UK gilts slump despite hopes of fall in February CPI; investors await BoE’s monetary policy decision

The UK gilts slumped Monday even as markets hope to see a fall in the country’s consumer price inflation for the month of February, scheduled to be released on March 20 by 09:30GMT. Also, investors are awaiting a host of 3-tier economic data through this week, the most important being the Bank of England’s (BoE) monetary policy decision, due on March 22 for further direction in the debt market

The yield on the benchmark 10-year gilts, jumped nearly 3 basis points to 1.45 percent, the super-long 30-year bond yields climbed 2 basis points to 1.81 percent and the yield on the short-term 2-year traded nearly 2 basis points higher at 0.83 percent by 10:30GMT.

"We do not expect anything particularly new of substance to emerge from the BoE’s monetary policy meeting, which concludes on Thursday. Certainly, we see no chance of rate hike. And after the MPC stated last time around that if the economy were “to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report” we anticipate no substantive change to the MPC’s forward guidance. However, not least due to recent snow disruption, the MPC might raise the prospect of a weaker than expected performance in Q1, that might in due course push back the likely timing of the first rate hike from May," Daiwa Capital Markets commented in its latest report.

First, in line, tomorrow will bring inflation numbers for February, when – in line with the consensus –the headline CPI rate is likely to fall 0.2ppt to 2.8 percent y/y. The core rate should similarly slow in line with the consensus view, by 0.2ppt to 2.5 percent y/y. Producer price inflation data will also be released for February and should add to evidence that the impact of sterling’s post-referendum weakness has passed its peak.

Next up, the latest labor market data, due on Wednesday, is expected to show that earnings growth nudged up 0.1ppt to 2.6 percent 3m/y in January. Additionally, after the unemployment rate rose for the first time in sixteen months in December, to 4.4 percent, it is expected to have remained unchanged in January, while employment may have increased by 100k between November and January.

Meanwhile, the FTSE 100 traded 1.27 percent lower at 7,074.25 by 10:35 GMT, while at 10:00GMT, the FxWirePro's Hourly Pound Strength Index remained neutral at 68.01 (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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