EUROPEAN FIXED INCOME: Bonds battered by a hawkish melting pot of Bullard, German PPI & Schnabel; Fed’s Bowman & Barkin loom

Analysis details (10:35)

• Core benchmarks are under marked pressure as the session began with and was hit by more hawkish events. At first, the handover from US/APAC was already on the hawkish-side of things following remarks from Fed’s Bullard and then a subsequent lifting of Goldman Sachs peak FFR call to 5.25-5.50%; a figure that is in-line with Bullard that this terminal view is “appropriate”. As such, core benchmarks were in the red with yields modestly firmer. Thereafter, the morning’s January German PPI release was hotter-than-expected, though did ease from the prior, and sparked around 20 ticks of downside in Bunds to a test of 134.00 to the downside. Following the data, and most pertinently from a European perspective, an interview with ECB’s Schnabel was released via Bloomberg in which the Executive Board member was overtly hawkish (click here for a recap). In the wake of this, Bund Mar’23 fell to a session trough of 133.67 and markets more broadly were impacted.


• Technically, the Bund has taken out the vast majority of potential support levels with little by way of resistance aside from full/round point marks until the 132.60 YTD low which printed on January 2nd. From a yield perspective, the German 10yr is comfortably above 2.50% on the session, though the move fizzled out on a test of the December 30th and January 2nd double top of 2.56%.


• While the move is most notable in core EGBs, the periphery is also feeling the weight of Bullard/PPI/Schnabel, as BTPs are down to a 112.51 trough from an initial 113.40+ level; similarly to Bunds, there is little by way of support until the 9th January low at 112.33 and thereafter full/half point marks before levels sub-111.00 come into play. Interestingly, the BTP-Bund yield spread has edged higher by around 5bp to near 190bp, the widest the spread has been in several weeks; a move spurred mainly by Schnabel emphasising that the pace of QT could increase and weaker policy transmission may necessitate more forceful action ahead.


• Leaving the EZ, Gilts are dented to a similar degree as core-EGB peers with the above factoring and also a marginal hawkish repricing occurring following strong January retail data for the UK. Specifically, the chance of a 25bp hike in March lifted back above 70% from the high-60s area that has been in-play since the month’s employment/wage metrics earlier in the week.


• Finally, USTs slump as Bullard continues to weigh and the aforementioned EZ/UK dynamics adding to the hawkish melting pot. As it stands, USTs are holding at the lower-end of 111.08 to 111.24 parameters with yields elevated across the board though the curve is incrementally flatter given the short-end implications of Fed speak and the subsequent GS call. For the session ahead, Fed’s Bowman and Barkin are due; voter Bowman is of particular note as she hasn’t spoken following this week’s hot US data and her commentary on Monday added little.

17 Feb 2023 - 10:35- Research Sheet- Source: Newsquawk