BoE: for illustrative purposes only

Morning Note

The Bank of England left rates at 0.1% and, to the surprise of some, did not increase the size of its asset purchase programme. Sterling bounced back a bit after a week of losses following the decision. GBPUSD tested support at 1.23 overnight but spiked north of 1.2380 on the Bank of England’s announcement.

The assessment of the economy from the Bank is grim. The BoE said indicators of UK demand have generally stabilised at “very low levels” with a reduction in the level of household consumption of around 30%.  “Consumer confidence has declined markedly, and housing market activity has practically ceased,” the MPC statement noted. Company sales are seen –45% in Q2, with business investment –50%.

In a ‘plausible illustrative economic scenario’, the BoE forecasts a fall in UK-weighted world growth from 2% in 2019 to -13% in 2020, before bouncing back 14% in 2021 and 4% in 2022. Andrew Bailey, the new governor, said there will be some long-term damage to the capacity of the economy, but in the illustrative scenario, these are judged to be relatively small. The Bank seems to be in the –V-shaped reovery camp.

Two things stand out, Firstly, more QE is coming, even if it’s not today. Two members of the MPC voted to increase the stock of asset purchases by £100bn at this meeting.

Secondly, the Bank’s assumptions on economic recovery seem rather optimistic – let’s hope the plausible scenario is right. I have a nasty feeling it won’t be as there will be deep and lasting changes to the way people shop, work, travel and simply move around. The deep central bank and government support, especially furlough schemes, will make a huge difference, but things won’t be the same. IAG today says the level of demand in 2019 won’t recover properly until 2023.

After a decent start to the trading session yesterday the S&P 500 failed to break above 2890 again and bears took hold later to drive the index down 20pts. Europe was dragged lower into the close with the DAX finishing down 1%. European markets rallied a bit at the open on Thursday but the move lacks much conviction – the US will be the driver today and there futures indicate a bounce.

US 10-year bond yields rose to their highest in three weeks, pressuring gold, which has relinquished the $1700 handle to test the $1682 support area. US real yields rose to –0.38% from –0.44% as 10yr Treasuries drove to 0.7%.

Oil is in a holding pattern after the EIA said crude inventories rose less than expected. Crude oil stocks rose 4.6m barrels in the week to May 1st, whilst gasoline inventories fell on a pick-up in driving as states reopen. Domestic oil output in the US fell 200k bpd to 11.9m bpd. Inventories at Cushing, Oklahoma rose a little over 2m barrels, the smallest increase since late March. Having rallied to $26, WTI retreated but has found near-term support at $23 and is bound by resistance at $24.50. The Brent futures curve indicates a narrowing in contango spreads that indicates markets are less fearful of oversupply in the physical market.