UK: Growth unchanged at 0.4%, but the YoY pace slipped to 2.0% - BBH

Research Team at BBH, suggests that the details of the UK's Q1 GDP were reported and the growth was unchanged at 0.4%, but the year-over-year pace slipped to 2.0% from 2.1%.

Key Quotes

“The composition of growth was a bit different than expected. Consumption was stronger, but capital investment and services were weaker, and trade was a bigger drag. Sterling extended its recent gains to $1.4740. Sterling has only been higher briefly on May 3 (when it staged a key reversal) since the very start of the year.

Many attribute the sterling's gains to some polls that suggest the "remain" camp is moving ahead of Brexit. While there may be something there, we note that 1-month implied volatility is surging today. It was around 11.7% yesterday, and now indicative prices suggest it is closer to 16.4%. It is the biggest jump in nearly two decades.

Why has implied volatility spiked? The higher volatility reflects the demand for options. What options? We look at the pricing skew between puts and calls (25 delta). That skew has exploded. Yesterday participants were paying 1.25% more for puts than calls. Today it is 5.4% more.

If the polls show a tilt toward remaining, why are investors still buying sterling puts? We suspect puts are being used as an insurance policy, not as a wager of the referendum's outcome. On the other hand, some put owners may be using the spot market to neutralize or reduce insurance, which might be a factor helping sterling. The next key chart point for sterling is the high from May 3 (~$1.4770), which corresponds to the 200-day moving average.”