16th June 2014
Consolidation session in the UK with little or no news hitting the sterling market. Some overnight comments by BoE’s Bean highlighting the known fact that ‘higher rates are a welcomed sign that the UK economy is returning to normal’ only continued to show the shift in opinion within the MPC. The belly of the curve failed to launch any relevant move, with 10y gilt hovering around the 2.75 yield level. The front end of the curve suffered some stronger losses as the fixings continued their upward path (£3m +0.6bps and 6m +1.2bps) pushing the reds down another 4bps after Friday’s 20bps drop whilst cable broke through the 1.70 level for the first time since august 2009. Worries surrounding the difficult geopolitical situations in Iraq (which pushed Oil to a 3-year high) and Ukraine (rumours of a missed gas payment and reduction of Russian supply) provided some support to the European market and could push into a squeeze if things were to materially deteriorate from here. As for now, the UK seems to be excluded from such support. We look for tomorrow’s CPI print and Wednesday’s MPC minutes as the most relevant pieces of data…
3rd June 2014
The start of a very important week (key data and ECB meeting) and it has to be said that in spite of some abysmal German inflation data and weak US ISM (since restated) the market trades very heavily. Over the past month or so, data such as today would have sparked a huge short covering rally – but now it feels like much of it may already be in the price. We would say there is a likelihood that many are now thinking that the well flagged ECB action on Thursday may well underwhelm the (bond) market…..and they are selling now in anticipation. We wouldn’t disagree with this. In the UK the manufacturing PMI came in as expected at 57. This is an extremely solid reading and is consistent with the 0.8-1.0% QoQ GDP growth we have been seeing and confirms our view that growth will continue at or around this (strong) level. The market has been peeled off, led by the sell off in the US but interestingly the strip has held in quite well (probably helped by the German CPI print) allowing 2×10 to steepen 3bp as gilt futures fall half a point. Tomorrow we will have a passing glance at the construction PMI ahead of the important services PMI on Thursday. This wee however it’s all about the ECB and US jobs data which will dictate where we head to from here. STOP PRESS: The ISM has been restated to 55.4 which merely pressures the market further.
20th May 2014
Bear steepening day with reds and greens under pressure from the open and then pushed further on the back of stronger than expected CPI. The core annual rate jumped to 2% vs. 1.8% expectation and up 0.4% on the previous month, mainly on the back of airfares. The knee jerk move lower in the strip found support when the market digested the impact of base effects and holiday distortions, underlying the probability of a reversal next month. Subdued house prices and weaker PPI also added some weakness and confusion to the data . Despite elevated levels, market still feels short, even with the Carney telling us that rates aren’t moving (ever). Given the inflation report and the post Q&A session after, I’m not sure we are going to see the split in the committee tomorrow that we are hoping for. It’s hard to see the strength of the data sitting easy with all MPC members, however maybe it’s a month or two too early before the split becomes apparent. Looks like we will sit in a pretty tight trading range with the 10yrs being the sweet spot in the curve in terms of volatility.
Pablo F. Alonso Caprile 