UK rate hike views pushed way off after U.S. jobs growth slows
By Andy Bruce
LONDON (Reuters) - Investors pushed back their bets on when UK interest rates will start to rise to the tail end of next year or even early 2017 after U.S. job creation faltered, putting the market at odds with previous Bank of England signals.
British government bond prices rallied sharply after U.S. monthly payroll figures showed employers slammed the brakes on hiring, raising doubts about whether the U.S. Federal Reserve will follow through with its earlier intentions of raising interest rates by the end of the year.
Five-year gilt yields, which are sensitive to changes in interest rate expectations, plunged to their lowest level since Feb. 17. at 1.084 percent before recovering to 1.13 percent, closing down 5 basis points on the day.
Short sterling futures soared, up 8 ticks for late-2016 and 2017 contracts, in another sign markets had pushed back their bets on the timing of the BoE's first interest rate hike since 2007 by several months.
The first BoE rate hike was now priced in for around early 2017, said John Wraith, head of UK rates strategy at UBS.
"When you get a number like that which shocks people's expectations about the Fed, it really does have a direct spillover to the outlook for the UK," Wraith said.
"The fear is that the slowdown everywhere else, in China and emerging markets, is going to spill over into economies that up until now have been doing okay, like the U.S. and the UK."
Last month BoE Governor Mark Carney and other policymakers were keen not to overstate this risk, and Carney has said the decision on when to raise rates would come into "sharper relief" around the turn of the year.
Wraith said weak data, like that from the United States on Friday, would make it less likely that the BoE would try to lean on markets to bring expectations for rate hikes closer to the central bank's view.
The closely-watched Markit/CIPS survey of services companies is due on Monday, followed by the result of the BoE's October policy meeting on Thursday.
"If we did get a weak services PMI, that would be a big concern. Then you've got the Bank of England and we'll be looking for any signs that they're changing their tune," Wraith said.
The 10-year gilt yield dived to its lowest level since late April at 1.646 percent. It closed the week at 1.70 percent, down 4 basis points on the day.
The premium that 10-year gilts offer over the equivalent German Bund hit its lowest in more than a week after the U.S. jobs data at 114.8 basis points, before recovering to 119 basis points -- down around a basis point on the day.
(Editing by Ruth Pitchford)
