Bets on BOE Rate Cut Fall to 50% as Factory Optimism Jumps
U.K. Factory Activity Falls Even as Optimism Sees Record Surge
(Bloomberg) --
The path toward a potential Bank of England interest-rate cut this month took another twist after a report showing a surge in optimism among U.K. manufacturers pushed market pricing for such a move down to 50%.
The figures from the Confederation of British Industry indicate that Boris Johnson’s decisive election win last month boosted sentiment by the most on record in the three months through January. That pushed up the pound, seeing the currency erase the losses suffered since a Jan. 9 speech by BOE Governor Mark Carney supercharged bets on a cut.
The reaction to the CBI report, which is rarely seen as a market-moving release, highlights the focus traders are placing on any U.K. survey in the run up to the decision. A spate of weak data so far this year, along with dovish comments from policy makers, boosted market bets on an imminent move above 70%, although the euphoria has faded slightly following more positive reports this week.
Read More: Pound’s Reaction to Data Hints a ‘Back to the Future’ FX Regime
With traders now regarding the chance of policy easing this month as essentially a coin toss, the next key release is the purchasing managers’ indexes due Jan. 24. These can prove highly sensitive to changes in sentiment and economists have pointed out they have been historically correlated with the CBI numbers. The BOE will also likely draw heavily on intelligence from its own network of agents.
The big question for policy makers is whether an increase in optimism will translate into an improvement in activity. The CBI report suggested that is yet to happen, with output falling at a similar pace to December and a measure of total new orders dropping at the fastest pace since the financial crisis in the quarter.
“The boost to optimism in the manufacturing sector is very encouraging given the difficult environment that firms have faced in recent months,” said Tom Crotty, chair of the CBI Manufacturing Council. “However, it is clear that the sector is not yet out of the woods in terms of performance.”
The pound climbed as much as 0.7% to $1.3135 after Wednesday’s release, while U.K. gilts fell, pushing the 10-year yield up by as much as two basis points.
--With assistance from Greg Ritchie.
To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Lucy Meakin
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