Did an MC save our lives or was it murder on the dance floor?
If Mark Carney was a DJ, then last week he double-dropped a huge bass-line and the crowd on the dance floor – who thought the party was coming to an end – just went crazy.
The bouncers will spend the rest of this week peeling them off the ceiling. So the Bank of England actually surprised markets and delivered on all fronts. I had expected the moves, but not the quantum: a 25-basis-point cut (tick); some QE (tick, although £60bn of gilt purchases is more than I would have expected); a new term funding structure to replace the old Funding for Lending Scheme (tick); and £10bn of corporate bond purchases ... I discussed, but didn’t think they would do it (big fat cross).
Communication from the bank has indicated more cuts to come before year-end, possibly around the time of the November inflation report or earlier, if data warrant it. The bank has ruled out sub-zero rates. Mrs Jones is happy as our mortgage rate drops to just 1.1% (so more expenditure freed up for curtains!). With the bank expecting growth to tank to sub-1%, its inflation-fighting credentials just went out the window, as this cut is to support growth ... that is a hell a lot of curtains by anyone’s standard ….
The result was a huge rally in the gilt market and one heck of a move in sterling corporate bond yields. My screens were awash with bids. Lloyds immediately put out a monster buylist, as did other brokers, all scrambling to get long sterling risk. In some cases I saw entire balance sheets being flooded into the market to buy paper! Even insurance and bank debt saw demand as the crazed frenzy spilled over into higher beta subordinated debt as well. The banks should benefit from the term funding scheme as they can borrow up to 5% of the value of their existing loans in order to lend on to retail and corporate borrowers. The new scheme totals £100bn. So a rally in bank paper too.
US treasury and bund yields took their lead from gilts, but on a normal day I'd have seen their yields rising. What’s normal anymore? The German construction PMI rose from 50.4 to 51.6, the retail PMI was up from 51.6 to 52.0, suggesting little spillover from Brexit. It was not much different in the US: weekly jobless claims still low at just 269,000, rising Bloomberg confidence data, and US factory orders ex-transport rising 0.4% versus expected falls of 0.2%.
You have to ask yourself: did Carney and the other Keystone cops really need to cut rates, let alone chuck the kitchen sink at it?
A case of too much too soon, methinks.