MNI Gilt Week Ahead: Driven by external factors this week

• UK markets this week are likely to be driven more by external factors than domestic. Last week’s announcement of the Ofgem price cap has led to much speculation in the press of how the next Prime Minister will respond (which is likely to be Liz Truss as betting markets see a 94% probability of her winning). The result of the leadership contest is due to be announced Monday next week and we are unlikely to hear any definitive plans on dealing with the energy price rise until she has been confirmed as PM.
• There are no MPC members scheduled to speak this week and the UK data highlights include money supply and credit data due today, the BRC shop price index due overnight and Nationwide house price data and the final print of the manufacturing PMI both due on Thursday.
• Against this backdrop, growing expectations of a potential for a 75bp ECB hike has helped push SONIA futures to price in more aggressive BOE easing – although the ECB hike expectations are also somewhat dependent upon whether it looks likely that the EU can agree to some kind of price cap or plan to deal with the spike in energy prices on a bloc-wide basis. Perhaps the biggest events of the week will come from the US, however, with the ISM manufacturing index (including the prices paid component) and the US employment report due on Thursday and Friday respectively.
• Markets now price 60bp (up from 56bp a week ago) for the September MPC meeting, 131bp (cumulatively) for the November meeting (up from 114bp), 176bp for December (up from 153bp), 217bp for February (up from 195bp), 246bp for March (up from 211bp) and 261bp for May 2023 (up from 215bp) before the curve starts to invert.
• Note that the DMO will release the FQ3 (Oct-Dec) gilt operations calendar at 7:30BST on Wednesday. For our expectations see the MNI UK Issuance Deep Dive: FQ3: Can the gilt market cope with QT?

GiltWeekAhead20220830.pdf