EUROPEAN FIXED UPDATE: EGBs softer with OATs underperforming slightly post-Moody's, PMIs in focus

USTs: +2 ticks, 109-30

• Rangebound in a tight 109-27+ to 109-31 band ahead of Flash PMIs from the US but with the focus firmly on Wednesday’s FOMC.


• Overnight, WSJ’s Timiraos wrote "Investors widely expect a third-in-a-row rate cut this week. Officials are ready to slow—or even stop—lowering rates after that.". An article which highlights that the main focal point for this week’s meeting will be on any forward guidance in the statement, and then how explicit Powell is on next policy steps.


• Given contained action for the benchmark yields are also relatively steady but are lower across the curve, which itself is marginally flatter.

Bunds: -5 ticks, 134.59

• Pressured, but yet to deviate significantly from the unchanged mark in a tight 134.43-72 band.


• PMIs sparked modest two way action with the net read being bearish as the German economy fares better than expected in some areas at the end of the year and as Services input pierce inflation “shot up significantly in December”.


• Furthermore, upcoming political developments are adding to the upward momentum for yields. Though, Chancellor Scholz losing today’s no-confidence motion is very much the base case, a loss which will open the door formally to a February 23rd election.


• Into the EZ figure Bunds experienced a bounce to near the unchanged mark, before swiftly paring this move on the much better than expected Services outurn, though the “pretty dire” manufacturing situation has kept Bunds off lows.


• As it stands, Bunds reside just in the red as the dust settles post-PMIs and remarks from ECB speakers thus far are yet to move the dial; ahead, the often influential Schnabel is scheduled.

OATs: -13 ticks, 124.75

• Softer, moved in tandem with EGBs on the German metrics after being relatively unreactive to their own PMIs which focused firmly on political uncertainty.


• On which, the new PM got an unwelcome announcement from Moody’s who downgraded France by a notch with the outlook stable, due to increased political uncertainty and a low probability that the gov’t will succeed in reducing the deficit.


• For today, we await the debate on a law to allow the 2024 budget to be rolled over to 2025 in order to avoid a shutdown. The measure is expected to pass, as RN has indicated it will support it.


• While OATs are the marginal underperformer, the OAT-Bund 10yr yield spread hasn’t widened significantly and is currently holding around the 80bps mark, with pressure in Bunds seemingly serving to offset some of the widening post-Moody’s we may otherwise be seeing.

Gilts: +5 ticks, 94.37

• A touch firmer but little changed overall into the UK Flash PMI release, which was mixed but in a delayed reaction weighed on Gilts, given services strength and inflationary internals, pressuring them from a 94.50 high back towards but not testing earlier 94.24 lows.


• Main focus for the UK are the week’s wage and inflation metrics before Thursday’s BoE, a MPC meeting which is expected to deliver no policy change though this will likely be subject to dovish dissent from Dhingra.


• On this, S&P Global wrote alongside the PMIs “Policymakers … may be cautious about cutting interest rates, however, given the resurgence of inflation being signalled, adding further to downturn risks in 2025.”

16 Dec 2024 - 10:05- Fixed IncomeEU Research- Source: Newsquawk