EUROPEAN FIXED UPDATE: AI updates drive haven allure while Central Bank meetings move into focus

USTs: +19 ticks, 109-02

• A firmer start to the session with AI-driven risk-off trade creating a haven-allure for fixed income (see equities for AI-specifics).


• Thus far, this action has been sufficient to drive USTs above 109-00 to a 109-02 peak, within reach of the January 109-05+ high with a gap thereafter until 110-00 and levels from late last year.


• The docket ahead is light from a data perspective, though the FOMC on Wednesday means supply is frontloaded with both the 2yr & 5yr auctions occurring today. It remains to be seen if any concession will emerge into this, or if the risk tone will remain in the driving seat.


• For the week as a whole the FOMC is the focus point, where a hold is expected and markets ascribe less than a 1% chance of a cut. As such, the focus will be on the trajectory for the year as a whole with c. 48bps of easing currently implied.


• On the FOMC, Generali’s Zanghieri writes that the statement and press conference will perhaps be a bit more dovish than expected, given the better pricing news from recent CPI prints.

Bunds: +60 ticks, 131.85

• As it stands, Bunds are holding just below the 132.00 mark having hit a 132.06 peak just after Ifo and the opening of the US pre-market, resistance at 132.15 and 132.22 from last Tuesday and Wednesday respectively.


• In-fitting with USTs into the morning’s Ifo release. A release which saw Business Climate and Current Conditions print firmer than expected, however Expectations slipped from the prior as expected.


• A release which came alongside some modest further upside in EGBs, with Bunds testing 132.00 to the upside following the data; note, the benchmark was already posting gains in excess of 50 ticks and the Ifo release came alongside the opening of US pre-market trade which saw NVIDIA post downside in excess of 8%.


• The Ifo Chairman said Germany’s economy is not progressing and is not benefitting from improved global economic conditions. Lines which chime with the downgraded 2025 growth assessment from Germany itself last week but come in contrast to Flash PMIs which saw a “much better outlook on future activity”.


• Overall, the data is dovish given the stagnation of the German economy. However, it remains to be seen what this will mean for the ECB with the PMIs and Ifo pointing to Services price pressures, a development which could see a stagflationary environment for the blocs largest economy.


• President Lagarde spoke this morning but the remarks were pre-recorded and not pertinent to current policy. Ahead of Thursday’s announcement a cut is fully priced (-27bps implied). From the statement/press conference we are attentive to any discussion around the magnitude of the move and then the pace/frequency of easing for the year with markets currently pricing around 92bps of easing.

Gilts: +45 ticks, 92.38

• Gapped higher by 41 ticks on the AI-driven action, to a 92.32 open before extending and hitting a 92.60 peak post-Ifo and the US pre-market open.


• UK specifics not market moving thus far, lots of press attention on various initiatives the gov’t/Treasury is considering to drive growth with these being subject to a mixed reception depending on the outlet, as you would expect.


• Reports which come ahead of a speech from Chancellor Reeves on Wednesday, in which she is expected to announce various measures around infrastructure and planning reforms to drive UK growth. Into this, the bullish fixed income (if it remains) will be welcome with UK yields returning to their lowest levels YTD.


• Docket ahead is light with attention turning to next week’s BoE but before that for any relevant insight from the Fed and/or ECB. For February’s BoE, markets price around an 85% chance of a cut with just under 70bps of easing seen in 2025 as a whole.


• Holding 10-15 ticks shy of the mentioned high, if this is returned to then we look to January’s 92.88 peak after which there is a bit of a gap until the 94.00 mark and levels from late-2024 above it.

27 Jan 2025 - 09:55- Fixed IncomeUS Research- Source: Newsquawk