MNI Gilt Week Ahead: Gilt operations calendar due Tues

• The highlight of last week was the release of the flash PMI which saw the fourth-largest month-on-month fall since the PMI series began and a larger fall that at any time during the pandemic. The details were also concerning with the “fastest rise in operating expenses” since that index began in January 1998 and business expectations at the lowest point for two years. Perhaps the biggest concern from the MPC, however, will be the employment component which was the smallest increase for 13 months and “Some businesses noted that a desire to reduce costs had led to the non-replacement of voluntary leavers.” Given that the MPC is worried that the tight labour market can be a contributing factor to inflation expectations pushing higher through faster wage growth, this is one of the first data points that has indicated that the tightness in the labour market may be coming under some pressure. Market pricing for BOE hikes (which ended the prior week around 129bp for the year), fell to as low as 116bp following the PMI data but is now back to 125bp, a level which is still consistent with an average of one 25bp hike per meeting for the rest of the year. The market-implied probability of a 50bp hike in one of the next two meetings has fallen from about 60% to 50% (hitting a low of 25% in the aftermath of the data).
• There was nothing new from last week’s speakers while public finance data was largely in line with expectations. The Chancellor set out his cost of living plan which was probably more generous, but also more targeted than most had expected. There were some analysts who revised their forecasts for the BOE path on the back of the announcement, but most saw the announcement as removing negative risks rather than an outright positive.
• This week is a holiday shortened week, with UK markets only open Monday to Wednesday. Tuesday will see the release of the money supply / bank lending data (which is very rarely market moving) while Wednesday will see the final print of the manufacturing PMI. There are no MPC members due to speak this week so the domestic focus will be on the release of the gilt supply calendar for FQ2 (July to September). For more see our summary of the GEMM / investor consultation in the PDF.
• Again, political events will continue to brew in the background this week, but are unlikely to moves markets.

GiltWeekAhead20220530.pdf