EUROPEAN FIXED INCOME: FOMC underpins benchmarks going into the BoE & ECB

Analysis details (10:40)

• Benchmarks remain underpinned and in proximity to the post-FOMC/Powell peak. Newsflow since has been relatively light aside from the first few central bank decisions of Super Thursday with the SNB & Norges Bank announcements interesting, but not markedly shifting the broader macro dial. Ahead, we have the BoE and ECB; newsquawk previews available.


• Currently, Bunds are holding just below the 137.00 mark having trimmed incrementally from the initial 137.28 high as newsflow slows slightly and attention turns to Lagarde. Even given this, Bunds remain around 50 ticks above Wednesday’s 136.52 peak with all moves higher now fresh March’24 contract peaks. From a yield perspective, the German 10yr has tested but not breached 2.00% to the downside (2.02% trough), with the yield at its lowest since March 2023 when the SVB/Credit Suisse banking crisis was in full swing. Technically, a breach of 2.00% brings the March 24th and 20th lows of 1.994% and 1.923% into play. Price action which has had a modest narrowing impact on the BTP-Bund yield spread, down to 170bp so far. For the ECB, focus is on any tweak to their bond operations though Schnabel, who heads such operations, said she was not concerned about the market impact of any tweak. Additionally, how Lagarde responds to market pricing and the Fed pivot will draw particularly scrutiny, particularly as markets are currently pricing in over 150bp of cumulative tightening for 2024.


• Leaving the EU, Gilts have similarly trimmed from a 101.69 best but still hang on to upside in excess of 100ticks, likely given recent relative underperformance in Gilts as market pricing for the BoE has been slightly more contained than that seen for peers. Specifically, Gilts gapped higher from Wednesday’s 100.07 close to 101.32 before extending to the current peak, as it stands we are holding just below the opening level but comfortably above yesterday’s final price. Action which has pushed the UK 10r yield below 3.70% and now has markets pricing around 115bp of 2024 easing i.e. four 25bp cuts priced and a 60% chance of another. A marked extension from the post-data 2024 pricing of circa. 95bp seen Wednesday morning. For the BoE, a hawkish-hold (6-3 split) is the consensus though Powell’s pivot and recent data prints could alter the voting narrative and may impact the degree to which the statement pushes back on market pricing. Reminder, today’s BoE does not include a formal press briefing from Bailey.


• Finally, USTs are comparably contained, given US-specific risk events have now passed, with upside of around 20 ticks having extended marginally above Wednesday’s best as participants await the aforementioned policy announcements and continue to reassess their calls after the dots/Powell endorsed dovish market pricing to a larger degree than expected.

14 Dec 2023 - 10:34- Fixed IncomeResearch Sheet- Source: Newsquawk