EUROPEAN FIXED UPDATE: Bearish factors in focus but benchmarks remain well within Friday’s extremes

Analysis details (10:50)

• Core benchmarks are under pressure this morning with JGBs continuing their post-BoJ selling in APAC trade, which prompted Japan to step in with an unscheduled purchase in the 5-10yr bracket as yields continued to lift after the YYC language tweak. Action which has seemingly settled the complex, with JGBs incrementally firmer at the top-end of 146.75-146.91 parameters. Throughout the European morning, Gilts have been the incremental laggard, not too affected by their own data points but with attention turning almost entirely to Thursday’s BoE policy announcement where a 25bp hike is consensus and while Dhingra will undoubtedly continue her dovish dissent, given last months 50bp a three-way vote split remains a possibility. Currently, Gilts reside at the 95.47 trough which is 36 ticks above Friday’s base.


• Since, price action has been more limited with newsflow light throughout much of the morning in a quiet start to another packed week. The morning’s main scheduled event was the numerous EZ metrics. Most pertinently, Flash HICP saw the headline cool as expected while the two core measures once again surprised to the upside incrementally. Nonetheless, market reaction was limited and shortlived with participants attentive to another Flash reading before the 14th September gathering; currently, market pricing continues to ascribe around a 25-20% chance of a 25bp hike at that meeting.


• For EGBs specifically, Bunds reside towards the lower-end of 132.45-132.82 parameters, a low which is yet to test a touted support band between 132.34-49, with little support seen thereafter until the 131.81 Friday low. Conversely, if core counterparts find a bid as we enter the US session, then resistance is touted at 132.98 and 133.08 before Friday’s 133.34 best.


• In terms of the periphery, BTPs and Bonos are relatively in-line with their core counterparts but magnitudes as is often the case slightly more contained. For Italy, investors are perhaps cognisant of the latest commentary from Italian officials, confirming PM Meloni's stance that they are looking to exit China's Belt & Road and are examining ways to do so without harming relations. Elsewhere, the latest on the political front in Spain has seen incumbent PM Sanchez lose another seat to opposition PP in an area recount, though this does not have any real impact on the parliamentary arithmetic ahead of the August 14th return to parliament.


• Finally, USTs are following suit to the above and are on the backfoot with newsflow very limited but the docket ahead features Fed’s 2023 voter Goolsbee, the SLOOS and Treasury estimates ahead of Wednesday’s quarterly refunding. As a reminder, Goolsbee generally resides on the dovish side and his commentary comes after hawkish-Kashkari said he is not sure when the Fed will be done lifting rates, but acknowledged good progress and that they “may or may not” hike in September.

31 Jul 2023 - 10:35- Fixed IncomeResearch Sheet- Source: Newsquawk