EUROPEAN FIXED UPDATE: EGBs/Gilts sink post-GDP while USTs tread water

Analysis details (10:35)

• A session that aside from UK GDP has been devoid of any significant macro drivers. Currently, fixed benchmarks are under modest pressure with the price action a continuation of the downside seen over the last few sessions and has EGBs on track to end the week at the midpoint of its range. Gilts are in-fitting but today’s magnitude is more pronounced while USTs buck the trend and are little changed ahead of PPI.


• The main mover this morning has been Gilts, a hawkish move was seen following stronger-than-expected UK GDP data for June which in turn lifted the Q2 estimate to growth of 0.2% vs the forecast stagnation. Reminder, for 2023 as a whole the BoE forecasts GDP growth of 0.5%, a forecast that is more optimistic than the views of many desks. Nonetheless, the release sparked a hawkish move in Bunds at the time, taking them to the current 131.75 trough and when Gilt trade commenced for the session it gapped down to a 94.32 trough; markedly below Thursday’s 94.87 base but comfortably above the 94.06 WTD base. Given the move, market pricing for the BoE saw a modest hawkish adjustment and now ascribes around a 70% chance to a 25bp hike in September, pricing which remains more-dovish than the SONIA strip; currently, the September contract has a 25bp hike fully priced.


• Back to Bunds, the mentioned 131.75 trough leaves just Monday’s 131.33 base as support before the 131.00 figure itself. While developments have been light, we note the release of an ECB podcast featuring Chief Economist Lane – albeit, this is relatively dated and focuses on the broader inflation themes rather than policy nuances.


• Finally, USTs are treading-water ahead of PPI after Thursday’s CPI showed prices are increasing at a moderate pace, a release which is expected to show an annual cooling. Thereafter, the docket includes the prelim. reading of Uni. of Michigan and again the inflation components will draw the most scrutiny. For reference, while near unchanged currently the WTD picture for USTs is slightly different to EGBs/Gilts, as the benchmark printed an incremental new low for the week at 110.21, though this remains essentially a full point away from last Friday’s base at 109.24 on the NFP report.

11 Aug 2023 - 10:34- Fixed IncomeData- Source: Newsquawk