UK gilts gain on Fed dovish meeting minutes; higher retail sales limits fall in yields

The UK gilts gained Thursday as July Federal Reserve meeting minutes revealed a more dovish tone. On the contrary, higher retail sales limited the fall in bond yields.

The yield on the benchmark 10-year gilts fell 1-1/2 basis points to 0.552 percent, the super-long 40-year bond yield dipped 4 basis points to 1.169 percent and the yield on short-long 2-year bond slid 1/2 basis point to 0.156 percent by 10:40 GMT.

Minutes from the 26 – 27 July FOMC meeting indicated that FOMC officials were split on whether a rate hike was needed soon. Overall, many judged that it was appropriate to wait for additional information that would allow them to evaluate the underlying momentum in economic activity and the labour market and whether inflation was continuing to rise gradually to 2 percent as expected.

However, several participants suggested there would likely be ample time to react if inflation rose more quickly than they currently anticipated, and they preferred to defer another increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis.

On balance, participants generally indicated that their economic forecasts had changed little over the intermeeting period, continuing to anticipate that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace and labour market indicators would strengthen.

Moreover, the UK retail sales jumped 1.4 percent m/m in July turns out above our above-consensus prediction of 0.9 percent m/m and far exceeds the market consensus expectation of a 0.2 percent m/m increase.

Meanwhile, the FTSE 100 traded 0.06 percent higher at 6,863.70 by 10:40 GMT.