From Societe Generale's Kit Juckes:
Crackerjack PMI in the UK
That was a crackerjack of a UK services PMI report. A jump to 56.9, up from 56.9 last month, which was itself a surprise to the market. Mark Carney, helicoptered in to help the MPC reinvigorate the economy, may find himself sitting on his hands for a while on monetary policy. A measure of the composite PMI is now above 55, compared to 48.7 for the Euro Zone and 53.4 in the US on our forecast for this afternoon.
The bullish case for the pound is pretty clear from the data. EUR/GBP, in the middle of a range in which it has been languishing, can now drift lower and the Swiss franc’s safe haven bid today provides a chance to get GBP/CHF longs on, too. We have been GBP bulls for a while, but there are bigger market implications for the Gilts and UK swaps. Last week I was offended by how much the short sterling strip had sold off, and wrote about that and receiving 2y/2y sterling relative to the US. These trades have worked nicely. It is time to replace them with something far longer on the curve.
Long-dated Gilts shine
You can get 3.44% in long-dated Treasuries, 3.2% in OATs and 2.4% in Bunds. But if you hurry, you can get over 3.5% at the long end of the UK curve, either in 2044s or even better, by going ‘all the way’ and buying the new 2068 gilt (3.51). The semi-annual vs annual comparison is unfair and the gilt actually yields a few bps less than the US Treasury, but signs of life in the UK economy ease fiscal concerns slightly, and the big contrast with the US is that the Fed has tilted its bond purchases to the long end of the curve. There is more danger of the Treasury curve steepening than there is in the UK, where duration-hunters will buy into any signs of rising yields. A steady grind of out-performance with UK long yields drifting below those in the US is likely over the coming weeks and months while the bulk of the front end move is over unless the UK eco-data deteriorate again.