MNI Gilt Week Ahead - December 14, 2020

• Another week and another Brexit trade talk extension. The weekend deadline has come and gone but talks are still ongoing at least for the next few days. At 7:30am GMT on Monday 14 December, Michel Barnier will brief EU ambassadors on the state of negotiations, so headlines will probably kick off early this week. Regarding the state of negotiations, a reporter from the Sun stated on Twitter that "the EU has dropped its insistence on a 'ratchet clause' which would have formalised the principle both sides should keep up with each other's standards. It's now ready to cater for divergence in the future so long as there are strong safeguards to rebalance unfair competition." If true this is a positive step forward for negotiations regarding the level playing field. The ratchet clause would have meant that if the EU increased regulations and the UK did not match these regulations that that the EU would have been able to introduce lightning tariffs on these goods (the UK would have had the same rights if the UK's regulations increased). These headlines suggest that despite the continued rhetoric that the two sides remain far apart and that no deal remains the most likely outcome that there is at least some progress being made behind the scenes.
• Against this backdrop, the Bank of England MPC meet this week. After announcing its intention to increase asset purchases to last until the end of 2021 at its November meeting, the focus at this meeting will be on the implementation of QE. The initial pace of QE has yet to be confirmed (although it was previously suggested that the pace would remain unchanged). We suspect there may be a case for increasing the pace in the case of a no deal Brexit, but whether we have any more clarity on this by the time of the MPC meeting is anyone's guess. We are also expecting the details of any technical changes to QE – buckets, gilts eligible for purchases etc. We will write on this in more detail in our BOE Preview out Wednesday but we wrote our preliminary thoughts on this in our November BOE Review.
• In terms of data this week, it will be a busy week. The highlights for us will be PMIs on Wednesday and retail sales on Friday. Data kicks off on Tuesday with the release of the labour market survey – however, most of the data here will be stale as it will be from before the English lockdown and subsequent larger extension of the furlough scheme. Inflation data on Wednesday will be lower key for markets (even ahead of the MPC decision) with the main impacts likely to be on the linker market. The PMIs, also on Wednesday, will be closely watched, however, as they are the first major survey to be released of the post-English lockdown situation, and will also potentially include some concerns about the future of the EU-UK trade relationship. Friday will see GfK consumer confidence and the CBI industrial trends survey, but notably will also see the release of retail sales for November. This will be the first hard data point for November so will give us the best indication so far of how consumer spending has held up and will include Black Friday (although likely not the whole weekend).

GiltWeekAhead14122020.pdf