Q2 Could Be The Best For Risk in 2018
"One day hot, one day cold, and the people on the other side of the message are left not really knowing where they stand."
So said Pat McFadden MP at a Treasury Select Committee in 2014, talking about the Bank of England, and Mark Carney in particular. Four years on, and it still rings true. On Monday this week, the probability of the MPC hiking rates on the 10th May was 97% according to Bloomberg. This morning it touched 52%. So market pricing has moved from it being a certainty, to a simple coin-toss.
The change is that Mark Carney said (whilst he was in the US, at dinner time for us in the UK) that “there are other meetings” this year that they could raise rates on. To be fair, this followed a weaker than expected CPI and RPI print on Wednesday - which in our view may mean inflation has peaked in the UK. That in turn gives the MPC enough wiggle room to delay hiking in the face of “Brexit uncertainties”, and essentially Carney was only confirming that view. But it is quite a turnaround given it was only a few short weeks ago Carney himself was guiding towards May.
This further develops what Mark Holman wrote of earlier this week, talking of the potential for Q2 to be the best quarter for risk in 2018. A slower rates profile in the UK following a tempering of inflation could certainly add to that impetus and we would welcome a re-appraisal of the rates impulse following this fresh data.
One question it does raise in our minds however is the extent to which Mark Carney has brought the committee with him in terms of making the case for raising rates? Contrast the MPC to the Fed; Fed members have individual views but seem to stay pretty close to message, whereas we wonder if Mr Carney has potentially been shooting a bit more from the hip recently? Has the recent inflation data been the perfect way of Mark’s MPC colleagues giving him a nudge towards a more consensual view?
Whatever the reasons for the shift, we would caution anyone who has got a dinner date in the diary with Mr Carney to have a plan B and keep their options open!