EUROPEAN FIXED UPDATE: Debt dips as sentiment strengthens pre-CPI, supply & Fed speak

Analysis details (10:21)

• Core benchmarks are in the red, a deterioration that has been very steady in nature and largely a function of the improved but still somewhat tentative risk tone pre-CPI. Thus far, specific macro drivers for the European session have been limited but featured an ECB bulletin that reiterated the last announcement and the RICS survey for the UK that provides further evidence of the tightening cycle's impact.


• Within Europe, Bunds are the incremental laggards trading lower to the tune of 50 ticks but just off of the 132.36 trough. A low below Wednesday’s 132.57 base but someway shy of the WTD 131.33 base that was printed on Monday. Scheduled drivers specifically for Europe are very limited and therefore the tone will likely be dictated by US CPI and how the expected uptick in the headline measure is perceived; though it is worth bearing in mind there are still several other data points before the September FOMC including an additional inflation release not to mention the Jackson Hole symposium during the last week of August.


• Core aside, the periphery is faring slightly better but remains in the red. Again, specifics are in short supply particularly as the week’s sales from Italy were cancelled given summer conditions, as is usually the case. We noted in recent sessions that while core and periphery benchmarks were moving directionally together that the BTP-Bund yield spread had inched up to recent wides above 170bp, perhaps given the surprise Italian bank tax; since, this dynamic has dissipated and the spread is back towards the mid-160bp region.


• As mentioned, newsflow for the UK has been equally dearth aside from the RICS survey that shows continued pressure for the housing market on the back of the ongoing tightening cycle. A cycle that has almost 50bp of further action priced. On this, Friday sees the release of the latest GDP data which will be used as part of the BoE’s assessment of whether they are approaching the point where the balance of risk shifts from doing too little to doing too much, a point Chief Economist Pill has spoken about extensively.


• Finally, USTs are in the red with yields bid across the curve but overall action is very limited in summer conditions and ahead of US CPI. Currently, USTs are at the mid-point of 111.06+ to 111.12+ parameters which have just dipped below Wednesday’s low but similarly to EGBs remain someway from the WTD base and thereafter last week’s trough. Aside from CPI, we have a handful of scheduled Fed speakers who typically reside on the dovish side of the spectrum alongside the final bout of US issuance via a 30yr. This sale follows impressive 10yr and 3yr sales this week, with last night's 10yr a particularly strong affair when considering the mixed reception that the sessions German supply saw.

10 Aug 2023 - 10:21- Research Sheet- Source: Newsquawk