Spoiled And Spurned

US and global equities came into Friday poised for a fifth consecutive weekly gain.

For some, that’s all that matters. But in rates, spoiled markets are feeling spurned — a jilted lover loudly airing grievances.

Complaints centered around the Bank of England. It’s true markets were woefully wrong-footed. The BoE had ample opportunity to walk back rate hike bets and they didn’t. When Andrew Bailey told a virtual panel the bank “will have to act” late last month, traders understandably interpreted that as something like confirmation of a move at the November meeting.

But at least some astute market watchers saw it coming. “This ‘relief’ outcome is perhaps the largest reversal danger for global fixed income’s recent flattening spasm,” Nomura’s Charlie McElligott said Tuesday, after the RBA pushed back against aggressive market pricing for accelerated rate hikes Down Under. “The risk [is] that we made the flats, and are now biased again to steepening from here,” McElligott went on to say. “Gasp — even BULL steepening.”

Fast forward to Friday and this week did, in fact, witness a sharp reversal at the short-end (figure below).

Some folks were aghast. “Never did the BoE think it fit to push back on any of that market pricing despite numerous policymakers making comments left, right and center, day in and day out,” Bloomberg’s Ven Ram said Friday. “Sorry, Governor, if the BoE had managed its communication well, two-year gilt yields wouldn’t have tumbled a phenomenal 21bps.”

Without delving into a philosophical debate about the nature of the two-way communication loop between central banks and markets, I’d again note that after three weeks of front-end fireworks, it didn’t require a leap of logic to suggest policymakers might take the opportunity to send a message, considering the fortuitous setup that found the RBA, the Fed and the BoE all lined up back to back, with a chance to recalibrate expectations.

Analysts weren’t generous. “Deteriorated communication results in the BoE’s tools being less effective on a sustainable basis,” Commerzbank’s head of currency strategy, Ulrich Leuchtmann, chided.

“Even though it’s not the MPC’s job to spell out in advance when it will or won’t raise interest rates, let alone to micro-manage every single move of the curve, some degree of clarity in its communication to the public is essential,” Rabobank’s Stefan Koopman remarked, in a piece called “Forward misguidance.”

Note that Rabobank’s appraisal was that a rate hike “wasn’t warranted” and that the bank “was about to score an own goal” given that “monetary policy can’t solve supply-side problems and hikes may prove self-defeating.” So, it wasn’t the decision itself, but rather the lack of transparency that engendered Koopman’s somewhat caustic assessment.

“The outcome of the meeting for GBP is pretty clear: It’s heading lower,” TD said, adding that “the most damaging aspect is that the BoE failed to match expectations for the 15bps hike, kick-starting a pretty significant shift in market positioning.”

You get the idea. One way or another, markets don’t like being cut out of the loop. In the very near-term, it’s not so much a matter of whether policymakers are leaning hawkish, dovish or neutral. It’s that whichever way they lean, markets want a heads up.

Recall that the Bank of Canada’s surprisingly hawkish pivot at the October meeting triggered chaos in front-end rates. In addition to a huge spike in two-year yields, the front-end of the Cdn curve delivered a 15-sigma move on October 27. The Dec21 BA contract sold off by 30bps after 12 months of sub-2bp per day delivered moves.

Again, the message was clear: Markets aren’t used to operating without complete transparency from policymakers. And many traders aren’t old enough to know another world.

Commenting on the BoE, Aaron Rock, an investment director at abrdn plc in Edinburg, said Thursday “must surely go down as one of the worst pieces of communication since the BoE gained independence in 1997.”

Bailey, in remarks to Bloomberg TV’s Francine Lacqua, said simply, “I don’t think it’s our job to steer markets day by day and week by week.”