GBP Swaps: Killing time; One and not done?

Stale news headlines failed to move a market focused on pre-MPC positioning. Deutsche sees the MPC going for one more, some more.

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  • Gilts killing time ahead of MPC

  • Deutsche: One and not done


    Gilts killing time ahead of MPC

    Stale news headlines today focusing on the danger of offshore investors losing their taste for gilts and how generally difficult it is to sell lots and lots of gilts spoke volumes for a lack of market-moving real news out there today.


    Gilts refused to be downcast by their own proliferation, with the 10y opening at 4.36% after a JGB-inspired soft opening for core bond markets, before rallying steadily to close down at 4.30% with little in the way big leaps during the session.  


    One senior trader at a leading GEMM said that “it opened a bit weaker and came back during the day. There’s no one thing driving it and flows seem more two-way from where I’m sitting. People are more focused on positioning ahead of (the MPC decision on) Wednesday than anything more ambitious I think… I can’t see much happening (in terms of market swings) before then.”


    Today’s mortgage lending data (Jun 54.7K, versus forecast 49.0K) caught the eye of the above trader who said that tomorrow’s Nationwide house price data might prompt a surprise if it turns out some people are risking paying a few months of peak mortgage rates in order to attempt some dip-buying in the recently-weakened housing market.


    Aside from that though, all eyes are on the MPC with strategists torn between 50bps (HSBC suggested it would be 50bps earlier today) and 25bps (see Deutsche below), and the above trader said that “the MPC might find it easier to follow the Fed and ECB” who both hikes by 25bps last week, “while they get more information about inflation.”  


    At the 4:15pm close today the SONIA strip was -1 tick in the front end, +1 tick in the long end and unchanged in Mar24 and Jun24while the gilt future was +20 ticks on volumes of 150K. On the gilt curve the 2y was +1bp at 4.96%, 10y was -2bps at 4.30% and the 30y was -3bps at 4.45%. Swap spreads reflected the tightness of the gilt yield moves, with the 2y +0.5bps at 64.3bps, 5y was +1bp at 34.6bps, was -0.6bps at -7.1bps and the 30y was -0.6bps at -43.2bps.


    Catching the mood, the inflation market closed little-changed, with real yields moving by a maximum of just 1bp in either direction, while RPI swaps were +3bps in 1y, dwindling to unchanged in and beyond 20 years.  



    Deutsche: One and not done

    The latest look at the upcoming MPC meeting from the strategists at Deutsche Bank shares the widely held view that it is tough to choose between whether the MPC will go for 25bps or 50bps. But opts for the smaller number, with more to come.


    Deutsche says: “It's a close call, but we now think the MPC will settle for a 25bps hike, lifting Bank Rate to 5.25%. The significant upside to wage growth in May will likely be offset by the material miss in headline and services CPI. The labour market is cooling a little faster than the MPC anticipated last quarter. And forward-looking price and activity data continue to point to some downward momentum in underlying price pressures.”


    “Vote split. We see a 8-1 vote tally for 25bps hike, with only one dissenter looking to keep Bank Rate on hold at 5%. Risks are skewed to 2 or 3 votes for a 50bps hike with Mann, Haskel and potentially Ramsden opting for a bigger hike given the stronger wage data.”


    Deutsche warns too that “it's too early for the MPC declare victory on inflation. Underlying price pressures remain too strong with wage growth running at more than double the pace needed to bring inflation sustainably back to target. Services CPI also remains sticky. For us, we see two further quarter point rate hikes on the table, with Bank Rate peaking at 5.75%. Rate cuts, we think, could commence from Q2-24. But risks are skewed to a later and more shallow easing cycle.”