Rare Diamond Pattern In UK - U.S. 10-Year Spreads
Ashraf Laidi | Jun 18, 2015 12:21AM ET
Yesterday's UK jobs figures powered the pound across the board as average weekly earnings growth (excluding bonuses) shot up to a six-year high of 2.7% in the three months to April y/y, exceeding market expectations for a 2.1% rise. Subtracting the 0.1% level of inflation, real earnings come in at 2.6%, also the highest since 2009. If wage gains persist on their upward trend, then wage cost inflation would follow, forcing the gilt market to price more aggressive expectations for a BoE rate hike.
With regard to the release of the Bank of England's BoE minutes, the usual hawks (likely to be Weale and MacCaferty) continued to deem their vote to hold rates unchanged as “finely balanced”, which raises the probability of seeing 1-2 dissenting voters (in favour of a rate hike) by end of this summer. Private economists are calling for rates to be lifted by Q1 2016, while short sterling contracts are pricing a full chance of a 25-bp rate hike June 2016 versus August 2016 prior to this morning's release of the jobs and BoE minutes.
On the yield spread front, UK-US 10-year spreads have bottomed out from key support, now eyeing the 200-DMA, a break of which would pave the way for the top of the diamond formation.
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