EUROPEAN FIXED UPDATE: Generally rangebound trade pre-Powell, SONIA lifted after Ofgem’s hike

Analysis details (10:55)

• Despite fairly pronounced ranges of over 100 ticks in Bunds thus far, the generally tone has been a fairly tentative one with fresh drivers limited and somewhat inconsequential anyway given all focus is on Chair Powell. As such, the benchmarks remain well within existing WTD parameters.


• USTs are lower by around 10 ticks and near the 117.11+ low for the session, action which sent the associated 10yr yield to a 3.08% peak, but this is well within the week’s existing 2.94-3.12% parameters. For reference, the US yield curve is bear-steepening modestly after yesterday’s modest flattening action.


• The session ahead is dominated by Powell’s Jackson Hole appearance (15:00BST/10:00ET) where he will be providing opening remarks on the economic outlook, focus points for his speech centre around the September magnitude, the terminal rate and how long at this point before a ‘pivot’ occurs – newsquawk primer/schedule here.


• Back to Europe, Bunds have dipped just below 150.50 at worst with little by way of notable support before 150.00 and thereafter the heavily flagged 21st July low at 149.69. If we see a reversal in price action, then resistance lies at 151.73 above the 151.24 peak. Note, ECB’s Schnabel and Villeroy speak on Saturday, focus points include TPI/APP guidance (particularly from Schnabel) and recent Euro weakness.


• Turning to the UK where the big event has been the, as expected, 80% increase to the Ofgem energy price cap for Q4-2022 alongside which the regulator remarked that gas prices could get significantly worse through 2023. Note, at their last gathering the BoE expected the increase to be 75%, but nonetheless the implications are much the same and align with their forecast for a Q4 recession which lasts for all of 2023. Once trade commenced, Gilts saw some marginal volatility but are essentially unchanged within narrow sub-40 tick parameters while the SONIA strip has taken a slight dovish skew. Perhaps awaiting the seemingly inevitable support measure(s) announcement when a new PM is appointed on September 5th and reading into the argument that such support could offset some inflationary pressure and perhaps motivate the BoE into pausing its tightening cycle; reminder, Tenreyro dissented against the recent 50bp increase (voted 25bp) arguing the BoE may have already done enough regarding inflation. Albeit, depending on what the measures are and how they are implemented, fiscal support could end up providing the BoE with additional hawkish validation, as a lessening of the spending impact potentially provides cover against recession concerns.

26 Aug 2022 - 10:55- Fixed IncomeResearch Sheet- Source: Newsquawk