###POV: WHICH DIRECTION NOW FOR 5-YR..........>

GILTS: ###POV: WHICH DIRECTION NOW FOR 5-YR BREAKEVENS?

- The widening in the 5-yr breakeven rate has taken a breather having rallied by

over 10bps since the end of 2017 and within touching distance of breaking above

3.0% for the first time since Nov 29.

- The most likely reason for the widening between nominal and linker Gilts is

the surprise rise in inflation to 3.1% y/y in November, rally in commodities

(Brent crude up nearly 10% since Dec 14) and slow steady grind lower in Sterling

versus the Euro. While renewed concerns over level of consumer spending in the

run-up to Christmas could weigh on Q4 and Q1 GDP growth as continued negative

wage growth finally begins to bite.

- Next week's data that includes December CPI and retail sales along with 5-yr

Gilt supply could be crucial in determining if 5-yr breakeven continues to widen

or fall back towards 2017 low of 2.82%. With mounting evidence of a slowdown in

consumer spending and no sign of costs pressures easing significantly, risk is

that inflation will remain elevated but retail sales will fall hurting economic

growth in Q4, putting the BoE back on CPI vs growth conundrum.