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Andy Bruce
LONDON (Reuters) – Inflation data came in weaker than expected on Wednesday Investors scaled back bets on U.K. government bonds that the Bank of England would raise interest rates sharply after propelling sharp gains in stocks.
Consumer price inflation slowed to 7.9 percent in June from 8.7 percent in May, a drop that exceeded expectations of almost all economists polled by Reuters. Core and services inflation, which the Bank of England watches closely, also cooled.
The market reacted in a dramatic fashion.
Ahead of Wednesday’s data, investors roughly allocated 11 Chances of a half-percentage-point rate hike by the Bank of England on August 3 for%. The result becomes 15% Chances of a quarter-point rise after the data.
The predicted peak in bank rates is no longer priced at 6%, and the overnight index swap curve shows the same probability of 5. 15% Peak.
Gilt yields have fallen sharply, especially short-dated bonds that are most sensitive to the outlook for interest rates.
Michael Metcalfe, head of macro strategy, said “June’s inflation numbers will be welcomed by gilts and the Bank of England” in 200200 Road Street
(NYSE:
STT
) Global Markets, say. “But it will take more than a month of data to calm the interest rate market after unexpected gains totaling a not-so-cool 1.5% over the past four months.”
Two-Year Treasury Yield Falls Today’s
base point GMT – On track for biggest one-day drop since March , bond prices soared after the collapse of Silicon Valley Bank. Yield fell to 4.25%, the lowest since June .
Longer-dated gilt yields also fell sharply , Annual rate of return drops The bps of the day.
the gap between 1-year UK and Bund yields – Widened dramatically in recent months to reflect more serious inflation problems in the UK – narrowed to 25 bps from . 60
