Boockvar on Bank of England Rates, Savings
The following is from Peter Boockvar:
BoE scores it 6-3 no hike/Savings rate at 18 yr low ex Covid/Claims benign/GDP
As fully expected, the BoE voted to keep its base rate unchanged at 3.75% but three members voted to hike by 25 bps. This is the key for what happens from here and we/they watch to see how it plays out, and I believe the same can be said for the Federal Reserve. “The risk of material second-round effects in price and wage-setting, against which policy needs to lean, is greater the longer higher energy prices persist. There is little evidence so far to suggest such effects, and there have continued to be clear signs of underlying disinflation in recent data.”
And, “The Committee judges that the risks to the inflation outlook are tilted to the upside relative to the central projection in the July Monetary Policy Report, but there remains scope for the outlook to change materially as events in the Middle East unfold.”
Following the US 2 yr yield drop yesterday and with no surprise in today’s statement with six still not wanting to hike, the 2 yr gilt yield is down by 8 bps to 4.37%. The 10 yr is lower by 3 bps to exactly 5%. The pound is little changed.
To the just released economic data.
Headline PCE in June fell one tenth m/o/m as expected but off a .5% rise in May (revised up by one tenth). The core rate was higher by one tenth vs .3% in May and that was one tenth under the estimate. The y/o/y figures were as expected due to rounding with a headline increase of 3.7% and core rate of 3.3% vs 4.1% and 3.4% in the month before.
The reversal lower in energy prices of 5.9% after the spike over the prior four months is why the headline print was negative. Goods prices were higher by 3.7% y/o/y and at the same pace with services.
The income and spending data were about as forecasted when we include the May revisions. As income and spending both rose about to the same extent, the savings rate was little changed at 2.7% vs 2.8% in the month before but that is the lowest since June 2022 and April 2008 before then. On one hand, a higher wealth effect lessens the need to save for some but on the other, lower income households have a tough time saving anything.
Savings Rate
Initial jobless claims remained very low at 197k after last week’s big drop to 188k. The estimate was 200k and the 4 week average falls to 203k from 208k. Continuing claims were little changed at 1.782mm.
The bottom line remains the same with a modest pace of firing’s as measured here and with an improved pace of hiring compared to last year.
Finally, Q2 GDP grew 1.5%, weaker than the estimate of 2% and brings the first half year growth average at 1.8%. The major factor here was the 6.2% jump in the price deflator, well above the estimate of 4% with higher energy prices likely a key factor and subtracts from the REAL growth rate. Combining the two puts nominal GDP growth at 7.7% vs the forecast of 6%.
Personal spending surprised to the upside with 3.2% growth vs the estimate of 2.3% with strength in spending on goods and overall adding 212 bps to growth with half from goods and the other half from services. Trade was the drag subtracting 100 bps. So was the drop in inventories by 67 bps. Government spending took off 14 bps because of a drop in non-defense federal government spending.
The spend on data centers was obvious as spending on equipment added 80 bps to growth and IP spend contributed 48 bps. Residential real estate became a net positive after many quarters of negative.
Bottom line, as said the huge jump in inflation was why the REAL growth rate was below expectations. Smoothing it all out, US GDP growth is around 2% which it was in 2025 too with a big chunk being driven by data center construction and upper income consumer spending.
All of the above is not really market moving, including PCE because it’s both old news with the subsequent rise in energy prices but also we’ve already seen almost all of the inputs. Long end yields are still up on the day while the 2 yr is little changed.
Positions: None.
