Gilt Week Ahead

13 July 2020, Tim Davis

For the full document see:

GiltWeekAhead13072020.pdf

Following on from Chancellor Rishi Sunak's Economic Update on Wednesday, focus this week will return to the economic data, the OBR's Fiscal Sustainability Report and the DMO's updated gilt remit update covering the period to November. The OBR report will be a key event for the gilt market and feed into expectations for the announcement of the gilt remit later in the week.

The OBR Fiscal Sustainability Report will include an update of the coronavirus reference scenario analysis. This analysis was originally published on 14 April and then updated on 14 May. The OBR have already confirmed that last week's announced measures will not be included in the numbers to be published this week. The accompanying government documents for Sunak's statement said that the new measures would account for up to GBP30bln of extra spending, but most analysis we have read suggest that the consensus is that closer to GBP20bln of spending has been added. The OBR's new analysis will take into account the previously announced lockdown reversal plans and provide three scenarios and all will be updated for the smaller than assumed fall in GDP (recall that the OBR's scenario had included a larger fall than consensus at the time). One scenario will be an update to the April scenario including a "sharp rebound in activity and no medium-term economic scarring", one a slower recovery and "some scarring to potential GDP" and the final scenario "one where the recovery is slower still and scarring is deeper". These updates will be presented alongside the usual long term projections that are included in the Fiscal Sustainability Report.

We have seen very little from the sell-side into how this will translate into the DMO's remit update for the period to November due on Thursday yet (most have focused on the full year picture). The previous update saw a target of GBP275bln for the period of April to August which was broadly in line with consensus. To date GBP203.9bln has been raised and we estimate that the DMO is on target to raise GBP275-285bln by the end of August depending on PAOF proceeds. Our initial estimate prior to the OBR report is that the DMO will announce an issuance target of GBP350-365bln until November with issuance for September at a similar but slightly slower pace than August with three auctions per week before a slowdown in issuance for October and November with 2-3 auctions per week.

Economic data this week will kick off with monthly GDP for May and its components such as IP and index of services on Tuesday. All 25 economists in the Bloomberg survey at the time of writing are expecting a positive number but only a partial rebound from the -20.4% fall seen in April. The median and mode estimates are 5.0% with a positive skew. Most of the estimates in the survey are between 4-8%. On a 3-month over 3-month estimate this leaves a surprisingly strong consensus of between -18% and -17% with 75% of economists in the survey forecasting in this range. We note that although many of the lockdown reversals such as reopening schools and a wider array of businesses opening did not occur until June, the government's messaging on Covid-19 changed on 10 May from "stay at home, protect the NHS, save lives" to "stay alert, control the virus, save lives". This coincided with advice for those who could not work from home to return to work, and so it makes sense that consensus is forecasting a positive monthly number for May. Inflation data will follow on Wednesday but is unlikely to change the MPC's course of actions. Labour market data will then conclude the economic data calendar for the week on Thursday, but the headline numbers are still only May data and the claimant count data is likely to remain distorted, so some of the experimental numbers remain more useful at such an inflection point.

For the full document see:

GiltWeekAhead13072020.pdf

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