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Bonds: BoE in focus, scope for surprises deemed limited

By Alexander Bueso

Date: Wednesday 31 Oct 2018

Bonds: BoE in focus, scope for surprises deemed limited

(Sharecast News) - These were the movements in some of the most widely-followed 10-year sovereign bond yields:
US: 3.14% (+2bp)

UK: 1.44% (+4bp)

Germany: 0.39% (+2bp)

France: 0.75% (+1bp)

Spain: 1.55% (-2bp)

Italy: 3.43% (-5bp)

Portugal: 1.87% (-1bp)

Greece: 4.24% (-2bp)

Japan: 0.13% (+1bp)

Gilts underperformed on Wednesday, on the back of a sharp bounce in the pound and a second-day of gains for risk assets globally, as stocks on Wall Street managed to find a bid at month-end and amid more talk of stimulus from officials in Beijing.

Helping to feed the 'risk-on' mood, US consultancy ADP revealed a 227,000 person increase in American private sector payrolls (consensus: 190,000) for the month of October.

That stronger-than-expected report was perhaps more noteworthy than usual, with analysts at Pantheon Macroeconomics pointing out that it had come despite the impact of hurricane Florence.

Questions related to the methodology meant the strength in the ADP survey might not be reflected in the official data due to be released on Friday.

Nevertheless, Shepherdson hedged his forecasts, telling clients: "We'd be very surprised to see Friday's headlines as strong as the ADP data, but with hurricanes making landfall in the survey weeks in both September and August - that has never happened before, as far as we know - we're braced for anything."

Back in the UK, in a letter dated 24 October, Brexit Secretary Dominic Raab said he expected a deal on the UK's withdrawal from the European Union, by 21 November, sending Sterling bounding higher and longer-term Gilts lower

Against that backdrop, investors were waiting on the Monetary Policy Committee's decision the next day.

Analysts at both Pantheon Macroeconomics and Bank of America-Merrill Lynch saw scant room for any surprises or shifts in tone from rate-setters at Bank, given the all too real risk still of a 'no-deal' Brexit.

Indeed, since the start of October, financial markets had gone from pricing-in two hikes in 2019 - on optimism for a deal - to just a 40% chance of a hike.

"While we think that hopes of a Brexit-deal-bounce in growth may be overdone, there is scope for a selloff in rates on an agreement as some of the downside that has been increasingly priced in is removed," BofA-ML said.

"However, all this means for now is the BoE may do nothing to its existing guidance while Brexit continues to pose an immediate binary risk."

Nevertheless, in case of a deal, the two groups of analysts did expect the MPC to hike Bank Rate by another 25 basis points to 1.0% in May.

And Samuel Tombs at Pantheon Macroeconomics did see a risk that the MPC's Michael Saunders might have voted for an immediate hike, breaking ranks with his fellow policymakers again, although that was not Tombs's base case scenario.


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