UK test in bond market
The bond rally in global markets is expected to be tested this week with UK CPI data.
The softening in inflation in the world’s largest economies, especially in the USA, accelerated the global bond rally.
Bloomberg Global Government Bonds Cumulative Return Index, which tracks government bonds globally, had its best month this year. However, this rally will be tested by UK inflation data on Wednesday this week.
In the UK, the headline CPI is expected to fall to 2.1 percent in April, very close to the Bank of England (BOE) target. However, according to many analysts, this realization, which may be announced above expectations, may cast doubt on the pricing that the BOE will cut interest rates in June at the earliest.
RBC BlueBay Asset Management Strategist Mark Dowding said: “The CPI to be announced in the UK this week will be important. We see the risk that UK inflation will fall less than many hope. “This situation may push the enthusiasm for interest rate cuts further into the background,” he commented.
“We don’t have good evidence that inflation expectations are not anchored in the UK, but if there is a risk of them not being anchored anywhere, it will be the UK,” Bank of America strategist Ralf Preusser said. Preusser suggests taking an investment position towards UK real interest rates versus France on the grounds that the Eurozone economy faces lower inflationary risks.
According to the latest swap pricing, there is a 50 percent chance that the BOE will cut interest rates by 25 basis points next month. While the Fed is expected to cut interest rates for the first time in September with a 75 percent probability, it is almost certain that the ECB will cut interest rates in June.