UK gilts jump despite hopes of fall in December consumer price inflation, 5-year auction

The UK gilts jumped Monday despite expectations of a fall in the country’s consumer price-led inflation index (CPI) for the month of December, scheduled to be released on January 16 by 09:30GMT. Also, the 5-year auction, due on January 18 will add further direction to the debt market.

The yield on the benchmark 10-year gilts, slumped 1-1/2 basis points to 1.32 percent, the super-long 30-year bond yields slid 1 basis point to 1.83 percent and the yield on the short-term 2-year hovered around 0.58 percent by 09:15GMT.

The most notable UK economic data release in the coming week will be December’s inflation numbers, due tomorrow. While energy price inflation is set to increase further from 5.0 percent y/y in November, in line with the consensus, we expect that both headline and core rates will tick lower by 0.1ppt to 3.0 percent y/y and 2.6 percent y/y respectively. In addition to inflation, the focus will be on the retail sales data due at the back end of the week.

Major retailers reported mixed festive season results, and with the BRC survey suggesting that retail spending in nominal terms that month rose broadly in line with the average of the past year, December’s sales appear to have been unimpressive: a decline on the month is expected after strong results in November, when Black Friday discounting helped to boost sales. Nevertheless, given that sales fell particularly sharply in December 2016, we will probably see the annual rate rising from 1.6 percent y/y in November.

The UK housing market will also be in focus: alongside the inflation numbers tomorrow, the ONS will release the UK House Price index for November, whose growth rate is set to slow to a touch of 4 percent y/y, which would be the slowest increase in more than four years. In addition, Thursday’s RICS Residential Market survey results for December are again likely to suggest little momentum in the market, with a broadly flat near-term outlook for prices and sales.

Finally, later today, BoE external member Silvana Tenreyro will deliver her first speech since her appointment as an external member of the MPC last summer. The topic - ‘The Fall in Productivity Growth: Causes and Implications’, is not, however, irrelevant to the monetary policy outlook. External member Michael Saunders will be speaking publicly tomorrow.

Meanwhile, the FTSE 100 traded 0.04 percent lower at 7,775.50 by 09:20 GMT, while at 09:00GMT, the FxWirePro's Hourly Pound Strength Index remained neutral at -38.79 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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