Our views

Gilt corner: Carney’s second bite at the cherry?


Craig Inches, Head of Short Rates and Cash

5 July 2018

We’ve seen some encouraging UK data released lately – an upward revision for Q1 GDP and composite Purchasing Managers’ Indices (PMIs) averaging 55 – all of which should suggest an August rate hike is likely, shouldn’t it?
Markets appear unconvinced by the stronger data – or the Monetary Policy Committee’s (MPC’s) hawkish comments – they even dismissed the fact that the Bank of England (BoE) Governor ignored the views of his Chief Economist, who voted for a June hike. This has resulted in the market only pricing a 65% probability of an August rate hike. Is this ‘won’t get fooled again’? Or are markets too spooked by Brexit uncertainty to follow the data? Yields remain stubbornly low, especially at shorter maturities; this gives us greater conviction to position our portfolios for flatter yield curves from these levels. Thus we prefer to reflect our short duration stance in the front end of the curve and remain overweight longer maturities as the speed of increases will remain muted. 
With the Beast from the East a distant memory as the summer heat cracks pavements, are markets unconvinced by the data, or by the credibility of the BoE? August could – we say should – be a rational time to instigate the hike that we believe should have come much earlier in the year.  

We’ve seen some encouraging UK data released lately – an upward revision for Q1 GDP and composite Purchasing Managers’ Indices (PMIs) averaging 55 – all of which should suggest an August rate hike is likely, shouldn’t it?

Markets appear unconvinced by the stronger data – or the Monetary Policy Committee’s (MPC’s) hawkish comments – they even dismissed the fact that the Bank of England (BoE) Governor ignored the views of his Chief Economist, who voted for a June hike. This has resulted in the market only pricing a 65% probability of an August rate hike. Is this ‘won’t get fooled again’? Or are markets too spooked by Brexit uncertainty to follow the data? Yields remain stubbornly low, especially at shorter maturities; this gives us greater conviction to position our portfolios for flatter yield curves from these levels. Thus we prefer to reflect our short duration stance in the front end of the curve and remain overweight longer maturities as the speed of increases will remain muted. 

With the Beast from the East a distant memory as the summer heat cracks pavements, are markets unconvinced by the data, or by the credibility of the BoE? August could – we say should – be a rational time to instigate the hike that we believe should have come much earlier in the year.  

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.