UK gilts plunge on higher-than-expected retail sales; BoE policy decision in focus

The UK gilts plunged Thursday following the release of firmer-than-expected August retail sales data, which showed very little sign of a slowdown post Brexit vote. Markets now look ahead to the Bank of England’s monetary policy decision.

The yield on the benchmark 10-year gilts, which moves inversely to its price, increased nearly 5 basis points to 0.923 percent, the super-long 40-year bond yield jumped 6-1/2 basis points to 1.500 percent and the yield on short-term 2-year bond climbed 2-1/2 basis points to 0.188 percent by 08:40 GMT.

The UK retail sales fell 0.2 percent m/m in August, better than the market consensus of 0.4 percent decline, from prior 1.4 percent in July (revised to 1.9 percent). On an annual basis, it climbed 6.2 percent y/y, against market expectations of 5.4 percent y/y, as compared to the previous 5.9 percent (revised to 6.3 percent).

This latest development, which clearly marks a slight correction from the very robust July sales performance should be interpreted as gilts negative and raises questions about how keen the BoE MPC will be to cut the Bank Rate again in November.

Moreover, the Bank of England September monetary policy meeting is scheduled to be held on September 15 by 11:00 GMT. The MPC meeting is likely to be far less eventful than last month’s, with the members expected to unanimously agree to hold fire on monetary policy, following the August bumper monetary stimulus package. So we look for the official Bank Rate to hold steady at 0.25 percent and the programme of Gilt purchases, financed via reserves issuance, to be paused at 435 billion pounds.

In addition, Bank of England Governor Mark Carney while addressing parliament, indicated that post-Brexit recession risks have receded and added that the central bank further room to manoeuvre monetary policy, if needed.

Meanwhile, the FTSE 100 traded 0.05 percent higher at 6,676.50 by 08:50 GMT.