EUROPEAN FIXED UPDATE: Benchmarks pullback but remain above Monday's lows as we await tariff updates

USTs: -4+ ticks, 108-26

• Essentially flat. Has a very mild bearish bias but this is minimal in nature with USTs at the mid-point of a slim 108-23 to 109-00 band; one which is entirely within Monday’s much more expansive 108-21+ to 109-15+ parameters.


• The session’s main bout of action came as the US tariffs on China came into force at 05:00GMT, at which point China almost immediately retaliated with measures of its own on the US and an investigation into Alphabet’s Google. Amidst this, USTs lifted by around six ticks to print the above session high.


• Since, newsflow has been a little light as we wait to see what Trump’s reaction to China’s retaliation is and if this will spark a tit-for-tat war; as a reminder, Trump guided us to a conversation likely taking place between the US and China in the very near term. On the China retaliation, the WSJ has reported that China is still hoping to be able to negotiate a truce with the US.


• Tariffs aside, the docket ahead has Fed’s Bostic and Daly scheduled, both 2027 voters. Bostic on Monday said he prefers to wait before cutting interest rates further as he assesses the impact of last year's cuts on the economy while Daly at the start of the year warned that inflation remained uncomfortably above target.


• Elsewhere, the data docket features Factory Orders, RCM/TIPP and JOTLS, the latter comes ahead of the NFP print on Friday though they cover December and January respectively.

Bunds: -34 ticks, 132.95

• Pressured, as the region awaits any update on potential US tariffs on the EU. As a reminder, Trump described the EU as an “atrocity” on trade in remarks over the weekend.


• Politico writes that pressure is increasing in the EU to harden their stance towards China in an attempt to garner favour from Trump to keep the alliance and avoid tariffs. However, analysts highlight that the bloc’s divergence means there is essentially no chance of passing measures strong enough for Trump’s taste.


• Furthermore, the debate over what measures to implement could further fracture the bloc and spark negative economic consequences of China was to retaliate.


• Bunds are off lows and holding just under 133.00 in a 132.72-133.16 band. Aside from conversation around the above and earnings, newsflow for the bloc has been light and the docket ahead is sparse.

Gilts: -50 ticks, 92.69

• Also softer and currently marginally underperforming with the potential inflationary-impacts of Trump’s already announced tariffs and the possibility of measures on the EU and/or the UK lifting yields in the region.


• At a 92.67 low, with support below at Monday’s 92.53 trough. A move below this would bring into play Friday’s 92.47 and then Thursday’s 92.23 base.


• Additionally, and another possible driver of yields, are reports in Politico that the Treasury and OBR have been having some heated conversations over how much of the government's growth policies can be “scored” (i.e. accounted for in OBR forecasts) in the 26th March update. The OBR this week is expected to provide Reeves with the first of five initial projections on the March forecasts.


• Specifically, Politico’s Bloom says to watch if planning reform (i.e. around train stations and the Oxford-Cambridge hub) are included while Sky’s Coates doesn't expect welfare reforms to make the cut.


• A debate that has featured heavily in press/discussions on the Chancellor’s growth speech last week, as while the measures announced are pro-growth and may improve sentiment, they are unlikely to drive any real growth benefits for a few years at least and as such it remains to be seen what impact they will have on the OBR’s headroom forecast.


• Finally, though not necessarily a market mover, domestic politics is in focus as we count down to the May local elections after a poll showed the Reform Party beating Labour and the Conservatives to top position among respondents.

OATs: -19 ticks, 124.05

• PM Bayrou triggered Article 49.3 twice for two components of the budget on Monday, the debate on it was brief and immediately, but unsurprisingly, overshadowed by La France Insoumise (LFI) and the Democratic and Republican (GDR) each tabling no-confidence (censure) motions against Bayrou’s government.


• The motions from GDR and LFI are unlikely to pass, as the Socialist Party (PS) has stated that it will not be supporting censure; however, their support is for the budget not Bayrou, even given the various concessions Bayrou added to the “Secu”.


• Note, the 49.3 motions only apply to the first half of the budget so even if Bayrou survives the vote (likely on Wednesday), he still has to use it at least once more; opening the door to another censure motion.


• Monday’s action caused the OAT-Bund 10yr yield spread to hit a 76.5bps peak. Thus far today, action has been more muted and in proximity to the 70bps mark as we await details on the timing of the vote and then if censure can be expected when Article 49.3 is all but certainly used once again later in the week.

04 Feb 2025 - 09:55- Fixed IncomeEU Research- Source: Newsquawk