EUROPEAN FIXED UPDATE: Brief haven allure gives way to energy-induced inflation concern, bearish bias added to by the improving equity tone

USTs: -4 ticks, 110-27+

• Benchmarks began the week with gains, gapping higher from Friday’s 110-31+ close by a handful of ticks and then extended slightly further to a 111-04 peak, a tick higher than Friday’s best.


• Upside a function of the benchmarks trading as a haven, given the significant geopolitical escalation of Trump striking Iranian nuclear sites; details on the feed/see Commodities.


• However, the upside proved limited as while Iran has spoken about extensive retaliation they are yet to do anything particularly significant. The nation continues to strike Israel with missiles, and while Iran’s parliament has approved closing the Strait of Hormuz, the security body is yet to order it. Furthermore, no reported action against US-specific assets, though Iran says all options are on the table.


• The pullback is also a function of the benchmarks reacting to the spike in energy prices, and while crude has pared the initial upside and is now in the red, gas contracts remain firmer, though off highs. Once again, elevated energy prices potentially weigh on fixed given the inflation readacross.


• Geopols aside, the docket today is busy with several Fed speakers due and Flash PMIs for June; the latter expected to fall slightly from the prior.

Bunds: -28 ticks, 130.65

• The same narrative as above, for the first part of the session at least.


• Bunds got as high as 130.92 overnight, stopping shy of the figure and by extension Friday’s 131.33 best. The limited move and subsequent modest pressure appear, primarily, to be a function of the inflationary implications of higher energy prices.


• The morning’s docket has, Middle East aside, been headline by Flash PMIs. The French figures came in softer than expected across the board, sparking modest upside. Thereafter, Germany’s figures printed firmer than forecast and weighed slightly on EGBs. Finally, the EZ figure was softer than forecast, but with no real follow-through seen.


• HCOB wrote that the “price environment remains tense”, and pertinently highlights that recent sharp rises in energy prices have “only been partially reflected in the surveys”. However, they caveat the implications by concluding "Overall, however, the ECB can remain relatively calm, as the strong euro and the deflationary effect of US tariffs argue against a short-term rise in inflation.”.


• Overall, Bunds at the mid-point of a 130.47-92 band, under modest pressure given mentioned energy action; Dutch TTF printed a EUR 42.44/MWh high.


• Ahead, we now look for insight from ECB’s Lagarde, text expected, on the current situation.

Gilts: -22 ticks, 92.47

• As above, lifted to a 92.55 peak just after opening but has been drifting since in-fitting with peers. Went as low as 92.25, moved lower on the German Flash PMIs, but is now holding around 10 ticks shy of the aforementioned peak, but still in the red vs Friday’s 92.69 close.


• Geopolitics and the inflationary implications of the energy move aside, focus on PMIs. The UK Flash figures came in mixed, with Manufacturing and Composite better than forecast, though the Services figure was as expected. No real move to the data.


• Within the release, S&P wrote that the “picture of near-stalled growth, falling employment and lower inflation opens the door for the Bank of England to cut rates again at its next policy meeting in August”. As it stands, the next cut is not priced until November (-35bps) with August having around a 55% chance of a move and September around a 93% implied probability.

23 Jun 2025 - 10:05- ForexEU Research- Source: Newsquawk