Bank of England hikes rates more than expected

The euro has fallen back against the dollar over the past 24 hours, down roughly 0.5% to trade around $1.0925. The single currency is broadly unchanged against sterling at just under £0.86. Sterling is down a bit against the dollar, trading at close to $1.27.

Despite the Bank of England move (see below), UK 10 year gilt yields are down fractionally compared to yesterday morning, at 4.38% (-2bp). On the other hand 10-year German bund yields are currently trading at 2.47% (+5bp), while 10-year US Treasury yields are at 3.79% (+5bp).

European equities sold off during yesterday’s trading session, with UK stocks hardest hit – the FTSE 100 was down 0.75% while the Eurostoxx index was down roughly 0.4%. Both indices have sold off further in early trading this morning. US stocks on the other hand recovered slightly on the day (+0.4%) as tech shares rebounded, though futures are also sliding this morning.

The Bank of England hiked rates 50bp to 5.00% yesterday, surprising the market which was expecting a 25bp hike. The vote was 7-2, with the two dissenters preferring no change. The Bank justified their move noting that inflation had come in higher than their expectations, while the labour market had been stronger. As regards guidance, the MPC stuck to a data-dependent approach saying it would “adjust Bank Rate as necessary to return inflation to the 2% target sustainably in the medium term” and also stated that “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required”. In relation to the macro outlook the Bank reiterated that it expects headline inflation to fall as the decline in energy prices feeds through, though services inflation will remain quite high and GDP growth is expected to remain subdued.

UK retail sales came in a touch better than expected this morning. Headline sales were up 0.3% month-on-month versus -0.2% expected, while sales excluding fuel were up 0.1% versus -0.3% expected. Consumer confidence was also a marginal beat, at -24 versus -27 prior and -26 expected.

Fed Chair Powell reiterated his hawkish message during his second day of testimony on Capitol Hill, indicating that two further hikes from the Fed now seems likely.

The Bank of England wasn’t the only central bank in Europe in hiking mode yesterday. Norges Bank increased rates by 50bp to 3.75%, while the Swiss National Bank opted for a 25bp hike to 1.75%. However, the Turkish central bank’s move dwarfed all others, with rates raised by 650bp to 15%.

The focus today will be on the Flash Manufacturing, Services and Composite PMIs for the Euro Area, UK and US. These will give an early read on how economic activity is holding up in June as the impact of tightening monetary policy continues to work its way through the system. The market is expecting the composite PMIs for all three economies to decline marginally, with manufacturing expected to remain weak while Services is stronger. Also on the agenda today we have speeches from a range of Fed speakers including Bullard, Bostic and Mester.