EUROPEAN FIXED UPDATE: Bearish action continues pre-BoE though JGBs remain afloat

Analysis details (10:45)

• In short, a continuation of Wednesday’s post-Fitch/Refunding price action with catalysts since somewhat light as we count down to the BoE. As such, EGBs and USTs are lower across the board and have dropped markedly below the prior sessions’ troughs. Note, JGBs buck the trend and are modestly firmer after another unscheduled BoJ purchase overnight, which came much later in the session than normal and is the second such operation since the YCC tweak.


• Unsurprisingly, Gilts are drawing the most focus as we await developments from Threadneedle St. Currently, the UK benchmark is down to 94.27 from a 94.52 base, given there is limited interim support touted attention will likely turn more to the 10yr yield which is currently up to 4.43%. For the BoE, market pricing has become increasingly hawkish this week. Though, this is seemingly a function of broader bearish action rather than a fresh UK driver. As a reminder, the full newsquawk preview is available but in short a 25bp hike is expected though the vote will undoubtably be subject to some dissent and possibly a three-way split featuring Mann, Ramsden and Broadbent on the hawkish side and Dhingra on the dovish-end of the spectrum. After the decision, attention turns to exactly what guidance the statement and thereafter what Bailey provides on the meetings ahead.


• Back to Bunds, the German benchmark is at the low-end of 13178-132.55 parameters, having dropped below Wednesday’s 132.22 trough early on. If the complex continues to grind lower, then there is relatively clean until the 131.00 mark itself before the 130.82 and 130.60/61 support marks from July 11th and 10th/7th respectively. Action which has arisen despite particularly poor German trade metrics, which add to the chorus of indications that Germany is stagnating or perhaps contracting once again. For reference, the morning’s PMIs point to a continued easing of the Services sector that has been propping up the bloc's economic performance. Most concerningly for policy makers, and perhaps a driver of the bearish price action, the German Services measure highlighted that “output price inflation even went back up in July.”


• Turning to the semi-core, issuance from Spain and France was ok overall, however a few of the lines were slightly softer than the prior outing even giving the comparably smaller amount offered. Though, given the traditional dip in demand during the summer months and as benchmarks continue to pullback sharply in-line with core counterparts, the results are not too surprising.


• Stateside, USTs are in-fitting with their EGB peers having moved below the post-refunding low of 110.15 to a current 110.09+ trough. Fundamentals to the US are particularly light and ahead post-BoE action is set to be dictated by ISM Services, Fed speak and IJC; though, the claims figures are outside of the NFP window.

03 Aug 2023 - 10:45- Fixed IncomeEconomic Commentary- Source: Newsquawk