anything other than a bear case for the greenback. This is particularly the case considering that Fed policy independence was eroded further yesterday, after President Trump’s nomination of CEA Chair Steve Miran to fill the vacant Fed Board spot. I mean, seriously, give me strength!!

I suppose, at this point, the play is simple. Sell the buck as capital outflows accelerate, and watch that capital flow into the EUR, and into gold, which are the most obvious beneficiaries from this whole shambolic situation.

LOOK AHEAD – It’s finally Friday, and very nearly time to see in the weekend with a nice, cold beverage.

Before that, though, we have a mercifully empty-ish data docket to work our way through. The latest Canadian jobs data is the only notable release, where we’re likely to see unemployment make its way back towards the 7% mark. Money markets currently price about a 1-in-3 chance of a September BoC cut, though this likely hinges more on tariff developments than anything else.

The only other items of note on the calendar are speeches from 2025 Fed voter Musalem, as well as BoE Chief Economist Pill, who will likely attempt to explain his hawkish dissent at yesterday’s MPC decision.