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The UK gilts traded marginally lower Wednesday as investors awaited the auction of 10-year bond. Also, better-than-expected consumer inflation data released Tuesday for August discouraged investors from safe-haven buying.
The yield on the benchmark 10-year gilts, which moves inversely to its price, rose nearly 1 basis point to 1.092 percent, the super-long 40-year bond yield climbed 1 basis point to 1.615 percent and the yield on short-term 2-year bond jumped 1-1/2 basis points to 0.223 percent by 09:00 GMT.
Updated UK labour market statistics showing that the annual rate of average weekly earnings growth eased to 2.3 percent y/y in the 3 months to August, after an upwardly revised 2.4 percent in the 3 months to July (previous was 2.3 percent) is as the market expected and points towards a stabilising of the trend at 2.3 percent to 2.4 percent for the third quarter, after 2.4 percent y/y in the second quarter. But with productivity growth expected to have slowed in Q3, annual unit labour cost growth could pick up moderately in Q3, placing upside risks to future inflation.
Moreover, crude oil prices clawed back minor gains in early Asia trade Tuesday following an overnight decline but trading is expected to be muted now that the market has priced in a potential production cut. The International benchmark Brent futures rose 1.60 percent to $52.48 and West Texas Intermediate (WTI) jumped 1.07 percent to $50.83 by 08:30 GMT.
According to a Bloomberg survey, more than 70 percent of economists are expecting the BoE to cut rates to 0.10 percent in November. This does not include us, as recent UK data have not provided justification for further easing -- although recent MPC comments have remained dovish.
In addition, the acceleration of UK CPI inflation to 1.0 percent y/y from 0.6 percent in August occurs on the back of a 0.2 percent m/m rise, and stands at it highest reading since November 2014. The m/m increase, driven higher by road fuel costs, clothing & footwear costs, hotel accommodation costs and gas prices, is actually consistent with the average m/m rise for a Sep month over the past 10 years.
The BoE MPC members however, already know that inflation will move above its 2 percent target before the end of the 2-year horizon but have categorically stated that they would overlook the prospective overshoot when setting policy in order not to hurt future growth and jobs. So, any appreciation in GBP from these latest figures will probably be fleeting.
According to Bloomberg, gilt yields have been climbing for the past three weeks as sterling’s 18 percent slide since the vote to leave the European Union drove a market gauge of inflation expectations to the highest in 2-1/2 years. Faster inflation erodes the fixed payments on bonds, while also making it less likely the Bank of England will be able to cut interest rates and extend its asset purchases.
Meanwhile, the FTSE 100 traded 0.25 percent lower at 6,982 by 09:00 GMT.
