UK DATA: Consumer inflation expectations remain high in medium-term
The MPC will be relieved that consumer inflation expectations did not pick up further in the quarterly BOE / Ipsos Inflation Attitudes Survey which was conducted in May, but will remain wary that the 12-24 month and 5-year ahead inflation expectations remain so high. This has been flagged as a big concern for the MPC regarding second round effects and future wage demands.
- Year-ahead expectations fell back to 3.2% in May from 3.4% in February (which had been the highest level since August 2023).
- Expectations for 12-24 months remained at 3.2% in May (as they were in February after seven consecutive quarters of between 2.6-2.8% when rounded to 1dp). The fact this didn't pick up further will be a relief to the MPC, but they will likely have been hoping for this to fall a little more. As we noted in our preview, even when spot inflation was very high in 2022, this series never rose above 3.4%
- Looking at the 5-year ahead measure this remained at 3.6% in May (as it was in February). This was the highest reading in over five years (November 2019 which was also 3.6%). It has only been higher than 3.6% twice in the history of the survey which began in February 2009.
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GILTS: Support In Futures Holds
Gilts trade on the defensive over the last hour or so, perhaps in part owing setup for this morning’s 10-Year supply.
- Initial support in futures (91.43) holds on the first test.
- A break would deepen the bearish threat and expose the 76.4% retracement of the April 9 -May 2 rally (90.92).
- Yields now little changed on the day.
FOREX: FX OPTION EXPIRY
Of note:
AUDUSD 1.86bn at 0.6480/0.6500 (could act as magnet).
EURUSD 1.4bn at 1.1175 (a little far).
USDJPY 1.06bn at 147.00 (thu).
AUDUSD 1.32bn at 0.6475 (thu).
EURUSD 2.53bn at 1.1200 (fri).
- EURUSD: 1.1175 (1.4bn), 1.1200 (835mln).
- USDCAD: 1.3910 (366mln).
- AUDUSD: 0.6480 (945mln), 0.6500 (911mln).
- USDCNY: 7.2000 (758mln).
CROSS ASSET: UBS: CTAs Supporting Risk Rally, Wary Of Negative Duration Bias
UBS suggest that “CTAs have been supporting the rebound in risky assets”.
- Since their last update (April 28) UBS calculate that CTAs “have bought ~$30bln worth of global stocks, with a clear tilt towards DM indices”.
- UBS think that given “uninspiring price action and negative base effects (Q2-Q3 '24 rally falling out of the 1-Year rolling window), CTAs are about to turn negative duration again. We expect them to sell ~$50mln of bond DV01 over the next two weeks. All regions & tenors are likely to face selling pressure in the near term, with Korea 10s being the most at risk”.
- Elsewhere, they find that “in credit, CTAs have already covered their shorts, and are about to initiate new longs. The recent tightening, coupled with the elevated carry, make short positions difficult to sustain”.
- In FX, UBS believe that “CTAs continued to be heavy sellers of the USD in May (~$30bln). After aggressively buying G10 FX between February and April, their focus switched to EM FX this month. Going forward, we expect decent profit-taking in G10 FX, especially in JPY, and limited flows in EM FX”.
- Finally, for commodities, UBS point to “a little bit of agricultural selling this month, not much action elsewhere. CTAs remain heavily long gold and heavily short energy. We foresee some profit taking there”.
