UK gilts flat despite contraction in May construction PMI; eyes on services PMI, BoE Gov Carney’s speech

The United Kingdom’s gilts remained flat during European session Tuesday despite a contraction in the country’s construction PMI for the month of May, released, early today. Investors remain keen to watch the services PMI for the similar period and Bank of England (BoE) Governor Mark Carney’s speech, due on June 5 and 6 by 08:30GMT and 09:00GMT respectively for some additional direction in the debt market.

The yield on the benchmark 10-year gilts, remained tad higher at 0.869 percent, the super-long 30-year bond yields hovered around 1.454 percent and the yield on the short-term 2-year traded 1 basis point higher at 0.581 percent by 10:50GMT.

At 48.6 in May, down from 50.5 in April, the headline seasonally adjusted IHS Markit/CIPS UK Construction Total Activity Index registered below the 50.0 no-change mark for the third time in the past four months. The latest reading was the lowest since the snow-related downturn in construction output during March 2018.

The gloomy economic outlook was also evident in today’s BRC retail sales monitor, which indicated a much larger than expected drop in retail sales in May, with the survey’s measure of total sales down 2.7 percent y/y, while like-for-like sales fell 3 percent y/y. Admittedly, this followed a notable Easter-related boost to sales in April (up 4.1 percent y/y and 3.0 percent y/y respectively) and compared with a strong performance in May 2018 when sales were boosted by better weather, a Royal wedding and the run up to the football World Cup, Daiwa Capital Markets reported.

But when smoothing out the monthly volatility, the underlying message was still weak. Indeed, total sales growth fell by 1ppt to just 0.2 percent 3m/y, the softest pace since March 2017, with non-food sales down more than 1 percent 3m/y, the most in more than a year. And there was a notable slowdown in spending online last month too, with such sales up just 1.5 percent y/y, the weakest growth since the series began 10½ years ago, the report added.

Meanwhile, the FTSE 100 remained nearly flat at 7,189.50 by 10:55GMT, while at 10:00GMT, the FxWirePro's Hourly Pound Strength Index remained neutral at -60.53 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex