Societe Generale Identify Cross-Market Swaps Plays To Fade Recent Relative BoE Repricing

Societe Generale write “recent pushback of immediate rate cuts has removed more cuts for the BoE than for the Fed or the ECB.”

• “While the story of US exceptionalism could continue, there is more room to remove further rate cuts in the US than in the UK. “
• “Higher inflation in the UK relative to the central bank target and the recent 3-way split among MPC members (two asking for a rate hike) has made market participants more prone to removing rate cuts in the UK than has been the case for the Fed. “
• “Given our expectation that UK inflation and pay growth should undershoot the Bank’s forecasts over the coming months, we believe the markets will reprice a larger amount of rate cuts for the UK in relative terms.”
• “We prefer to express this as a relative view, via steepeners of the SONIA curve relative to the SOFR curve. The 2-5y curves exhibit a good correlation over time. A relative steepening of the SONIA curve would be in line with our relative official rate view (markets pricing more Fed and less BoE cuts than we expect) but also works if US exceptionalism continues.”
• “The 2-5y SONIA vs SOFR box shows a strong correlation over the medium term and good relative value in a long-term regression, while it carries favourably.”