UK gilts slump on impressive labour market report, likely to test 1.10 pct as support for Brexit strengthens

The UK gilts slumped on Wednesday as the British’s employment figures surprised to the upside. Also, firmer equities market pushed gilt prices down.

Meanwhile, the yield on the benchmark 10-year gilts rose more than 4 basis points to 1.189 percent, yield on super-long 30-year bonds jumped 3-1/2 basis point to 2.022 percent and the yield on short-term 2-year note also climbed 3-1/2 basis points to 0.390 percent by 09:20 GMT.

Latest UK labour market data reveal a tightening labour market and firming wage pressures. The 2.0 percent y/y increase in headline average weekly earnings growth in the 3 months to April and the 2.3 percent y/y bounce in the underlying ex-bonus component, exceed the market consensus expectations of 1.7 percent y/y and 2.1 percent y/y respectively, and reflect the impact of the introduction of the national living wage.

Similarly, the headline unemployment rate declined to 5.0 percent in the 3 months to April, as compared to 5.1 percent previously and against the consensus expectation of an unchanged reading of 5.1 percent. This fall comes on the back of a 20K drop in unemployment in the 3 months to April, whilst the claimant count u/e declined in May, by 0.4K, following a revised jump of 6.4K in April, against previous decline of 2.4K. Additionally, we foresee that the BoE monetary policy is not expected to be altered by this latest development anytime soon.

In the global debt market, the benchmark 10-year US Treasury note yield hit fresh 4-month low as 'Brexit' vote looms. The German 10-year bund yields fell below zero for the first time to -0.03 percent in the early Asian session. 20-year JGB yield fell to a record low of 0.145 percent, 30-year yield to 0.215 percent and benchmark 10-year yield to record low of -0.185 percent.

In addition, the latest polls by various corporate bodies in the United Kingdom in run up to the June 23 Brexit referendum indicate that the percentage of citizens in favor of "leaving" the European Union (EU) has outnumbered those who want to "remain", raising the possibility that Britain might leave the EU after 43 years of membership in the bloc.

According to a recent poll on Brexit by YouGov, showed 46 percent of participant are in favour of ‘Leave’ while 39 percent wanted to ‘Remain’, rest being indecisive. Further, a new UK poll on the EU by ICM for the Guardian shows a 6 percent lead for the Leave side (53-47 percent), when undecided of 6-7 percent were excluded. Reportedly the results were the same for polls conducted online and by phone. This contrasts with prior rumours of a similarly-sized pro-Remain balance.

According to the latest Betfair odds, the implied probability of the UK voting to remain in the EU has now fallen to 55 percent, down from 59 percent earlier and around 64 percent yesterday. Last Thursday the implied probability to remain peaked at 78 percent.

Today, crude oil tumbled more than 1 percent after data showed a surprise build in U.S. crude inventories last week, adding to the market's nervousness around Britain's vote next week on whether to leave the European Union. The American Petroleum Institute (API) showed U.S. crude inventories rose by 1.2 million barrels in the week to June 10 to 536.7 million, against market consensus for a decrease of 2.3 million barrels. The International benchmark Brent futures fell 1.46 pct to $49.10 and West Texas Intermediate (WTI) dipped 1.09 pct to $47.96 by 09:30 GMT.

On Tuesday, the UK consumer inflation rose 0.2 percent m/m (0.3 percent y/y) in May, lower than the market consensus of 0.3 percent m/m (0.4 percent y/y), from 0.1 percent (0.3 percent) in April. Similarly, Core CPI rose 1.2 percent y/y, against market consensus of 1.3 percent y/y, from prior 1.2 percent.

We foresee that the benchmark 10-year gilts yield likely to slid to a record low of 1.10 percent ahead of Britain’s referendum on European Union membership.

Lastly, Markets will remain keen to focus on Fed policy decision and Fed Chair Yellen’s post-statement press conference on Wednesday (18:00 GMT), retail sales and BoE interest rate decision on Thursday.

Meanwhile, The FTSE 100 trading up 0.90 percent at 5,977 by 09:30 GMT.