GILTS: Futures Roll Sold

• The 2s5s10s Bund butterfly has eased back toward -10bp from its recent late-September peaks near -5bp, as the belly regained ground against the wings. The structure looked overextended at those highs after the belly had cheapened aggressively through August and September. Following this recent pullback, the fly now sits roughly 4-5bp above its year-to-date average of near -15bp.

For the full MNI Gilt Week Ahead including BOE balance sheet tracker, projected gilt market cash flows and issuance calendars / results here.

• There are a number of MPC speakers this week, but we think it’s unlikely that we will hear anything new from the scheduled appearances. Indeed, all of the speeches are either from members we have already heard from in the past couple of weeks or are not focused on monetary policy. The domestic data calendar is highlighted by August GDP (Thursday) with the BRC-KPMG Shop Sales Monitor due for release tonight. Early views we have heard from clients on the Budget suggest expectations are for a rather subdued event with modest tax rises to offset modest spending with a reduction in the headroom. Any headlines changing this view could be market moving.
• Looking at the MPC member speeches in more detail, we have already heard from Mann this afternoon. She maintained her hawkish stance (as expected given her recent hawkish dissents). Governor Bailey is due to travel to Asia this week and participate in a roundtable on regulation on Thursday (9:00BST), a fireside chat on Friday (3:00BST) and appear on a panel on Saturday (7:45BST) on digital finance. The fireside chat is the most natural time for him to make monpol comments – but we think it unlikely for him to change his rhetoric. We continue to think he’s the most likely member to join the hawks in voting for a 25bp hike in November if energy prices remain elevated. (For more see the PDF - link above).

An Austrian National Bank publication, released today, draws an arguably dovish-leaning conclusion that "elevated services inflation largely reflects a relative-price adjustment following the exceptional shocks of recent years. This adjustment is primarily driven by real economic forces such as sectoral productivity growth, demand patterns and the uneven propagation of supply shocks, which are largely outside the control of monetary policy".

• Instead, "the role of monetary policy is to ensure that this adjustment remains consistent with price stability. Therefore, services inflation can remain above 2% for some time while headline inflation is close to the 2% target, provided that elevated services inflation does not develop into a broader, self-sustaining inflation process."
• Full policy brief here.