Feeling Gilty ?

The Bank of England could surprise markets by lowering its inflation projection for 2017 and that will be positive for gilts, according to Mike Riddell, a U.K. fixed-income portfolio manager at Allianz Global Investors.

This would go against the consensus in a survey for Thursday’s Inflation Report, where only economists from NatWest Markets and Intesa Sanpaolo among the 20 polled agree with Riddell. Of the rest, five see the BOE keeping its inflation outlook unchanged for this year and 13 see it upgrading the forecast. Oil prices have fallen and sterling has moved higher since the BOE’s last report in February, supporting his case.

“The market seems to be expecting a hawkish rhetoric from the Bank of England and I expect it’s more likely we see the opposite,” said London-based Riddell, whose firm manages 480 billion euros ($522 billion). He said on Wednesday he did “actually go a bit long again” on gilts, as they now offer “better value.”

Gilts have traded in a narrow range this year, amid uncertainty over the country’s exit from the European Union and the potential response from the central bank as U.K. economic data takes a turn for the worse. Ross Walker, head of European economics at NatWest, is another who sees a “fractionally lower” outlook for prices because of slower GDP growth, a stronger pound and muted wage inflation.

With U.K. snap elections less than a month away on June 8, it is unlikely the BOE will want to surprise the markets, said John Wraith, head of U.K. macro rates and strategy at UBS Group AG in London, but he agrees it will refrain from lifting inflation projections for 2017.

Riddell said he had changed his view on gilts from a month ago, largely linked to the BOE meeting, where he sees it also announcing a downward revision to its growth forecast. The yield on 10-year gilts rose two basis points on Thursday to 1.19 percent, after reaching its highest since March on Tuesday.

“If we get to 1.10 percent I will probably start fading it again,” Riddell said. “My biggest concern for bond markets and why I am not super long and super bullish is that the Fed is clearly very keen to hike rates and this is not yet fully priced in by the markets.”


The Pinstripe and Bowler Club shares information with MF Solutions Ltd.


Feddy Steady

U.S. central bankers stuck to their outlook for gradual monetary-policy tightening after they left interest rates unchanged and showed no alarm over recent economic weakness.

Federal Reserve officials were unusually explicit in their statement, released Wednesday following a two-day meeting in Washington, indicating that a disappointing first quarter wouldn’t knock the committee off its path to raise rates two more times this year after a hike in March.

“The committee views the slowing in growth during the first quarter as likely to be transitory,” the Federal Open Market Committee said. “Near-term risks to the economic outlook appear roughly balanced.”

The widely expected decision contained no concrete commitment to the timing of the next rate increase. Even so, investors increased bets on a move in June after absorbing the Fed’s sanguine assessment of the outlook and its encouraging observations on inflation, following data showing first-quarter economic growth of 0.7 percent and monthly price declines in March.

“Nothing in the statement today, which was voted unanimously by the FOMC, leads me to believe that the Fed is even close to changing its mind on rates,” Roberto Perli, a partner at Cornerstone Macro LLC in Washington, wrote in a note to clients. “Base case is for a couple more rate hikes this year — probably in June and September — and for the beginning of balance sheet shrinkage in December.”

The Fed didn’t signal any change to its balance sheet policy. It is discussing how to begin shrinking its $4.5 trillion in holdings, and officials have said they hope to release a plan this year. They may start unwinding by the end of 2017, though that hinges on economic conditions.

The jobless rate has fallen to a level officials see as consistent with their maximum-employment mandate, and inflation is near the Fed’s 2 percent goal, even if price gains slowed in March. A core measure that strips out food and fuel was 1.6 percent on an annual basis, based on Commerce Department data, and headline inflation stood at 1.8 percent.

“Inflation measured on a 12-month basis recently has been running close to the committee’s 2 percent longer-run objective,” the Fed said. Household spending rose “only modestly” but the fundamentals underpinning consumption growth “remained solid.”

“The statement makes it very clear that the Fed does not take the reported slowdown in first-quarter growth seriously,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., wrote in an email to clients.

Fed-Speak Friday

The decision to leave the target federal funds rate unchanged in a range of 0.75 percent to 1 percent was unanimous and in line with forecasts. Fed Chair Janet Yellen did not have a press conference after this meeting. But she and at least five other Fed officials are scheduled to speak on Friday, giving policy makers a chance to explain their decision more fully.

Employers continued to hire at the start of 2017, averaging 178,000 net new jobs a month in the first quarter, and signs of labor-market tightness suggest wage growth will pick up further. The unemployment rate was 4.5 percent in March, near or below most estimates for its longer-run sustainable level. April’s figures are due Friday from the Labor Department.

The Fed’s next meeting will take place June 13-14 in Washington. That decision will come alongside officials’ updated quarterly economic projections and will be followed by a press conference with Yellen.

Investors increased the likelihood of a move next month to around 65 percent, according to pricing in federal funds futures contracts, compared to 60 percent before the FOMC decision was announced.

“This glass-half-full statement leaves the door wide open to a June hike, provided, of course, that the recent data letdowns are indeed transitory,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., wrote in a note to clients. “We expect this will be the case.”


The Pinstripe and Bowler club shares information with MF Solutions Ltd.

Hong Kong Peak

Hong Kong housing prices are close to their peak and economically “unsustainable,” said Cusson Leung, managing director at J.P. Morgan Chase & Co.’s Asia Pacific equity research unit.

