BoE widens scope of its Gilt purchases to include linkers

Chris Scicluna
Emily Nicol

BoE to include linkers in its Gilt purchases, spooked by UK bond-market “dysfunction”
Having yesterday signalled a willingness to increase significantly the size of its long-dated Gilt purchases this week, and also announced a temporary expanded collateral repo facility (TECRF) to try to ease further the liquidity squeeze on LDI funds, this morning the BoE announced further steps to try to ease the sell-off in the UK bond market. Explicitly noting “Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics”, the BoE acknowledged that developments still “pose a material risk to UK financial stability”. So, it has widened further the scope of the daily gilt purchase operations to include index-linked gilts. And, having yesterday stated that it would be ready to buy up to £10bn of gilts each day this week, this morning it reaffirmed that total but stated that up to half of it would be allocated to linkers, with the other half allocated to conventional long-dated bonds. Meanwhile, the BoE’s concerns about financial stability further impeded its plans to normalise monetary policy, as it suspended this week’s planned sales of its corporate bond holdings. Separately, BoE Governor Bailey and Deputy Governor Cunliffe are due to speak in the US at pre-arranged events later today.

Drop in UK unemployment reflects increased inactivity, but wage growth remains well above BoE comfort zone
Today’s labour market data reported a further tightening over the summer, with the unemployment rate down to 3.5% in the three months to August, marking a drop of 0.3ppt on the quarter and the lowest since February 1974. But this decline was somewhat misleading, as it reflected another rise in inactivity, in part due to increased numbers of workers considered to suffer long-term sickness. And the number of people in employment fell 109k in the three months to August, the most since February 2021, to leave the employment rate 0.3ppt down from the previous three-month period and 1ppt lower than before the pandemic. So, despite the largest quarterly decline in vacancies for two years, the number of unemployed people per vacancy fell to a record-low 0.9%, further illustrating the tightness in the market. Against this backdrop, growth in nominal wages accelerated in the three months to August, by 0.5ppt to 6.0%3M/Y, with regular wages up 5.4%3M/Y, the fastest growth for a year, to remain well above the BoE’s comfort zone. Of course, given high inflation, real wage growth remained firmly in negative territory, with total pay down 2.4%3M/Y and regular earnings down 2.9%3M/Y.

Positive BRC retail sales data likely masks online downtrend in UK high street spending in September
At face value, the BRC retail sales survey suggested that spending on the UK high street was firm at the end of Q3, with headline like-for-like growth up 1.3ppts to 1.8%Y/Y, the best since February. However, these nominal figures are flattered by high rates of inflation, as well as base effects (sales in September 2021 were particularly weak). So, we think these figures are consistent with a drop in real seasonally adjusted sales on the UK high street at the end of Q3. To some extent, that will reflect the impact of the extra national holiday for the Queen’s funeral, which will have likely resulted in a significant shift to spending online. But, overall, total retail sales are likely to have remained weak in September and dropped over Q3 as a whole.

Japanese economy watchers less pessimistic about household demand, but corporate sector still face challenges
Japanese economy watchers were somewhat less pessimistic about current conditions at the end of the third quarter, with the headline DI rising 2.9pts to 48.4 in September, a three-month high. But this was nevertheless still below the key 50 ‘improving’ level. And over the third quarter as a whole, the DI was 6½pts lower than the Q2 average. The improvement reflected a surge in household-related demand for food and services following the slump earlier in the summer when Covid-19 infections jumped. But corporate-related demand fell back in September, with the respective manufacturing DI back down to July’s near-two-year low and the non-manufacturing DI softer too. Moreover, the outlook for both corporate- and household-related demand remains clouded by high prices and increasing risks of global recession.

Italian IP due and ECB Chief Economist Lane to speak publicly
Ahead of Wednesday’s euro area IP release, today will bring equivalent production numbers from Italy. Output is expected to have slipped back slightly in August (-0.1%M/M) following only a modest rebound (0.4%M/M) in July. Separately, ECB Chief Economist Lane will give a keynote speech on ‘Financing accelerated transitions’ at a conference on ‘New directions for Economic Policy’ in New York. Given the subject matter, it remains to be seen if he’ll give any clues to what he’ll recommend monetary policy-wise at the next ECB monetary policy meeting at the end of the month.

US small business survey likely to see optimism index still close to June’s 9-year low
A relatively quiet day for US economic releases brings the NFIB small business survey for September. While this might well see a modest improvement in conditions as price pressures ease slightly, the headline optimism index is still likely to remain close to June’s near-9-year low. 

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