UK gilts plunge as services PMI beats expectations in September

The UK gilts plunged Wednesday after recent data showed that country’s services sector grew more than expected in September. Also, rally in crude oil prices drove out investors from safe-haven buying.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 3 basis points to 0.819 percent, the super-long 40-year bond yield also climbed 3 basis points to 1.547 percent and the yield on short-term 2-year bond bounced 1/2 basis point to 0.132 percent by 09:40 GMT.

The 52.6 reading on the September UK services sector PMI is a slightly better outturn than the market consensus prediction of 52.0 but is still down from 52.9 in August. This development, combined with improvements in the manufacturing and construction PMI activity gauges for the same month, allows the Markit-calculated composite PMI to harden, to 53.7, its highest since January, from 53.2 in August, which also contrasts with the consensus expectation of a dip to 52.3.

All the same the quarterly average of the key services sector PMI, eases to 51.0 in Q3 from 52.7 in Q2 forcing the Markit-calculated composite average down, to 51.4 in Q3 from 51.9 in Q2, and vs 54.2 in Q1. We see this development as a reaffirmation of slower paced growth trajectory in train over the balance of this year, to around 0.25 percent to 0.3 percent q/q per quarter, compared with 0.55 percent per quarter in H1.

Moreover, Bank of England Deputy Governor Broadbent said that the UK economy has performed 'somewhat more strongly' than the Bank's near-term forecasts, but policymakers shouldn't rush to judgement. Brexit-related uncertainty 'raises the bar' for investment decisions, but the GBP fall will help to cushion the impact. These balanced comments don't add much new to the policy equation. Whether the BoE cuts rates again in November is a close call but the data argues against it.

In addition, the UK gilts have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of England's target Crude oil prices bounced above $50 a barrel after a report that U.S. fuel inventories may have fallen for a fifth straight week. The International benchmark Brent futures rose 1.63 percent to $51.72 and West Texas Intermediate (WTI) also jumped 1.62 percent to $49.48 at 09:20 GMT.

On Tuesday, as was the case with the September manufacturing sector PMI, the UK construction sector PMI for the same month rises to 52.3, exceeding our above-consensus prediction of 50.6 (with the market consensus having predicted a still-contractionary 49.0). This builds on the improvement to 49.2 seen in Aug, following the post-'Brexit' vote slump to 45.9 in July.

So it appears that construction sector activity is now back into moderately expansive territory although it would take much stronger PMI readings for positive construction quarterly output growth data to be generated. Whilst this should be viewed as a positive development for GBP, the currency's fate continues to lie with lingering market uncertainty surrounding the impending triggering of Article 50 of the Lisbon Treaty. So a move to 1.2500 on Cable remains on the cards.

Lastly, investors remained keen to focus on the series of upcoming economic data, highlighted by 30-year Gilt Auction, industrial production, trade balance and 10-year Treasury action.

Meanwhile, the FTSE 100 traded 0.49 percent lower at 7,040.70 by 09:40 GMT.