Weekly Market Report - 23 February 2010
January consumer prices data showed UK inflation rising to a 14 month high, with the sharp upward movement in year-on-year CPI forcing BoE Governor Mervyn King to write another open letter to the Chancellor explaining why CPI is so far above the 2.0% target. Year-on-year CPI rose from 2.9% to 3.5% and year-on-year RPI rose from 2.4% to 3.7% in January.
Last week’s February MPC minutes revealed a 9-0 vote to keep Base Rate unchanged at 0.5% and pause QE asset purchases at £200bn (i.e. maintain the BoE’s stock of Gilts and corporate bonds at £200bn). However, the minutes clearly left the door open to extending QE beyond £200bn should the UK economy deteriorate further. Mervyn King has today cited his key concern for the UK economy as being headwinds arising from the stalling global recovery.
Long dated Gilt yields have continued to drift higher with the 30-year yield rising another 13bps to 4.69% last week. This sharp upward move is being driven by nervousness over the UK fiscal deficit and the uncertain timing of essential spending cuts, and also by general sovereign credit risk concerns stemming from peripheral Eurozone economies. Long dated swap spreads are still at extreme negative values (i.e. long dated Gilt yields are much higher than equivalent maturity swap rates) with the 30-year swap spread closing the week at -42bps. Short dated Gilt yields and swap rates remain anchored at rock bottom levels.
This week brings a fairly quiet data calendar with the main event being the second estimate for UK Q4 2009 GDP on Friday. On Thursday the US will also report its second estimate for Q4 2009 GDP. Nationwide House Prices for February are expected at some point during the week.
4 March 2010 - The Bank of England Monetary Policy Committee met today and voted in favour of holding interest rates at 0.5% and maintaining its £200bn stock of asset purchases