UK gilts slump despite poor retail sales, investors eye Q3 GDP data

The UK gilts slumped Thursday as markets largely shrugged off weaker-than-expected retail sales data for September.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 3 basis points to 1.116 percent, the super-long 40-year bond yield climbed 1-1/2 basis points to 1.619 percent and the yield on short-term 2-year bond jumped 3 basis points to 0.247 percent by 10:30 GMT.

UK Sep retail sales of 0.0 percent m/m turns out weaker than the 0.4 percent m/m rate expected by the market, but taken against the context of an upward revision to the August figure to read 0.0 percent m/m, from down -0.2 percent m/m previously recorded. The situation, though weak, is not as bad as it appears, and crucially the Q3 rate of 1.8 percent q/q is still a pretty robust outcome that should prove supportive for a moderate GDP growth rate for Q3.

Investors will remain keen to focus on the upcoming Q3 GDP data, which is scheduled to be released on October 27.

Moreover, updated UK labour market statistics showing that the annual rate of average weekly earnings growth eased to 2.3 percent y/y in the 3 months to August, after an upwardly revised 2.4 percent in the 3 months to July (previous was 2.3 percent) is as the market expected and points towards a stabilising of the trend at 2.3 percent to 2.4 percent for the third quarter, after 2.4 percent y/y in the second quarter. But with productivity growth expected to have slowed in Q3, annual unit labour cost growth could pick up moderately in Q3, placing upside risks to future inflation.

According to a Bloomberg survey, more than 70 percent of economists are expecting the BoE to cut rates to 0.10 percent in November. This does not include us, as recent UK data have not provided justification for further easing -- although recent MPC comments have remained dovish.

In addition, the acceleration of UK CPI inflation to 1.0 percent y/y from 0.6 percent in August occurs on the back of a 0.2 percent m/m rise, and stands at it highest reading since November 2014. The m/m increase, driven higher by road fuel costs, clothing & footwear costs, hotel accommodation costs and gas prices, is actually consistent with the average m/m rise for a Sep month over the past 10 years.

The BoE MPC members however, already know that inflation will move above its 2 percent target before the end of the 2-year horizon but have categorically stated that they would overlook the prospective overshoot when setting policy in order not to hurt future growth and jobs. So, any appreciation in GBP from these latest figures will probably be fleeting.

Meanwhile, the FTSE 100 traded 0.01 percent lower at 7,021 by 10:30 GMT.