Off Cheaps, Light Bear Flattening Impulse In Play

Gilts look through the uptick in inflation expectations in the latest BoE DMP survey (collated before the latest CPI release), operating around levels provided in our latest update, leaving futures -20 and cash Gilts running 1-2bp cheaper, with a light bear flattening impulse in play.

• Softer than expected Eurozone CPI data (including a move lower in the Y/Y services HICP metric) only triggered a modest blip higher in Gilts (futures lodged a fresh session high), which was quickly unwound, akin to the related move in core EGBs.
• Domestic credit and money supply data did little to encourage participation, with the same holding true for the modestly firmer than flash final manufacturing PMI release.
• Within the details of the PMI, the survey collator noted that “the UK manufacturing downturn deepened in May, with output, new orders and employment all falling at increased rates. Manufacturers are finding that any potential boost to production from improving supply chains is being completely negated by weak demand, client destocking and a general shift in spending in the UK away from goods to services.”
• This manufacturing-services dynamic (and the feed through into inflation) is key for near-term BoE policy decisions.