UK gilts rally as nationwide HPI ends string of 15 monthly rises; investors shrug off higher construction PMI

The UK gilts rallied Wednesday after recent data showed that the country’s house prices failed to rise in October and annual inflation slowed to the weakest since January. Also, markets largely shrugged off better-than-expected construction PMI figures for October.

The yield on the benchmark 10-year gilts, which moves inversely to its price, fell 9 basis points to 1.189 percent, the super-long 40-year bond yield dipped 8 basis points to 1.682 percent and the yield on short-term 2-year slid 7 basis points to 0.191 percent by 09:50 GMT.

Market also remained concerned of a Brexit-like outcome at the presidential election on November 8. Also, it is widely expected that the Federal Reserve is unlikely to hike rates at this week’s FOMC meeting on November 2 before the US presidential election.

UK’s house prices were flat in October, ending a string of 15 monthly rises, according to Nationwide. This contrasts with expectations of 0.2 percent m/m. On an annual basis, it rose 4.6 percent, down from 5.3 percent the previous month, and the slowest annual pace since January.

This reflects a slowdown in housing activity due to Brexit as well as new tax measures; but generally, the housing market has been holding up better than expected since the country voted in June to exit the EU.

Moreover, the UK’s Markit-CIPS construction PMI climbed to 52.6 in October (overall contraction in the sector that makes up 5.9 percent of GDP), higher than the market expectations of 51.8, from 52.3 in September.

The Bank of England will conclude its November monetary policy meeting on Thursday by 12:00 GMT. We expect the meeting to end in the decisions to maintain the official Bank Rate at 0.25 percent and keep the programme of asset purchases paused at 435 billion British pounds for Gilts and at 10 billion British pounds for corporate bonds.

In addition, the British government bonds 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. Crude oil prices fell for a fourth day as investors remained cautious ahead of official U.S. stockpile figures later in the day after industry data showed a surprise build in inventories, underlining a persistent global glut. The International benchmark Brent futures fell 1.29 percent to $47.52 and West Texas Intermediate (WTI) tumbled 1.59 percent to $45.93 by 09:50 GMT.

Meanwhile, the FTSE 100 traded 0.48 percent lower at 6,885 by 09:50 GMT.