EUROPEAN FIXED UPDATE: Core curtailed as inflation increases with Gilts lagging post-ONS

Analysis details (10:50)

• Core benchmarks experienced a fairly contained start to the session, though this proved to be shortlived and pronounced action has been seen following the French and Italian CPIH numbers and the overall EZ flash reading for August.


• Bunds and EGBs broadly were steady going into the French metric but saw upside of around 40 ticks to a test of the 149.00 mark and printing a session peak a tick shy. However, this was relatively short-lived as an early release of the Italian inflation numbers, which were significantly above exp./prev., saw a pronounced pullback from mid-148.00 region to a 147.98 session low. Finally, the EZ-wide Flash print was modestly above expectations for the headline but featured a notably hot core figure of 5.5% (exp./prev. 5.1%), pushing the contract to a 147.75 low; albeit, this was fleeting. Overall, the print hasn’t added too much to the narrative going into next week’s ECB gathering – as officials have made clear that inflation pressures are pronounced and a concern in recent communication, hence the talk around 75bp. Nonetheless, the release has prompted Nordea to join Danske Bank in calling for a 75bp hike. For reference, market pricing currently implies around a 55% change of 75bp, which is relatively unchanged from pre-EZ inflation levels.


• Amidst this, debt benchmarks across the board have been directionally in-fitting with the above action. With little to separate the core and periphery in terms of the magnitude of the moves, e.g. Bunds -55ticks, BTPs -70ticks, and as such the BTP-Bund spread remains relatively steady just above the 230bp mark.


• Elsewhere, the main mover of the morning is Gilts. Action that has of course been influenced by the EZ dynamics but exacerbated significantly by the ONS deciding, as most officials had expected, to treat the GBP 400 Energy Support as a fiscal transfer rather than an inflation adjustment; a ruling that is in-fitting with other measures given the funding is provided directly to households without conditions. As such, CPI readings from October will be subject to essentially the entirety of the 80% Ofgem energy cap increase – while not necessarily a surprise, this decision is a disappointment from a gov’t/inflation perspective, and thus offers no respite to the new-PM or the BoE. Specifically, Gilts are lower by around 130 ticks and the associated 10yr yield is at a fresh YTD peak of 2.86%.


• Finally, USTs are directionally downbeat but comparably contained in terms of magnitudes as the complex is influenced by EGB/Gilt action, though is awaiting fresh Fed remarks from Mester and Bostic alongside the relaunch of the ADP report. A release that has been revamped and will include new insights around wages; though, the likes of Pantheon caution that as no new methodology has been published, expectations around it are little more than guesses.

31 Aug 2022 - 10:50- Research Sheet- Source: Newsquawk