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Pay concerns push back easing expectations; curve flattens

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  • The weekend saw the independent pay review bodies recommend 5.5% increases for some public sector workers including doctors, nurses and teachers. The government had budgeted for around 3% in their plans but Reeves hinted towards an above-inflation pay increase. In an interview on the BBC she said that she would make an announcement on public sector pay by the end of this month (note that also by the end of this month she will report on the public finances to parliament and announce the date of the Budget - we expect 30 October, or possibly 6/13 November).
  • Potentially above-expected public sector pay awards would make it harder for a series of cuts from the Bank of England and hence this morning we are seeing aSONIA futures underperform, particularly in the Whites and Reds with 2-year gilt yields also rising by over 3bp this morning leading to a flattening of the curve. 2s10s is around 4.5bp flatter today at writing.
  • Around a 40% probability of an August cut is priced with 95bp cumulatively priced by June 2025 (around 2bp less than Friday's close).
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  • The weekend saw the independent pay review bodies recommend 5.5% increases for some public sector workers including doctors, nurses and teachers. The government had budgeted for around 3% in their plans but Reeves hinted towards an above-inflation pay increase. In an interview on the BBC she said that she would make an announcement on public sector pay by the end of this month (note that also by the end of this month she will report on the public finances to parliament and announce the date of the Budget - we expect 30 October, or possibly 6/13 November).
  • Potentially above-expected public sector pay awards would make it harder for a series of cuts from the Bank of England and hence this morning we are seeing aSONIA futures underperform, particularly in the Whites and Reds with 2-year gilt yields also rising by over 3bp this morning leading to a flattening of the curve. 2s10s is around 4.5bp flatter today at writing.
  • Around a 40% probability of an August cut is priced with 95bp cumulatively priced by June 2025 (around 2bp less than Friday's close).