Bloomberg News

Pound Weakens on Bets PMI Data Insufficient to Stop Further QE

October 03, 2011

Oct. 3 (Bloomberg) -- The pound weakened against the dollar for a second day and gilts rallied as traders judged a surprise expansion of U.K. manufacturing as insufficient to keep the Bank of England from providing further stimulus for the economy.

Sterling depreciated against 11 of its 16 major peers. A gauge of manufacturing rose to 51.1 from 49.4 in August, a survey by Markit Economics and the Chartered Institute of Purchasing and Supply showed. That was higher than the 48.5 median forecast in a Bloomberg survey and above the 50 level that indicates expansion. Gilts rose, pushing 30-year yields down to a record, after Standard & Poor’s affirmed the U.K.’s AAA credit rating and said the outlook is stable.

“Certain bits of data might come out a bit more positive, but the overall outlook for the U.K. economy isn’t very good,” said Shant Movsesian, a strategist in London at 4Cast Ltd., a research company that counts central banks among its customers. “More quantitative easing is the only way forward. Sterling has already taken a big hit, but pound-dollar can still go lower.”

The pound declined 0.8 percent to $1.5464 at 4:26 p.m. in London, and slid 1.3 percent to 118.57 yen. Sterling was little changed at 85.78 pence per euro.

The yield on the 10-year gilt dropped eight basis points to 2.35 percent. The 3.75 percent security due September 2021 rose 0.735, or 7.35 pounds per 1,000-pound face amount, to 112.32. Two-year note yields were little changed at 0.58 percent.

QE, Inflation

The 30-year bond due December 2040 surged, pushing the yield down 14 basis points to 3.417 percent, the least since March 1996 when Bloomberg began compiling the data, before settling 12 basis points lower at 3.43 percent.

It is becoming “increasingly probable” that another round of government-bond purchases may be needed to boost the economy, Bank of England policy makers said in the minutes of its Sept. 8 policy meeting. The central bank has the tools available to provide additional “monetary loosening” should the economy continue to deteriorate, Chief Economist Spencer Dale said in an interview with the Daily Mail published on Sept. 29. At the same time, accelerating inflation means a resumption is not a “no brainer,” he said.

Inflation in the U.K. increased in August, with consumer prices increasing 4.5 percent from a year earlier, compared with 4.4 percent in July, the Office for National Statistics said on Sept. 13.

‘Wealthy, Open’

S&P affirmed the U.K.’s top credit rating saying the country has a “wealthy, open, and diversified economy, supported by a well-established political system and macroeconomic policy framework, which can react quickly to economic challenges,” according to a statement released today.

The stable outlook on the nation’s debt rating reflects S&Ps expectation that the government will implement the bulk of its fiscal austerity program, the statement added.

U.K. Chancellor of the Exchequer George Osborne, speaking today to the Conservative Party’s annual conference in Manchester, pledged to freeze local taxes for a second year as the economy falters amid the deepest public spending cuts since World War II. Osborne also said he would continue with his deficit-reduction plan, saying low interest rates are the best way to generate growth.

The central bank’s next decision on interest rates and its bond-purchase program will be on Oct. 6. Policy makers will keep the benchmark rate at an all-time low of 0.5 percent, according to all 53 economists surveyed by Bloomberg. Nine of 30 economists surveyed by Bloomberg predict the Bank of England will increase its asset-purchase target by at least 50 billion pounds ($78 billion) from 200 billion pounds, a separate survey showed.

‘Buying Into Gilts’

“QE is coming back, possibly this week but almost certainly by next month,” said John Wraith, a fixed-income strategist at Bank of America Corp.’s Merrill Lynch unit in London. “With QE highly likely people are buying into gilts. The more fundamental flow is also coming from risk aversion to do with the euro-zone debt crisis. People want a safe place to put their money and gilts are a beneficiary of that trade.”

Sterling fell 2.9 percent against the dollar in the third quarter as signs of sputtering economic growth and prospects for more QE curbed weighed on the currency. Gilts returned 8.9 percent in the period, the best quarterly performance since the fourth quarter of 2008 following the collapse of Lehman Brothers Holdings Inc., according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg.

U.K. house prices fell for a fifth month in September and the pace of decline may increase in coming months, property researcher Hometrack Ltd. said in a report today. The average cost of a home slipped 0.1 percent from August and was down 3.5 percent from a year earlier, the company said.

--Editors: Matthew Brown, Mark McCord

To contact the reporter on this story: Garth Theunissen in London at gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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