EUROPEAN FIXED INCOME UPDATE: Bunds a touch higher as tariff threat concerns weighs on the EZ outlook

USTs: -1.5 ticks; 109.06

• Focus for the US at the start of the week has been on the fallout from Friday's NFP report which saw a softer-than-expected headline print but was accompanied by a sizeable two-month net revision lower, unexpected decline in the unemployment rate and firmer-than-expected wages. Accordingly, markets now expect just 36bps of cuts last year vs. 42bps pre-NFP.


• Markets are also digesting weekend comments from US President Trump that he will announce 25% tariffs on all steel and aluminium coming into the US on Monday and unveil reciprocal tariffs on Tuesday or Wednesday which will go into effect almost immediately. Details on reciprocal tariffs are light at this stage, however, trade disputes remain framed in the context of being inflationary.


• On the fiscal front, US House Speaker Johnson said he will push the ‘one big bill’ strategy for passing US President Trump’s tax cut agenda and Republicans will find offsets to pay for Trump’s tax cut plans, according to a Fox interview.


• Today's docket sees the release of US employment trends and NY SCE. Greater attention lies on CPI and Fed Chair Powell's Testimony later this week.


• Mar'25 UST contract sits towards the lower end of Friday's 109.01-110.00 range; the upper bound of which was the initial spike higher seen following the softer-than-expected NFP print. Strategists continue to see 4.5% as the focal point for the US 10yr yield with focus on the downside after peaking at 4.8% at the beginning of the year; the recent low from 5th Feb sits @ 4.40%. Currently, there is no steepening/flattening bias on the US curve.

Bunds: +11 ticks; 133.36

• Bunds marginally higher in what has been a recent run of consolidation for German paper. Macro focus for the broader EZ-region has been on the implications of Trump tariff threats over the weekend. The bloc will likely be impacted by 25% tariffs on all steel and aluminium coming into the US, whilst it remains to be seen whether expected reciprocal tariffs on Tuesday or Wednesday will focus on the region.


• If the EU is finally dragged into the trade war in a material way, the market will likely focus on the negative growth implications for the region and could see markets ramp up bets that currently look for circa 87bps of cuts by year-end. That being said, European Nat Gas rising to a two-year peak acts as a complicating factor from an inflation standpoint.


• For Bunds specifically, Germany's election front-runner Merz said he was open to reforming Germany's borrowing rules amid pressure regarding defence spending financing, according to the FT.


• Today's EZ-docket is light in terms of data, however, ECB President Lagarde is due to participate in a plenary debate on ECB Annual Report 2023 at 14:00GMT, whilst Germany's Schnabel is set to speak @ 17:00GMT.


• Mar'25 Bunds are currently tucked within Friday's 132.95-133.69 range with the corresponding 10-year yield towards the middle of the 2.35-2.40% range.

Gilts: +13 ticks; 93.33

• UK paper a touch higher after an indecisive session on Friday. Global trade is the main macro focus today for global markets, however, it remains to be seen how much of a negative this will be for the UK given that rhetoric towards the UK from the Trump administration has been tempered on account of Trump's relationship with PM Starmer and the lack of goods trade imbalances between the two nations.


• Closer to home in the UK, BoE's Mann is due to speak today at 17:30GMT and markets will be parsing her words to get more colour on her drastic u-turn on rates which saw her back a 50bps cut last week. In terms of what we do know, the minutes of the February decision showed that one MPC member (assumed to be Mann), backed a larger cut on account of wanting to show an "activist approach...even as monetary policy would need to remain restrictive for some time to anchor inflation expectations”.


• Elsewhere, this week's UK data highlight comes on Thursday with December/Q4 GDP metrics due. Investec looks for a consensus print of 0.1% which would translate “into zero GDP growth on the quarter, avoiding contraction only by a whisker”.


• Mar'25 Gilts are currently tucked within Friday's 92.94-93.87 range with the corresponding 10-year yield within Friday's 4.436-4.510% bounds.

10 Feb 2025 - 09:45- Fixed IncomeData- Source: Newsquawk