Front End Outperforms As BoE Pricing Eases Post-PMIs

Gilts remain the comfortable outperformer in core global FI markets after the run of softer than expected UK & European flash PMI readings.

• A quick reminder that the PMI survey collator noted that “the early UK PMI survey for August suggests that inflation should moderate further in the months ahead, but also indicates that the fight against inflation is carrying a heavy cost in terms of heightened recession risks. A renewed contraction of the economy already looks inevitable… While a further hike in interest rates in September looks to be on the cards, the August PMI data will add to speculation that rates could soon peak.”
• Gilt futures +160, around 10 ticks off session highs. A bearish technical theme in the contract remains intact, however, a strong rally today suggests the contract remains in a short-term corrective cycle. Price has traded through the 20-day EMA. A continuation higher would signal scope for a stronger recovery and open 94.89, the 50-day EMA.
• Cash benchmarks run 11-15bp richer as the curve bull steepens.
• The front end draws added support from the dovish post-data move in BoE-dated OIS, which last indicates 28.5bp of tightening for next month’s meeting, while terminal policy rate pricing sits around 5.90%. Liquid BoE-dated OIS contracts are 4-18bp softer on the day.