pray for gilt traders

Back in the financial crisis, Morgan Stanley analyst Andrew Sheets created the above cartoon to show just how tough things were for bond traders at the time.

This comes to mind in view of the market’s reaction to a third consecutive jump in UK inflation, which probably caused some gilt traders to skip their breakfast this morning.

The two-year gilt is 35 basis points higher than today and yesterday.

Discounting the smartness of the minibudget – and assuming it stays that way when the market closes – this will be the biggest two-day increase in yield @tradeweb Records till 2008. pic.twitter.com/m31pz3i2Pe

— Andy Bruce (@BruceReuters) May 24, 2023

This serious ploy is probably exacerbated by –cough- technical factor. It wouldn’t be surprising if some macro shops had a very bad day today.

Ten-year gilts haven’t been much tougher, but yields rose 12 bps to 4.28 per cent today, the highest since last autumn’s apocalypse.

The UK appears to have a problem of structurally high inflation compared to many other G10 countries, which is beyond our scope to diagnose right now. But in the near term, such inflation readings obviously increase the pressure on the Bank of England.

JP Morgan’s Alan Monks points out that UK inflation looks like it is increasingly being generated domestically, and raises the prospect that the bank will have to resume rate hikes in 50 bps increments.

This is the third consecutive big upside surprise in the inflation data, and it comes at a time when commodities are declining. The scale of April’s surprise is unlikely to be repeated next month. But it cannot be described as a one-off or simply an indirect by-product of food and energy price gains, as the BoE and Doves have recently suggested.

, , , We think there is a good case for the BoE to consider 50bp in June. The BoE is concerned about the backward effect of previous tightening, and reduced the pace in March. But there appears to be a related interaction between wages and prices – an upside risk in the BoE’s forecasts – and the bank should try to get ahead of it with clear signs in the data that this risk is now becoming apparent. It is important to move quickly given the muted pace of transmission from higher rates in the mortgage market, and then the absence of another shock that would prevent this dynamic from sustaining.

, , , We believe the BOE will not go 50 bp in June, even though it probably should. But if that is to change, we would expect some clear indications from Bailey. For now we expect the BoE to hike by 25bps in June, and then as it does another inflation forecast upgrade in August, we expect it to move 25bps to 5%.