BoE Monitor: MPC Favouring a Pause – Data May Mean Sooner Cuts

Summary

• Recent comments from the likes of Bailey and Pill suggest continued support for holding rates steady ahead.
• They also continue to suggest that the BoE is favouring alternative measures of wage growth than the ONS’s AWE.
• What little data we got from the labour market outturn (partly delayed due to low response rate) adds weight to this argument, with a sharp drop in PAYE wage growth to below 7%.
• Inflation data tomorrow will be important, but the trend is more important than the single print. Expect the detail will support continued dovishness.

Market Implications

• We continue to like to receive near-term SONIA/be long near-term SONIA futures.
• We also still like 2s10s GBP steepeners vs EUR.

BoE Positioning to Hold Rates Steady

We highlighted after the last MPC meeting that the BoE was laying the groundwork for a more dovish MPR in November. This remains our lean at this stage.
Comments from BoE Chief Economist Pill and Governor Bailey support the idea that the internal members of the MPC are leaning towards holding rates high at their current levels, rather than hike further.

Recent comments have also touched on the feed through of policy. By Pill’s reckoning, the rate is somewhere above 20-25%, although the calculation they use is hard to parse. Looking at the feed through of new secured consumer borrowing (mostly mortgages) to outstanding stock sits around 36% since July 2022 (when new mortgage costs rose above outstanding, Chart 1). The feed through to renters is lower (with rents having risen around 9% since the start of 2022. But this still remains a lot faster than in (for instance) Europe.

MPC Composition Likely Less Hawkish

The departure of Cunliffe is not likely to significantly affect the MPC’s composition. He had typically been a more dovish member, but at the last meeting he voted for a 25bp hike (the only internal member to do so). New joiner Breeden has been very cautious about taking a strong view before she has the full internal data picture, so it is hard to parse where she will sit on the next vote (Chart 2). The November MPR is likely to guide her strongly, and in that we expect dovishness will prevail. At the very least she is unlikely to be more hawkish in her voting than the 25bp vote she replaces.

Otherwise, there is little to trigger any obvious changes in votes versus the last meeting. Dhingra, Bailey and Pill all sound likely to continue to favour another pause at this time. Our lean ahead is that the upcoming data will show slowing medium-term inflation pressures (lower wage intensive services, and continued loosening in labour market) that could be enough to allow Greene to back a pause.

Labour Market Data Half Delayed – Indications Point to Loosening

UK weekly earnings missed consensus in the total number at +8.1% YoY (cons: +8.3% YoY), but came out as expected ex-bonus (+7.8% YoY), albeit with an upward revision to last month to +7.9%.

These figures are less important given the fact that the BoE is turning away from the ONS AWE wage numbers. The more important figures will be the employment numbers from the labour force survey (LFS), but these are delayed by a week on the back of low response rate.

AWE wage growth being high is not surprising, but there is some dovish detail in the PAYE HMRC numbers. Median YoY wage growth, dropped to +5.75% YoY in Sep from +7.6% in Aug, taking the 3mma to below 7% – about in line with DMP, and Indeed data (Chart 3).  This is a big drop, and on the back of the BoE’s doubts around the accuracy of the ONS AWE numbers, should add to their feeling that non-ONS wage numbers are converging at a lower growth rate.

Meanwhile, payrolled employee numbers also shrank in the PAYE report: down 8k on the month, the second drop in a row. This was driven by declining employment (inflows) rather than rising redundancies, but it is another sign that the labour market is loosening at an accelerating rate (Chart 4).

An Overview of Surveys & Data

For Charts see Appendix Charts.

• UK financial conditions remain tight, albeit less so than at their late-2022 peak (Chart A1).
• Medium-term inflation expectations continue to re-anchor. Market pricing for inflation remains higher than we would have expected and (as Pill noted) the MPC would like to see. BoE studies suggest the space is not efficiently priced (Chart A2).
• ONS wage growth remains high, but alternative sources suggest the level is much lower (Chart A3).
• Unemployment continues to rise, and surveys suggest labour market tightness continues to fade (Chart A4).
• Surveys remain bleak: consumer confidence and manufacturing orders remain subdued, even while broader firm confidence recovers (Chart A5).
• Wage intensive services inflation continues to decline. Services inflation instead supported by non-wage intensive services (Chart A6).

Market Too Reluctant to Price Cuts

The market has pared hiking risk in the near-term (from 20bp post BoE to around 12bp). But there is further to go, and the market is still too reluctant to price in cuts in early 2024.

By our estimates, cuts could come in late H1 2024. The initial cut size is hard to predict: we have pencilled in 25bp, but it could be smaller or larger (Chart 5). From a historic perspective, the pause from August to May would be relatively short, but given the pressures on households, lack of fiscal spending, path of labour loosening, and declining momentum in sticky inflation that seems well justified.

On this basis, we continue to like to receive near-term SONIA/be long near-term SONIA futures. We also still like 2s10s GBP steepeners vs EUR.

Recent Policy Maker Comments

Appendix: Data and Surveys

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)