Archive

Hedge in May and Go Away

• A sharp rise in market rates drove down equity prices in April. The correlated move was consistent with our suggestion before Easter to hedge the downside with equity options.
• We now believe the front end is broadly flat enough, so we have turned neutral on rates relative to the market despite being more hawkish than the consensus on the BoE.
• The potential for market expectations to overshoot again, extending the bearish trends, means hedging with options may still appeal over selling or hoping for recovery.

By Philip Rush

HEM: Molting Hawk Feathers

• Rolling rate cuts have flattened the front end enough
• Hikes are unlikely despite limited cuts coming later
• Market pricing may overshoot before we become dovish
• Our Nov-24 BoE call is still slightly later than priced
• A Fed delay beyond Sep would slow ECB cuts after June

EA Core Inflation Softens By Slightly Less

• EA inflation unsurprisingly remained at 2.4% y-o-y in April, with a 5bps slowing taking it within 1bps of our forecast. Energy and industrial goods continue to weigh temporarily.
• Services inflation ended a five-month streak at 4%, slowing to 3.7%. That was a tenth higher than we expected again, with the core rate 3bps more resilient at 2.67%.
• The ECB will be reassured by services inflation slowing, easing a June cut, but ongoing upside surprises urge caution, with September’s cut conditional on progress at the Fed.

By Philip Rush

Policy Tightness is Gradations of Weak

• The PMIs mostly revealed surprise resilience in April, albeit with the US disappointing. Divergent surprises may reflect excessive spread changes in policy expectations.
• Residual seasonality may exaggerate current strength and unwind in the summer, but stability in unemployment trends still suggests global monetary policy is not that tight.
• Persistent excess demand requires tight conditions to be sustained. The BoE MPC seems desperate to cut, but resilience should delay it, including relative to Fed pricing.

By Philip Rush