The Queen’s Bazooka: Full Bank Of England Post-Mortem

Now days, it’s always advisable to curb your enthusiasm when it comes to hitting the keyboard frantically as soon as a developed market central bank announces something big. Why? Because in all likelihood you’ll end up having to publish something an hour or so later with a title like “market fades latest central bank Hail Mary pass.”

So was that the case this morning after the BOE kitchen sinked it? Well, yes and no. First let’s get to the details and as usual, it’s easier for us and you if we just start with the bulleted summary via Bloomberg, that way those who don’t want to get down into the weeds with us on the technical aspects can just hit the high points:

  • BOE Cuts Rate to 0.25%; Vote 9-0; Expands QE, Buys Corp Bonds

  • Bank of England says it will buy GBP60 bln gilts over six months.

  • BOE to buy GBP10 bln corporate bonds over 18 months

  • MPC voted 6-3 on QE; Weale, Forbes, McCafferty dissented

  • MPC voted 8-1 on corp. bonds; Forbes dissented

  • BOE announces term-funding scheme to mitigate impact of low rates on some lenders

  • BOE signals it may cut interest rate to near zero later this year. Says if data come in as expected, ‘a majority of members expect to support a further cut in bank to its effective lower bound”

  • BOE says lower bound is “close to, but a little above, zero”

  • Corporate Bond Purchase Scheme will operate for initial period of 18 months

  • Total amount of corporate bonds eligible for program is about 150 billion pounds

  • Bank will purchase bonds issued by companies that make a material contribution to economic activity in the U.K., including their finance subsidiaries

  • Corporate bonds issued by banks, building societies and insurance companies will not be eligible

  • Bonds with complex or non-standard structures are not eligible, convertible or exchangeable bonds not eligible

Got all of that? Here it is in three easily digestible points: 1) they cut rates, 2) they’re buying more government bonds, 3) they’re buying corporate bonds. Basically they threw everything at it. The only thing they didn’t do was hint at negative rates. In fact they said that was off the table. We’ll see. Let’s get to the market reaction.

Obviously, UK assets and sterling reacted as you might expect. They just got a shot of monetary heroin and that was pretty evident in price moves. Here’s a look at UK stocks and the pound:

And here’s the collapse in bond yields (read: “quick, frontrun them!”):

As for everything else, well frankly it doesn’t look like anyone much cares. Here’s a look across markets:

That’s since the BOE announcement and basically what it conveys is this: “mehh.”

As for analysts, we might as well run down the desk commentary for you too for those who are really interested in knowing what the implications of this may be. Here you go:

  • Culled from various Citi strategists (there’s actually some interesting stuff in here): “The BoE exceeded consensus and with forward guidance signaled more easing to come. Combined, we think the measures are sufficient to keep existing GBPUSD shorts in the trade. Today’s decision is consistent with medium term GBP weakness. To our surprise, the MPC judges that the eligible universe will be about £150bn, consisting of about 150 issuers. Currently, the £ IG iBoxx index has only about £160bn outstanding of senior non-financial corporates. And updating the universe that was eligible for the 2009 programme, we had estimated that only about £55bn would be eligible. It remains unclear to us how the gap between the two amounts can be bridged, but it implies that their eligibility definitions differ from previously.  How much should spreads tighten? The knee-jerk reaction in bonds that we deem likely to be eligible has been a 10-15bp tightening. By comparison, € bonds that are eligible for the CSPP have tightened by 65bp since the ECB announced the programme on 10 March. We do not expect tightening in eligible £ IG bonds on a similar scale, because 1) the starting point for spreads is tighter, 2) the external backdrop is different, 3) the size of BoE buying may well end up smaller than the £10bn, 4) if the eligible universe is £150bn, then the proportion the BoE will buy is smaller than the ECB, which at the current run rate will hold more than 10% of eligible bonds by the end of the existing programme in March of next year.”

  • From BofAML: “The BoE’s package was close to our expectations. We had looked for a 25bp rate cut, £50bn QE (mixed between gilts and private sector assets) and some further "credit easing". The BoE went a little beyond that, with strong guidance that rates are heading down close to but above zero if the economy performs as badly as expected, £60bn QE (gilts), £10bn corporate bond purchases, and a "TLTRO" which on first impressions goes beyond what the FLS could have delivered. We don’t believe rate cuts at this stage are net contractionary and the BoE clearly doesn’t either. Strong hints of fiscal stimulus The strong hints from Chancellor Phillip Hammond of fiscal stimulus "once the OBR has produced a forecast" rounded off a positive response. This seems to be "arm’s length" monetary and fiscal coordination, preserving BoE independence but also clearly signalling that the authorities know the BoE is now at the limits of what it can do so fiscal will have to help.”

  • From Barclays: “Quick take on the forecast: The Bank of England released its new macro forecasts in the accompanied Inflation Report. The Committee slashed its 2017 GDP growth by 1.5pp to 0.7%, with 2016 GDP growth unchanged. Given the strong Q2, carry over for 2016 is already at 1.7pp meaning that the Bank does not expect a technical recession in the second half of this year, being much more optimistic than our forecasts. Inflation, however, is expected to pick up faster than previous, reaching 2.1% y/y by the end of next year after 1.8% y/y previously. Overall, this results in a growth forecast above consensus but an inflation profile broadly in-line with consensus.”

  • From Bloomberg's Paul Cohen: “The sterling bond market is much smaller than the euro bond market and has fewer active market makers, which could apply pressure to the central bank’s opportunities to extract GBP10b."

  • From CIBC: “Moves in long-end rate spreads underline ongoing downside risks for the pound, leading the way for a slide in cable toward 1.25. Investors still seem comfortable to play GBP from the short- side after rate announcement, despite presumptions of excessive GBP shorts going into the BOE. While investors seemed fully prepared for rate cut, it seems the market was less prepared for additional bond purchases.”

  • From ING: “Should BOE open the door to another rate cut and further policy easing, that would certainly keep bearish GBP sentiment in place in near term. Look for more of an orderly sterling fall from here over the next 3-6 months with the main catalyst for any material GBP downside likely to be political risk and uncertainty.”

  • From Credit Agricole: “The surprise came from the aggressive QE announcement more than anything else. This could push gilts and corporate bond yields lower; GBP is following U.K. rates lower. 25bp rate cut is in line with expectations BOE effectively pre-announced another smaller cut before year-end.”

And that’s pretty much all we’ve got for now, although they’ll no doubt be plenty more to come. It’s worth mentioning what GBP positioning looked like going into the announcement. Have a look:

(Charts: BofAML)

Consider those charts and then recall what CIBC said above: “Investors still seem comfortable to play GBP from the short- side after rate announcement, despite presumptions of excessive GBP shorts going into the BOE.”

Also, for information’s sake, here’s a look at the structure of US, euro, and UK IG corporate bond markets:

(Table: BofAML)

Note that highlighted UK Yankee figure. As BofA noted last week, that could well be a good thing for the US IG market.

Oh, and speaking of BofAML… golf clap:

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