BoE and the UK economy

Today marked the first inflation report for the new BoE governor Carney, the main headlines were as follows

BANK OF ENGLAND MPC SAYS ADOPTS FORWARD GUIDANCE, WILL NOT RAISE INTEREST RATES UNTIL UNEMPLOYMENT FALLS TO 7 PCT

 BOE STANDS READY TO BUY MORE GILTS IF NEEDED, WILL NOT REVERSE QE AND WILL REINVEST MATURING GILTS WHILE UNEMPLOYMENT ABOVE 7 PCT

 BOE AUGUST INFLATION REPORT FORECASTS UK UNEMPLOYMENT RATE TO STAY ABOVE 7 PCT UNTIL AT LEAST Q3 2016

These statements summarize the change of plan from the BoE and the financial markets most certainly moved - this being said, the majority of anaylsts expected forward guidance based on U/E so it wasn't that shocking. First off the reaction in the GBP.

1 min GBPUSD - Thomson Reuters.

As we can see there was quite a move totalling about 320 pips from high to low, while most of the action was here the gilts were quite active also.

10Y gilt tick chart - Thomson Reuters.

We had about a 11.6bps range in trading today however by the end of the session the gilt yield was little changed.

FTSE 100 cash - Thomson Reuters.

The FTSE took a bit of a hit today dropping 1.4%.

Short Sterling Dec 15. Thomson Reuters

With an almost 30 tick range short sterlings had a wild day. Going from an implied rate of 1.05% to 1.3% for December 2015 over the course of the day.

As Interest rates were the main topic of discussion here, I'll focus on this. After the forward guidance was issued that the BoE would consider pulling back on stimulus after 7% U/E was reached, the markets actually pushed forward the expected date of a rate hike - completely the opposite of what Carney had intended. This is most likely because of the recent flurry of strong Economic data from the UK and so 7% U/E may be closer than we, or the BoE think.

For this reason there was this peculiar reaction to what was intended on being a dovish statement, from this analysis the reaction across the markets is clearly justified with cable rising on the hope of higher interest rates, the same reason FTSE and Gilts moved.

GDP vs Inverted Unemployment rate. Thomson Reuters

This final chart shows the relationship between GDP and the rate of U/E, and while not perfect there is definitely something there, and from this one would expect to see the U/E rate edge towards 7% as growth reaches 2.5% which is very reasonable and somewhat expected next year.

Overall, today's announcement did jitter the markets but it wasn't a surprise and so going forward I don't expect this to change much from the overall outlook which is that the FTSE and gilts will do whatever the DAX, Dow and UST's do. the GBP will struggle to go much higher and the move already was a tad exacerbated on short covering and short sterlings will likely recover as the BoE holds firm on its statement.