UK - Post CPI thoughts

It's hard to suggest the UK CPI figures provided a surprise for the BoE today with both headline (3.4%) and Services inflation (4.7%) in line with the BoE May MPR forecasts.

Goods inflation perked up and food inflation rising is a potential risk down the line. Services is still annualising (SA) at 4.5% over the past three months and we need to see further declines ahead to provide the dovish surprise that could convince more of the MPC to join the doves. The one chart that gives hope to a continued slowdown in Services comes from the housing sector with leading indicators for Rent (RICs, Homelet) suggesting big downside numbers in the months ahead (the ONS is just very slow at capturing it as they take an average new and stock rents).

 This CPI had a high bar for a dovish surprise as so many economists had pencilled in the error correction of VED and the post Easter effect drop from transport prices.

 It is the labour market news that has provided the recent dovish surprise (chart at the end showing the substantial PAYE job losses) and could prove to be the justification for a dovish shift in voting/language tomorrow at the June MPC.

 My expectations of a significant change in language are however low for now as this MPC will need bigger surprises in the data to change its use of the word “gradual.”

 We need to see downsides in PMIs, perhaps as soon as next week (with front loading of exports likely to be slowing down) to spark a bigger reaction among European central bankers.

 Jord

 GBP trades:

• [STIRT] Receive SONIA Dec25 (SFIZ5). Entry: 3.71%; Target: 3.50% by end Aug; Stop: 3.81%.
• [Curve] Long UK-US 2s5s box steepener; Entry: 10bps; Target: 30bps by end Sep; Stop: 0bps.
• [Rate spreads] 10yr UST-Gilt spread widener. Entry: -19bps; Target: 30bp by end Dec; Stop: -35bps.