EUROPEAN FIXED UPDATE: EGBs pressured post-sources while Gilts gap-higher on UK GDP

Analysis details (11:01)

• EGBs are under modest pressure with participants skewing their expectations hawkishly following Tuesday’s late-doors ECB sources piece. Gilts are firmer in contrast following particularly soft GDP data which has prompted a number of desks to trim their UK 2023 growth view, though a 25bp hike in September continues to be the base case from a market pricing perspective. Stateside, USTs are a touch softer taking cues from the above EGB move with US participants entirely focused on the upcoming CPI release.


• Bunds are at the low end of 130.19-130.56 parameters, expanding on the modest downside seen in Tuesday’s session which saw a 130.45 low point. Action this morning is being driven by the latest ECB sources piece, with Reuters reporting that the September forecasts will have inflation above the 3.0% mark in 2024 (vs Bloomberg consensus 2.7%), a report which if true will embolden the hawkish members to push for a 25bp hike despite increasing growth concerns in the bloc. Given this, market pricing has lifted to circa. 65% chance of a 25bp hike being delivered vs 50/50 in recent sessions. From a yield perspective, the German 10yr is inching back towards 2.70%. Perhaps more pertinently the BTP-Bund yield spread has widened slightly to just shy of 180bps, while this is well within the YTD 143-221bp range, it is the widest the spread has been since May and will be a point of concern for the dovish ECB members; particularly as we head towards the Italian budgetary season.


• Central banks aside, supply has featured heavily this morning with sizeable tranches auctioned from the UK, Italy and Germany; overall, the supply has been well-received but hasn’t sparked any significant lasting market reaction given participants remain focused on the pre-ECB calculus and today’s CPI data. As a reminder, the US sells 30yr supply later today after Monday’s poor 3yr and yesterday’s more respectable 10yr.


• For Gilts, UK debt remains firmer on the session but has relinquished the 95.00 handle given broader fixed income pressure from EGBs/USTs. The current session and WTD best of 95.09 printed as markets reopened following the July UK GDP data which saw a MM headline of -0.5% (exp. -0.2%) print and is the first occasion since June 2022 that all three sectors of the economy contributed negatively to the month’s reading. However, while a dovish move was seen in Gilts, pricing for the September BoE was unreactive with markets continuing to ascribe a circa. 75% chance of a 25bp hike taking place. Since the data, the likes of Goldman Sachs and JPMorgan have cut their 2023 growth views for the UK economy to 0.3% and 0.4% respectively.


• Stateside, USTs are in the red and have spent the morning moving in tandem with EGBs. The space is heavily focused on the upcoming US CPI release for the final main inflationary input before next week’s FOMC meeting. As it stands, markets are pricing in around a 5% chance of a 25bp hike taking place; with around 12bp of total tightening implied before end-2023. Within the data, participants will be attentive for any indications that it might skew the upcoming statement to the hawkish/dovish side and what implications that has on the mentioned 12bp of priced tightening and then and perhaps more pertinently timing for the first cut which has been moving between May and July 2024 on recent data points.

13 Sep 2023 - 11:01- Research Sheet- Source: Newsquawk