STIR: Hawkish BoE Pricing As Increased Issuance Risk Outweighs Dovish Bailey

A volatile open for GBP STIRs initially seeing a dovish move before hawkish flows came to the fore.

• BoE-dated OIS 1-8bp less dovish vs. the close, 22.5bp of cuts priced for November, 40bp of cuts priced through December and 105bp of cuts priced through June.
• SONIA futures now -0.5 to -6.0, volume in SFIZ5 the standout, with spread flow also factoring in. Some contracts already trade in 15+-tick wide ranges.
• SONIA initially rallied at the open as BoE Governor Bailey pointed to faster-than-expected disinflation after the market closed on Wednesday. This comes after he previously stated that the BoE could become a “bit more aggressive” in cutting interest rates provided the news on inflation continued to be good.
• This seems to steer towards a November cut, an outcome that was already nearly fully discounted by markets (last 90% priced). We don’t expect the BoE to upsize to 50bp cuts at this juncture.
• While there wasn’t any overtly hawkish commentary from Bailey, we would guess that the latest round of fiscal speculation has facilitated the hawkish flow ahead of the gilt open.
• Markets remain attuned to the risk of increased issuance, and we point to the latest Guardian sources piece noting that “Rachel Reeves will announce at the International Monetary Fund a plan to change Britain’s debt rules that will open the door for the government to spend up to £50bn extra on infrastructure projects”…” a move that will permit the Treasury to borrow more for long-term capital investment.”
• Flash PMI data and the continued digestion of Bailey’s comments/fiscal speculation is set to dominate early today.