UK gilts yields rise as expected date for an interest rate cut is pushed out

OVERNIGHT

Asia-Pacific equity markets are mostly down this morning. US markets will be open again today after the Thanksgiving break but only for a partial trading day. Japanese CPI inflation rose by slightly less than expected to 3.3% in October from 3.0% in September, while core inflation also picked up. In remarks to the FT, Bank of England Chief Economist Pill warned of ‘stubbornly high’ price pressures.

The November reading for the GfK consumer confidence measure for the UK saw a rise to -24 from -30 in October. The move reflected a rise in optimism both about consumers’ own financial conditions and their feelings about the overall economy. Since the data were collected prior to October CPI inflation coming in below expectations and the NICs cuts being announced in the Autumn Statement, confidence may show a further rise in the December report.

THE DAY AHEAD

Today’s November reading for the German IFO survey is expected to show that activity remains weak but offer further tentative hopes of an improvement next year. The current assessment measure is expected to have risen for the second month in a row but only to a level that is still well below where it has been for much of the year. However, the more forward-looking future expectations component is forecast to have risen by more, and to its highest level since May. That may be a reflection of growing hopes that interest rates have peaked, and a sign of that economic conditions are expected to improve next year.

Yesterday saw November PMI data for both the Eurozone and the UK surprise on the upside. In the UK, the composite PMI index moved above 50 for the first time in four months suggesting that activity picked up. The Eurozone recorded its sixth successive sub-50 reading but the number was higher than October. US PMIs which are being released a day later because of Thanksgiving typically tend to receive less market attention. However, that seems unlikely to be the case today given the current focus on whether rising expectations of an early interest rate cut are justified.

Recent US PMI reports have been a little stronger than their European counterparts but with the composite index only holding just above 50 in the last three months reports they have nevertheless suggested that growth is slowing. We expect a similar outturn for November but a surprise in either direction could have a significant impact on interest rate expectations in what is likely to be thin markets post-Thanksgiving.

MARKETS

UK bond yields rose sharply yesterday as markets pushed back the expected date for an interest rate cut in the wake of the Autumn Statement and stronger-than-expected PMI data. Sterling was also lifted by the news as it rose against both the euro and the US dollar. US Treasury yields have also gone up overnight as markets open again after Thanksgiving.