Revisiting the No 2’s

In March of this year the “watching the No 2s” stated that it was six-years to the day since the Bank of England “monetary policy committee” cut the bank’s base rate to a record low of 0.5%, the longest period of keeping rates on hold since the 1950s. After yesterday’s MPC meeting, it’s now 78 consecutive months at 0.5%. “Charmer” Carney, the Bank of England Governor, and his counterpart, Auntie Janet over at the Fed, have been in full flow recently in respect of their respective interest rates, without really giving anything away about when they will rise.

It is patently clear that Mr. C and his merry band of 1000+ economists at the B of E have little clue as to what is driving markets as he flip-flops once again, stating “there may be a month or two more of deflation whilst only a month or so ago saying that inflation is about to pick-up strongly due to wage and economic growth.”

We repeat the observation that central banks’, as evidenced by the UK’s MPC in this case, have never made a pro-active decision in their lives, only re-active. The Bank of England base- rate has followed the trend of the 2-year Gilt yield, not the other way round.

The first exhibit is an update of a chart shown in March, comparing the UK base-rate, UK CPI and the UK 2-year Government Bond Yield. Whilst the “official” base rate hasn’t changed, at 0.5%, UK CPI has fallen to 0% whilst the 2-year “market” rate has inched higher to 0.61% from the 0.6% reading of March.

 7 August 15 Blog 1

Deflation is alive and well in the UK and clinging on at 0.1% in the US.

As such, a base rate hike in both countries is very close now, despite the “clap-trap” metered out at the Charmer & Janet “dog & pony show” to the herding economists’ and financial experts from the media and mega investment houses.

The second chart shows the 2-year Government Bond Yield for the UK and the US, which we labeled the “No 2s.” Although the rate of change has eased slightly of late, the “market-rate” for two year debt has surged by a respective 63% for the UK and by 53% for the US in a short six-month period.

7 August 15 Blog 2

The UK and US No 2s have jumped not just because of the gathering deflation storm, but due to the growing fear on debt default, aka the recent Greek tragedy act 3, Puerto Rico and Chinese margin calls with  the likely knock-on effects from them.

In plain English, a far higher level of compensation is being demanded by lenders, as the risks are rising exponentially across the board.

The 2s should be re-visited often, for there are the clues.

Advertisements

3 responses to this post.

  1. […] week for the simple reason observed both here and for the UK Central Bank within our earlier “revisiting the No 2s,” they have never made a pro-active decision in their respective lives, they re-act to the market […]

    Reply

  2. […] decides on the interest rates that matter, not a central banker,” A subsequent August article, “revisiting the No 2’s,” showed a chart of UK and US two-year government bond yields, which had jumped by a respective […]

    Reply

  3. […] how the market has already voted. On numerous occasions, including the August 2015 overview, “Revisiting the No 2’s,” observations has been made that central banks’ have never made a pro-active decision in their […]

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: