EUROPEAN FIXED UPDATE: EGBs slip while USTs are mixed/tentative with drivers limited overall ahead of a busy PM agenda

Analysis details (10:39)

• A relatively contained start for the complex but with bearish pressure evident, though no clear/overarching catalysts is in play. Action which occurs despite broader risk sentiment deteriorating and the EZ PMI highlighting that the ECB “will be pleased to see that deflation of output prices has picked up speed again, falling at the most rapid pace in almost 14 years”.


• Currently, EGBs are lower across the board. Bunds are at the lower-end of 132.64-133.06 parameters as a failed test of yesterday’s 133.05 best gave way to a modest pullback, bringing touted support at 132.55 and 132.42 into play before attention turns once more to Friday’s 131.81 trough. As above, specific catalysts for the move lower are lacking with the readout from the region's PMIs a theoretical positive for the complex given the inflation commentary and subsequent implications for rate expectations and yields. For reference, the morning's data has not prompted any real movement in market pricing which continues to ascribe around a 25-30% chance of a 25bp hike occurring in September.


• For the periphery, the story is much the same with counterparts at the lower-end of parameters but comfortably within recent boundaries. As such, core-periphery spreads remain at comfortably levels with the BTP-Bund spread steady just above 160bp.


• Moving to the UK, Gilts are lagging slightly with action directionally in-fitting with the above and the modest underperformance perhaps explained by the region’s Manufacturing PMI noting that July saw little movement in selling prices. Reminder, the BoE meets on Thursday and market pricing currently shows a 60/40 split between 25bp and 50bp from the current 5.00% Bank Rate. Technically, a move below the current 95.68 low brings into play Monday’s and Friday’s 95.40 and 95.11 respective troughs. Elsewhere, the morning’s 2025 DMO outing was relatively in-line with the prior and robust overall when accounting for the lower average yield.


• Stateside, USTs are more mixed with the short-end bid and the long-end soft though magnitudes are relatively minimal and from a yield perspective it is only resulting in very modest curve flattening. Action which occurs prior to another busy US agenda with Final PMIs also due for the region but more pertinently the ISM Manufacturing print which came under further pressure in June, though the associated reaction faded in short order given the sectors woes are nothing new. Fed’s Goolsbee is scheduled once again after providing extensive commentary on Monday, available here.

01 Aug 2023 - 10:39- Fixed IncomeData- Source: Newsquawk