Bank of England Minutes Produce Mixed Interest Rate Expectations

How Did the Markets React? 

UK traders were largely surprised to see today’s Bank of England minutes show two dissenting votes against a rate hike, sparking swift declines in bond yields and the British Pound. Initial reactions proved premature, however, as a closer examination of official commentary implied a more mixed outlook on interest rates. Indeed, BoE Minutes were a far cry from the hawkish rhetoric that Pound bulls had hoped for, but cautiously crafted statements emphasized that inflationary risks remained to the upside. As such, we saw initial Pound declines immediately reverse course, with UK Gilt Futures posting nearly identical moves. The only exception to volatile price moves was the FTSE 100 Equity Index, which shrugged off the release and remained unchanged following the news. It will subsequently be important to see how interest rate futures react to upcoming economic data. Given the mixed emotions evident in the BoE minutes, subsequent economic releases will likely carry sizeable influence over interest rate expectations and, by extension, the British Pound. 

Bonds – UK 10-year Gilt Futures

Futures traders immediately sent bond yields lower after today’s BoE minutes showed a second voter dissented against raising interest rates by 25 basis points. Were the unexpected 7-2 vote not enough to cut interest rate hike expectations, the second dissenter was none other than Deputy Governor Rachel Lomax—a previously hawkish member of the voting committee. Regardless, it remained clear that knee-jerk reactions proved slightly exaggerated, with bond futures immediately dropping initial gains to match overnight lows.More importantly, Gilts stayed almost exactly unchanged over the day of trading despite a sharp currency appreciation. Clearly, currency traders were not reacting to expectations of future interest rate hikes, as Euro-sterling futures remained nearly flat through the session. As a result, recent Pound strength may run into considerable resistance if yields do not follow suit. We shall monitor subsequent price action to measure the likelihood of a retrace or continuation in Gilt and Pound markets, with bond yields likely to affect the domestic currency near 17-month highs.

Equities – FTSE 100 Equity Index Futures

The initial reaction in the equities markets to the minutes was one of confusion.  Since the report printed before the official open of London’s capital markets, traders were relegated to the futures market for a play on the fundamental action.  The immediate reaction was rather tepid with bids entering on the surprise dovishness of perpetual hawk Rachel Lomax to push the FTSE futures up to 6,248.  This high was lower than the 8:15 high set just after the open of trade at 6,249 and helped to set the pace for the rest of the session.  When the market began to break the report into its necessary parts, the modest tinge of dovishness could not overpower the repeated warnings of inflation risk.  With wage negotiations less than two months away, expectations run high for British consumers to receive a hefty boost in incomes which will in turn stoke spending.  When concerns that another rate hike could be in the works before the close of the first quarter, the market finally succumbed to the building pressure behind a technical retracement.  Triggered around 11:15 GMT, FTSE futures proceeded to drop 86.5 points from the previous swing high.  The contract closed the session at 6,177.0