Shares in London are flat early doors ahead of the Bank of England, with the FTSE 100 just about eking out a tiny new all-time high at the open where it’s camping out around 8,355. No one expects a move on rates today from the Bank’s Monetary Policy Committee but recent strength in the stock market suggests a cut around the corner.
US stocks were mixed on Wednesday with the Dow rallying and the S&P 500 flat as a pancake. Tesla moved lower on reports it’s facing securities, wire fraud investigations – I’d think the move ought to be bigger. Uber and Arm were among the tech names to fall hard after-hours on disappointing earnings scores. Yields rose overnight with the 10-year Treasury back to 4.5 per cent. In mainland Europe, shares in Frankfurt were up around 0.3 per cent but in Paris they were down slightly.
The Bank of England is expected to leave rates on hold today but signal a cut in the summer. Signs that the labour market softening is easing may be a worry, and wages are still moving higher at a rare old clip. Here’s what we are going to focus on:
Inflation forecasts are going to be key and these seem set to be revised downwards for two and three years ahead. Below target inflation over the forecast horizon would be a signal that the BoE thinks the medium-term outlook is supportive of cuts. Although the stickiness of services inflation in April, which remained stubbornly high at 6 per cent, the BoE seems confident that inflation is coming down. In the last quarterly Monetary Policy Report in February CPI inflation was projected to be 2.3 per cent in two years’ time and 1.9 per cent in three years.
Messaging is likely to shift further towards a cutting bias – whether or not there is an explicit green light for August is up for debate. This would only chime with market pricing, but could be seen as a modest surprise since the BoE has been playing its cards close to its chest of late. A green light for June would be a dovish surprise. Nevertheless, Deutsche Bank expects the Monetary Policy Committee to “set the stage for a June rate cut”, while HSBC also forecasts the first rate cut to come next month. Andrew Bailey speaks after the decision, with chief economist Huw Pill to tidy up any mess a few hours later.
The split of the vote is unlikely to be the most important signal – MPC members have been openly at odds. I think Deputy governor Dave Ramsden follows Swati Dinghra with a vote to cut today though, seeing a 7-2 split vs the 8-1 split last time. Ramsden said last month that he did not need to see much more evidence of falling inflation to vote for a rate cut as inflation could stick around the 2 per cent target for the next three years.
The problem for the BoE to cut as soon as we would all like is that while excess demand in the economy has declined a lot, and energy prices are a lot better, potential supply growth is very limited. Potential supply determines the level of output the economy can sustain without generating excessive inflationary pressures. And it’s a problem for the economy, not just how far we can stretch our incomes. “Over the past year, businesses have responded to the weakness in demand by retaining their existing employees, while using them less intensively,” the Bank said in February. But the good news is that the Bank sees improvement – potential supply growth is expected to pick up to around 1.25 per cent per year in 2025 and 2026, which was more than forecast a year before, albeit below historic trends.
So we will be paying close attention to what the Bank thinks about supply growth. The good news – I guess it’s good – is that the movement is in the right direction. “Although potential supply growth is expected to be relatively subdued, particularly in the near term, the outlook for demand is weaker.” Which begs for a cut sooner rather than later, one would feel.
The Trader is written by Neil Wilson, chief market analyst at Finalto
