MNI Gilt Week Ahead: Looking to external events

• Last week was a huge week for the UK with the release of labour market, inflation and retail sales data (amongst other releases), Governor Bailey’s Mansion House speech and the Conservative party leadership contest whittled down to the final two candidates. However, in spite of these huge domestic events it was actually external factors that saw the biggest repricing of UK rates markets – the US Philly Fed and then French, German, Eurozone and US PMI data all pointing to concerns surrounding the economic outlook. Indeed, these data drove UK rates markets more than the larger-than-expected 50bp hike by the ECB.
• This week, too, external factors are likely to have the greatest bearing on UK market moves. In terms of domestic data we are only due to receive CBI data, BRC shop price data and BOE credit data. The main external event of the week will be the FOMC meeting with the policy decision and statement due Wednesday with markets fully pricing another 75bp hike (with a small chance of a 100bp hike). This would see the Fed funds target rate at close to neutral by most analyst’s estimates. For the UK, the median estimate for the neutral rate in the Bank of England’s Market Participants Survey is 2.00% - which means that the MPC would need a 75bp hike to get back to neutral too. Markets are currently pricing around 45bp for the August MPC meeting – indicating about an 80% probability of a 50bp hike is priced, with 25bp fully priced. Economists are generally split between a 25bp or 50bp hike, too.
• This evening, we will see the first head-to-head debate between Truss and Sunak in the Conservative leadership race with Truss currently around a 65% favourite.

GiltWeekAhead20220725.pdf