Bonds: Scope for BoE easing unchanged after employment report

These were the movements in the yields of the most widely-followed 10-year sovereign bonds:

US: 1.549 (-3bp)
UK: 0.56% (-2bp)
Germany: -0.05% (-2bp)
France: 0.17% (-3bp)
Spain: 0.97% (-1bp)
Italy: 1.11% (+0bp)
Portugal: 2.87% (+3bp)
Greece: 8,1% (-5bp)
Japan: -0.07% (+2bp)

Gilts recovered some of the previous day's losses as markets reacted to a relatively dovish set of minutes from the US central bank's last policy meeting.

Not even the release of a better-than-expected employment report for the three months to June moved investors, although most economists appeared to expect weakness to eventually show up in the data following the referendum vote.

Significantly, the indicators included in the report referencing the month of July (after the Brexit vote) pointed to better underlying conditions than some had feared. The unemployment claim count in fact fell, instead of rising, and the number of vacancies did not shrink as much as some had been expecting.

"We think the vote to leave will result in the unemployment rate drifting up over the coming quarters. This increase in labour market slack should contain any further rises in earnings growth and keep domestic cost pressures in check.

"Accordingly, the MPC should be able to follow through with more monetary easing in order to support the economy, without worrying about stoking domestic inflationary pressures too much. We expect a further cut in Bank Rate from 0.25% to 0.10% in November," Scott Bowman, UK economist at Capital Economics wrote in a research report sent to clients.

In parallel, policy-makers at the US Federal Reserve were divided in July about what their next step should be, with some focusing on labour market gauges which were pointing towards so-called full-employment and others preferring to wait given what they said were benign inflation conditions, the minutes of their last rate-setting meeting showed.

To take note of, before the release of Wednesday's minutes St.Louis Fed chief James Bullard said his preference was for waiting for evidence of an economic rebound before deciding on anotehr interest rate hike.

"I think you would want to see at least modest rebound in growth or be confident that one was coming," Bullard said.

"I like to move on good news."

Yields on longer-dated Treasuries retreated after the minutes of the 26-27 July meeting were published.

The yield on the benchmark 10-year US Treasury note was down by two basis points as of 20:50 BST after having hit an intraday high at 1.5866%.

"Several [FOMC members] suggested that the committee would likely have ample time to react if inflation rose more quickly than they currently anticipated, and they preferred to defer another increase in the federal funds rate until they were more confident that inflation was moving closer to 2 percent on a sustained basis," the minutes stated.

“Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity."

Commenting on the content of the minutes, Michael Gapen and Rob Martin at Barclays Research said: "If the August employment report, scheduled for release on September 2 (after the Economic Policy Symposium at Jackson Hole), is solid, then we expect the Fed to raise rates at its September meeting.

"That said, the concerns in some corners of the committee about the inflation outlook may support a shift in the reaction function away from observed labor market progress toward actual progress on inflation. Should this policy shift take place, then the next rate increase is likely to be deferred to December, if not further into 2017."