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13 Aug 2013
Flash: Is forward guidance working?
FXstreet.com (Barcelona) - TD Securities Jacqui Douglas, Senior Global Strategist, Rates and FX Research at TD Securities notes the debate around Carney's 'Forward Guidance'.
Key Quotes:
“As the world digested the BoE’s new forward guidance last week, there was a lot of chatter that it didn’t seem to be working, since yields are no lower now than they were before the announcement”.
“The conclusion was the policy had failed. However, we don’t think it’s that simple. What those critics maybe haven’t fully appreciated is how strong the UK economic data has been recently, and how high rates might be in the absence of forward guidance”.
“The improvement in the UK PMIs in particular has been remarkable, with the composite PMI sitting at its highest level on record as of July (with data going back to 1998)”.
“if it weren’t for forward guidance, 5y yields would have kept marching higher over the last six weeks, as opposed to the pullback that they actually saw through July, and would probably even be north of 2.0% now. This illustrates that even if short sterling is not pricing in rates on hold for three years, which is what the BoE’s forecasts would suggest, forward guidance is still having a significant impact on fixed income markets by helping to hold down rates”.
Key Quotes:
“As the world digested the BoE’s new forward guidance last week, there was a lot of chatter that it didn’t seem to be working, since yields are no lower now than they were before the announcement”.
“The conclusion was the policy had failed. However, we don’t think it’s that simple. What those critics maybe haven’t fully appreciated is how strong the UK economic data has been recently, and how high rates might be in the absence of forward guidance”.
“The improvement in the UK PMIs in particular has been remarkable, with the composite PMI sitting at its highest level on record as of July (with data going back to 1998)”.
“if it weren’t for forward guidance, 5y yields would have kept marching higher over the last six weeks, as opposed to the pullback that they actually saw through July, and would probably even be north of 2.0% now. This illustrates that even if short sterling is not pricing in rates on hold for three years, which is what the BoE’s forecasts would suggest, forward guidance is still having a significant impact on fixed income markets by helping to hold down rates”.