Risk Rally Pauses As Fiscal Jitters Persist

WHERE WE STAND – I’d imagine most participants spent a decent chunky of yesterday twiddling their thumbs, such was the rather uninspiring nature of price action that transpired, at least outside of the bond market.

Still, that didn’t stop the BoE Chief Economist popping up with another round of illogical nonsense, with Huw Pill noting his belief that a quarterly pace of cuts is “too rapid” and that policy restriction is being removed “too rapidly”. This, despite the Bank having downgraded its growth forecasts, nudged unemployment expectations higher, and forecast a much more rapid return to the 2% inflation target at its meeting less than a fortnight ago.

Once again, we seem to once again be in a situation where the ‘Old Lady’ stands idly by watching a slow motion car crash within the UK economy while refusing to do anything to stop it from happening. Clearly, growth risks are tilted firmly to the downside, labour market slack is developing at an increasingly rapid pace, and inflation persistence against that backdrop seems highly unlikely. All that said, we’ll probably have to wait until late-summer before the MPC start to chase their tail, drop the ‘gradual and careful’ guidance, and ease policy more rapidly. By that point, though, it’ll probably all be far too little, far too late.

Besides that, I’m somewhat scraping the barrel in terms of interesting developments from Tuesday upon which I can opine, as news and data flow both remained light, and as markets on the whole spent the day struggling for direction.

Treasuries, though, again traded broadly softer across the curve, which bear steepened once more, though yields traded some way off the wides seen on Monday, with 5% still capping the 30-year benchmark. Nevertheless, the bond vigilantes continue to lurk, and it remains tough to bet against a continued steepening, not just in the States, but across DM, where long-end benchmarks continue to soften. Clearly, President Trump somewhat laughably claiming to be a “fiscal hawk” while also trying to pass a $5tln tax cut hasn’t exactly reassured market participants.

Higher Treasury yields briefly led to a stronger greenback, though those gains were pared in pretty short order, with most G10s again meandering along in relatively aimless fashion. The loonie did firm a bit on hotter than expected core CPI as bets on a June BoC cut were pared substantially, while the Aussie pared some losses after a dovish 25bp RBA cut early doors, though these moves, nor any others, are really worth writing home about. Still, I’d be buying the dollar dip here.

Finally, in the equity complex, the bulls seem to be suffering with a bout of exhaustion, as major Wall St indices took a pause for breath, and the S&P snapped a 6-day winning streak. I’m not especially worried here, though, with the path of least resistance still clearly leading to the upside, as 6,000, and then fresh highs, remain my two bullish targets.

I wouldn’t be surprised, though, if we did see some degree of tentativeness creep in as we get closer to Nvidia (NVDA) earnings next Wednesday, though I remain in dip buying mode were any to occur.

LOOK AHEAD – Another light data docket ahead today.

This morning’s UK inflation figures stand as the most notable release, though are likely to be very messy indeed, owing to a whole host of one-off factors, and annual price increases, which tend to skew CPI higher in April every year. In any case, headline CPI is seen having risen to 3.3% YoY last month, up from a prior 2.6%, while the closely-watched services CPI gauge is seen rising 0.1pp to 4.8%.

Anyway, as mentioned above, the BoE seem stuck resolutely in ‘wait and see’ mode, so today’s data is unlikely to impact the policy outlook much, if at all. My base case remains that the next 25bp cut will come in August, though with the GBP OIS curve discounting just 42bp of easing by year-end, risks are probably asymmetrically skewed towards there being more scope for a dovish repricing on a softer print, if it comes to pass.

Besides that, the calendar is almost entirely barren. Earnings from Target, a handful of ECB speakers, and a 20-year US Treasury sale are the only items of note.