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Cable, FTSE, and Gilt Yields Higher on Hot CPI

Tuesday, 12 December 2006 13:38:48 GMT  |  Terri Belkas, Currency Analyst

UK CPI (NOV) (9:30GMT; 4:30EST
                   MoM       YoY         Core YoY
Actual:        0.3%       2.7%            1.6%
Expected:   0.2%       2.6%            1.5%
Previous:    0.2%       2.4%            1.4%   

How Did the Markets React?

The release of CPI data today sent British markets reeling, as price growth accelerated faster than expected in November at a rate of 0.3%, bringing the annual figure to a decade high of 2.7%. The core measure of inflation jumped up to 1.6% on an annual basis, emphasizing broader price pressures in the UK economy. Additionally, RPI, the figure used to adjust payrolls in the UK, rose in line with expectations at 0.3%, while the annual rate jumped more than estimated to 3.9%. The gain will likely trigger concerns for hawkish central bankers that wage growth will increase the risks for inflation. Fixed income markets showed the most sustained reaction, as prices on 10-year gilts declined throughout the day. Meanwhile, FX and equity markets responded immediately to the data, but prices drifted aimlessly shortly after the release.

Bonds – German 10-Year Bunds

Prices on 10-year gilts declined immediately from 95.41 upon the release of hot inflation data, as traders priced in the potential of further monetary policy tightening by the Bank of England. Gilts gradually worked their way to a low of 95.21 later in the session and traded near that price for much of the day, leaving yields up to 4.603%.





FX – GBP/USD

Cable advanced more than 50 points on the release of stronger than estimated inflation data out of the UK, topping out at a session high of 1.9647. Following the Bank of England’s rate hike to 5.00% in November, some central bankers have remained concerned that wage pressures could create substantial upside risks to inflation. Those policy makers received some validation today, as RPI, the figure used to adjust payrolls, also picked up to an annual rate of 3.9%. Nevertheless, with a rift forming within the BOE monetary policy committee, more dovish members are likely to make the argument that the best decision will be to stay neutral for the time being. However, should the markets see more significant price pressures forming, traders are likely to price in the potential of another rate hike in Q1 2007.





Equities – FTSE 100 Index

UK stocks fell as news of stronger-than-expected UK inflation raised the prospects of a 2007 interest rate rise. The FTSE 100 index was down 16.5 points, or 0.3 percent, to 6,143.3. Generally, equity markets do not take kindly to benchmark hikes, as higher rates have the potential to curb domestic demand and raise borrowing costs for companies, subsequently leading to weaker business investment. Standard Chartered, the emerging markets-focused bank, fell 1.5 percent to 14.73 British pounds after mortgage income was hit by rising interest rates and strong competition. Meanwhile, oil companies came under pressure as crude prices fell 1 percent overnight. Royal Dutch Shell was down 1.2 percent to 18.03 British pounds. On the upside, merger speculation helped ICI gain 2.2 percent to 432½p on rumor that Akzo Nobel of Holland could be interested in the specialty chemicals maker.

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