Bank of England in focus on possible taper talk

Having dropped sharply on Tuesday on the back of sharp falls in US markets, European stocks underwent a major about turn yesterday, reversing all of their early week losses, with the FTSE100 making a new 14 month high.

While Tuesday’s sharp falls were blamed on a multitude of factors the reality was nothing much had changed from where we were at the end of last week. This may help explain why stocks managed to rebound yesterday given that the economic outlook remains undimmed, despite concerns of higher inflation.

That’s not to say that the risk of further losses for US stocks has diminished, it hasn’t as evidenced by yesterday’s rather lacklustre US finish, which saw the Nasdaq and the Russell 2000 end the day lower for the second day in a row, even as the Dow made a new record high.  

The pharmaceutical sector also took a knock after the US said it was open to supporting a patent waiver on vaccines at the WTO, which saw both Pfizer and Moderna’s share prices take a bit of a knock in late trading.

Today’s European session looks set to get off to a slightly weaker start as a result of the failure of US markets to hang onto their gains, with the main focus on sterling today as local and regional elections get under way across the country, with a lot of attention set to be on the Scottish vote and whether the SNP will be able to obtain a majority to claim the right to hold another independence vote.

Currency markets have been remarkably sanguine so far about the prospect of such an outcome, and to some extent it’s not hard to understand why. This isn’t a problem that is going to go away whatever the outcome of today’s vote.

The SNP’s entire raison d’etre is one of holding a new independence vote as soon as they can, however given the current polling on a new vote there’s no guarantee they would even win one if one were held. Furthermore, it’s highly unlikely if the SNP were able to win the right to hold a new plebiscite that it would be on the basis of a simple majority vote, which means the bar to separation is still a long way off.  

We also have the latest Bank of England policy decision and the final UK services PMI for April which is expected to be confirmed at 60.1 and an eighty-month high.

As far as the Bank of England is concerned today’s policy decision is important in the context of how policymakers see how the UK economy will evolve over the next few months, given how different the economic picture is now, from when they last met back in March. We can expect the bank to raise their growth as well as inflation forecasts for a start, given the strength of recent economic data, and the positive outlook for Q2. Their biggest conundrum will be as to how they will decide on the durability of the economic rebound.  

The March meeting saw some members of the Monetary Policy Committee become more optimistic, notably chief economist Andrew Haldane who suggested the potential for a coiled spring economic rebound from a build-up of excess savings.

His departure from the MPC in the coming months will be keenly felt, mainly due to his ability to think outside of his comfort zone. While some of his ideas have attracted criticism and scorn in some circles, at least he was prepared to think outside of the box, unlike other members of the MPC who seem rather two dimensional in their thinking when it comes to monetary policy.

Mercifully all of this talk of negative rates has been put to one side, with the vaccine rollout plan now much further advanced and various restrictions set to be eased further, new virus variants notwithstanding.

These potential improvements raise the prospect of some early discussion about the prospect of the bank becoming less accommodative over concerns that current policy might be a little too easy.  

No changes to monetary policy are expected, but we could start to see some taper talk. The recent pause in 10-year gilt yields…