The U.K Gilts plunged Thursday after data showed stronger than expected April retail sales data. Also, investors drove-out from safe-haven buying after FOMC April meeting minutes from the U.S. Federal Reserve’s strengthened bets of an interest rate hike in June. The yield on the benchmark 10-year bonds rose 4bps to 1.475 pct and the yield on short-term 2-year bonds jumped 2bps to 0.455 pct by 0915 GMT.
The U.K retail sales rose 1.3 pct m/m in April, higher than the market consensus of 0.5 pct increase, from down 0.5 pct in March. On annual basis, it climbed 4.3 pct y/y, more than the expectations of 2.5 pct y/y, as compared to prior 3 pct. Similarly, excluding sales of road fuel, the rise in sales volumes is an even more robust 1.5 pct m/m, from revised -0.7 pct m/m in March (previous was -1.6 pct).
The FOMC in its April 26-27 meeting minutes showed quite a hawkish view of Fed officials. This indicates that several participants believed in April that it is appropriate to raise rates in June if the incoming data indicated a rebound in the economy. On balance, these minutes go a long way in uncovering sentiment not very much reflected in the April FOMC statement. On balance, this release should go a long way in making the June meeting a live event, something that was seen as less likely in the wake of the April meeting. However, given the need for data to cooperate as the meeting approaches, nothing is certain. Nevertheless, we continue to expect only 50bps worth of tightening from the FOMC in 2016, regardless of whether or not they choose to act in June.
Yesterday, the April Claimant Count came at -2.4k, against market consensus of 4.3k, from prior 6.7k (revised to 14.7k). Similarly, March Unemployment rate remained unchanged at 5.1 pct, in the line of market consensus of 5.1 pct. Average weekly earnings rose 2.0 pct y/y, higher than the market expectation of 1.7 pct and average earnings (ex-bonus) rose 2.1 pct consensus was for 2.3 pct rise.
The decline in bond prices were also driven by the ease in ‘Brexit’ fear. In the latest YouGov EU referendum poll for the Times newspaper support to 'Remain' is on 44% and to 'Leave' is on 40%. Also, the survey by the ORB for the Telegraph newspaper uncovered an increase in support among all respondents to stay in the Union at 55 pct whilst those in the leave camp have tumbled to 40 pct. In the April survey the voting was 51-43 pct individually. However, among only those who say they will definitely vote the share narrows to 51-45 pct in favour of remain.
On the other hand, the British gilts have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of England's target. Today, crude oil prices fell more than 1 pct on rising US crude inventories, a stronger dollar and surging output from Iran to Europe and Asia. The US Energy Information Administration (EIA) published data showing an unexpected 1.31 million barrel rise in US crude stocks to 541.29 million barrels. Iran’s oil exports are set to jump nearly 60 pct in May from a year ago to 2.1 million barrel per day (bpd). The rises suggest that the country’s logistical problems following years of sanctions have been overcome or were less severe than thought. Meanwhile, the International benchmark Brent futures fell 1.80 pct to $48.05 and West Texas Intermediate (WTI) declined 1.33 pct to $47.55 by 0740 GMT.
Last week, the Bank of England left its policy rate unchanged at 0.50 pct, as expected and this decision was made from MPC 9-0 votes. The Bank of England's Monetary Policy Committee (MPC) sets monetary policy to meet the 2 pct inflation target and in a way that helps to sustain growth and employment. At its meeting ending on 11 May 2016 the MPC voted unanimously to maintain Bank Rate at 0.5 pct. The Committee also voted unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion. Twelve-month CPI inflation increased to 0.5% in March but remains well below the 2% inflation target. This shortfall is due predominantly to unusually large drags from energy and food prices, which are expected to fade over the next year. Core inflation also remains subdued, largely as a result of weak global price pressures, the past appreciation of sterling and restrained domestic cost growth.
Meanwhile, The FTSE 100 fell 1.51 pct or 92.80 points to 6,073 by 0915 GMT on tracking cues from weak crude oil futures.
