Gilts Still On Shaky Ground As NFP Looms

WHERE WE STAND – Another day of turmoil in UK assets on Thursday, as participants remained highly concerned over the perilous fiscal backdrop.

Gilts again lurched lower at yesterday’s open, with 10- and 30-year yields rising 10bp apiece, to fresh multi-year highs, though the move did pare as trade progressed through the day. Still, there remains clear concern over the likelihood that all of the Chancellor’s fiscal headroom has now been eaten up by the sell-off in Gilts, and the anaemic nature of UK economic growth. This is, again, shown by GBP tumbling south of the 1.23 figure, despite the surge in Gilt yields, a classic sign of fiscal de-anchoring, and potentially capital flight out of the UK as well.

Speaking of the Chancellor, Rachel Reeves has gone ‘missing in action’, ahead of a long-planned trip to China, sending her deputy, Darren Jones, to answer an urgent question on the current market turmoil in the Commons. Jones added little new information, though by virtue of that gave no reason for participants to stem the selling pressure. Markets want more than this mealy-mouthed political nonsense, with instead a firm commitment to further spending cuts, and/or revenue raising measures, being required to stem the bleeding in Gilts.

That said, said measures would, obviously, further dent the UK’s already anaemic economic growth, at a time when inflation remains sticky, leaving the economy in a worst of all worlds stagflationary scenario. This, in turn, will keep the BoE hawkish, for all the wrong reasons, at precisely the wrong time. Likely further pressuring sentiment is historical precedent, whereby typically Labour governments have failed to significantly rein in expenditure.

All of this, then, makes it very difficult to argue for anything other than being short GBP assets, whether in FX, rates, or equity. Sadly, while things already appear dicey, the situation is likely to get worse before it gets better.

Away from the UK, things were relatively quiet yesterday, with US participants largely away from their desks, as the country observed a National Day of Mourning for former President Carter.

Treasuries, though, did gain ground, led by the long-end, in a move that smacked of position squaring ahead of the December jobs report, due this lunchtime. As noted yesterday, though, participants’ default position into inauguration day seems to be flat risk, short Treasuries, and long USD, a broad bias that should return once the noise of today’s payrolls print is done and dusted.

LOOK AHEAD – Speaking of which, it is ‘Jobs Day’ today.

Headline nonfarm payrolls are set to have risen by +165k last month, a modest slowdown from the +227k pace seen in November, albeit a rate which would be broadly in line with the 3-month average. Meanwhile, average earnings are seen rising 0.3% MoM, which should see the annual rate hold steady at 4.0% YoY, while unemployment is also set to remain unchanged, at 4.2%, just shy of the cycle highs seen last summer.

It seems, however, unlikely that the jobs report will materially alter the policy outlook. A Fed ‘skip’ later this month is all-but-certain, with the USD OIS curve discounting a 95% chance that rates will remain unchanged. Furthermore, policymakers’ focus remains largely on the inflation side of the dual mandate, and on the impact of the early policies implemented by the incoming Trump Administration.

Elsewhere, jobs figures are also due from Canada, though will be largely overshadowed by those from the US, even with the BoC seemingly nailed on to deliver another 25bp cut at the tail end of this month. The latest UMich consumer sentiment figures are also on the docket, before the week draws to a close.