It is expected that the Bank of England will announce an extra 50bn of QE today’s meeting. As at this point it is expected that the bank will have completed its previous 275bn of QE target.
Recently data from the UK has been acceptable, with the exception of weaker GDP. There were a few shockingly good figures such as the PMIs, this was decreased the expectation of a double dip in the UK. Despite this I am still weary of the UK. Inflation is still eroding wages which in turn is holding back demand.
Inflation has seen a slight trend change coming in at 4.2%, but still well above the BoE’s target of 2%. However last year’s VAT hike will drop out the index from January indicating a chance of a speedy fall in inflation at least in the early part of this year. Household spending in the UK amounts to around 60% of the total demand. So, if inflation were to fall below nominal wage rises this would improve consumption. The MPC still remains wary however as to how much inflation will drop this year. This fear was clearly pointed out in the December and repeated in the January minutes. In spite of this the chief economist Dale has been optimistic that a fall in inflation and therefore a rise in real wages will add fuel to growth in 2012. But always be aware that the Euro zone crisis is just next door and still has negative impacts our exports. The UK’s latest lending survey revealed that lending to firms and households fell in December. This is a strong argument for the BoE to provide more liquidity. I have changed my previous view of a 75bn increase in QE to a 50bn increase due to the MPC reiterating their ‘less dovish’ stance combined with the staggeringly good PMIs.
It is possible that any further QE this month could mark the end of the BoE’s easing cycle, though the outlook will be determined by the relative strength of forthcoming data releases and the unhelpful consequences of troubles over the channel. It has been suggested that a BoE rate rise is unlikely until 2013.
Guru’s thoughts: I believe that there will be an increase of 50bn, easing the storm from the euro zone combined with the good PMIs in the UK will mean that the BoE do not have to as urgent as I once thought. In my eyes there are three possible scenarios to trade that I will be looking at: 1. If there is a 50bn increase there will be some movement but not much, if fixed income rallies I will look to sell at some point and the same if it sells off I will look to buy some sort of dip. This is because there are people who are long looking for more than 50 and people who are short looking for less. 2. If there is less than 50 it feel it will be a colossal surprise to the market, this should see fixed income get slammed, I will then look to sell (at the time and for the near future), it will also be a good opportunity to put on short sterling steepeners. 3. If 75bn is announced then I will look to buy dips in fixed income and put on short sterling flatteners. Being as I am flat in UK products at the moment, from a trading perspective I hope for no increase as I think this will rattle and shock them market, and shock means opportunities. Good luck!
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