Price increases in the world’s most expensive home market have outpaced Hong Kong’s gross domestic product growth “significantly” since 2009, and any external shocks could trigger tighter liquidity in the city’s banking system, increasing home buyers’ borrowing costs, Leung said in an interview.

“I won’t buy,” said Leung, who expects that new home prices will remain unchanged this year. “If the bubble bursts, buyers will not only lose their own money, they will also lose all of their parents’ money.” Buyers have been using all of their assets as well as leveraging parents’ existing homes as collateral to help make residential property deposits, he said.

The resurgent housing market has posed a headache for Hong Kong’s leaders. After a short-lived dip, existing home prices have set new records in recent weeks. Still, the market isn’t immune to risk as the Federal Reserve has signaled it will continue on a path of interest-rate hikes this year.

New property projects prices have also heated up, with Cheung Kong Property Holdings Ltd. last week offering 40-square-meter flats in east Hong Kong island for at least HK$10.3 million ($1.33 million), Apple Daily reported. The amount could buy a two-bedroom, inner-city Sydney apartment with a car park, according to rental aggregator Domain.com.

Despite efforts by Hong Kong Chief Executive Leung Chun-ying to curb the rally in home prices, investors have found ways to breach barriers. Qualifying as first-time buyers and buying multiple new flats on a single contract is an option wealthy purchasers have pursued, enabling them to skirt a measure that would increase stamp duty to 15 percent for existing property owners. The government is considering ways to plug the loophole, the Hong Kong Economic Journal reported last week.

Closing ways to bypass measures would make the property market “less crazy,” while the government could increase supply by selling public flats under its rental housing program, Leung said.


The Pinstripe and Bowler Club shares information with MF Solutions Ltd

Indian Summer

As India’s monetary policy committee begins its two-day meeting, the inflation-targeting central bank may be using flawed price measures as the basis for its swing to neutral policy.

All 52 economists in a survey predict the Reserve Bank of India will leave the repurchase rate unchanged at 6.25 percent on Thursday, as price pressures appear to be picking up. Governor Urjit Patel is concerned about core inflation — stripping out volatile food and fuel costs — which he says is worryingly sticky.

But what if the core gauge and the benchmark consumer-price index are off the mark? Patel could be missing a window to lower borrowing costs to spur investment proposals that are near a decade low. Such concerns revolve around three question marks over price data.

Core Concerns

The RBI’s measure of core CPI shows stickiness around 4.8 percent year-on-year since September. This feeds into overall CPI, which accelerated in February for the first time in seven months to 3.65 percent, nearing the 4 percent midpoint of the RBI’s target range. Bloomberg Intelligence’s economist Abhishek Gupta says that’s because the RBI hasn’t fully stripped out fuel costs from its transport basket; once done, core CPI is at 4.2 percent.

“A falling core-CPI inflation suggests that the pricing power at the retail level is sliding due to inadequate demand,” Gupta said. “This should signal the central bank to cut the policy rate in order to stimulate demand so that the economy can operate closer to potential.”

Consumption Patterns

Another argument pertains to the weights the RBI assigns various consumption patterns in its CPI basket. These are based on the government’s surveys on consumer expenditures in 2011-2012, which show that the average Indian spends about 46 percent of monthly income on food, the main driver of local prices.

More contemporary data published in January pegs private consumption expenditure on food at about 30 percent. Moreover, economists such as Surjit Bhalla, senior India analyst at Observatory Group, have argued that the CPI data ignores spending on financial services, and could be overestimating price pressures by roughly a full percentage point. He declined to comment when reached by email on Friday, citing obligations with Observatory.

Missing Inputs

Economists such as Soumya Kanti Ghosh at State Bank of India say the nation’s statisticians aren’t accounting for the rising e-commerce market, which offers consumers big discounts. Instead, they seek inputs from traditional suppliers, which typically sell at higher prices.

The gap was flagged by the RBI’s external advisory group in 2015, which has since been replaced by the monetary policy panel that votes on rates, and the government was last year said to be planning to include online retailers in its dataset. In a report published last month, Ghosh predicted headline CPI was below 4 percent in March, lower than his previous estimate of about 4.4 percent and the RBI’s 5 percent target.

TCA Anant, the government’s top statistician, said CPI represents the average Indian consumer, and so certain types of consumption — such as spending on luxury goods — may not be included in the index. The next consumer expenditure survey will ask people about online purchases, though that’s probably quite small, he said in an interview in New Delhi on Monday.

Apart from these questions about the price data, inflation could also swing as the outlook on India’s crucial monsoon rainfall remains uncertain and clarity is still awaited on the roll out of higher housing allowances for government employees and a nationwide sales tax.


The Pinstripe and Bowler Club shares information with MF Solutions Ltd.

The Fed 2017

As expected, Yellen & Co. raised interest rates by 25 basis points this week. Turns out, the Fed is the only major central bank among the global “developed” economies whose last policy move was a rate hike.

US policy seems to be normalising.

Central bank madness is still in full swing worldwide. Some developed countries with negative rates are still cutting them further. The

We have three possible scenarios on our hands. If the Fed raises rates three times this year, markets will likely go down. But if the rate hikes don’t come as often or as furious as expected, markets could go higher. Lastly, if we get more than three rate hikes this year, we’ll see bonds drop, commodities drop, and currencies against the dollar weaken.


The Pinstripe and Bowler Club shares information with MF Solutions Ltd.