EUROPEAN FIXED UPDATE: Gilts gap lower despite soft GDP, USTs await data

Gilts: -22 ticks, 90.80

• Opened lower by 10 ticks, despite softer-than-expected GDP data for November.


• Downside which was likely a function of three factors: 1) Weaker economic performance reduces the Chancellor’s fiscal headroom and as such is a Gilt negative. 2) An upward revision to the German Final CPI for December. 3) General fixed income pressure on account of the constructive European open with TSMC driving tech and heavyweight luxury names outperforming.


• Shifting from Downing St. to Threadneedle St. the data will be welcomed by the dovish contingent on the BoE and adds to calls for a February cut following on from the cooler than expected CPI, particularly for Services, from earlier in the week.


• Note, on inflation, while the cooling in December was welcome there are some caveats around the survey timing and desks generally look for an uptick in CPI around the Spring period. As such, while a February cut looks likely (next week’s PMIs may be the deciding factor for market pricing, currently 80% chance) it remains to be seen if we will see more than two or three cuts in total this year; currently, 59bps of easing is implied.


• On this, we heard from BoE’s Taylor yesterday who said his base case is for around 100bps of cuts this year and described recent yield moves as a "headwind for the economy”.


• Opened at the 90.91 mark and has since slipped to a 90.76 trough, while the loss of the 91.00 mark is notable the benchmark remains markedly clear of the sub-90 and by extension the 88.96 contract low from Monday.

Bunds: -21 ticks, 131.22

• Softer, hit early doors on the same three factors as Gilts. In terms of the German metric, Final CPI M/M was revised up slightly and seemingly almost exclusively as a function of travel prices, with package holidays +9.1%, and rail up 4.2% or 3.0% for long- and short-distance options.


• From 07:00GMT, Bunds dropped by around 20 ticks over the course of five minutes and thereafter continued to decline as the European risk tone continued to improve. Currently, in proximity to the 131.15 session low with support at the figure and then numerous recent lows between 130.70-28, the latter being the contract trough.


• Session ahead is headline by the ECB Minutes for December, an account which as is usually the case may well be judged to be somewhat stale. Nonetheless, we look for any details around the dropping of “keep policy rates sufficiently restrictive for as long as necessary”, the discussion around 50bps and the policy path.

USTs: -5 ticks, 108-05+

• Currently trading in-line with peers ahead of another busy data docket with Retail Sales and weekly Claims due before Treasury Secretary nominee Bessent’s confirmation hearing and the announcement for 20yr supply.


• US retail sales are expected to rise +0.6% M/M in December (prev. +0.7%), while the ex-autos measure is seen rising +0.4% M/M (prev. +0.2%). Bank of America’s December card data saw spending +2.2% Y/Y, noting consumers finished the year strong, while seasonally-adjusted card spending per household rose 0.7% M/M.


• At a 108-05 trough with yields firmer across the curve, the short end leading and as such the curve itself is flattening.


• The mentioned trough matches the low from January 9th, if this is lost then support resides at the figure before 107-28+ from the 8th and then a recent cluster between 107-11+ and 107-06, the latter marking the contract low.

JGBs: -4 ticks, 141.01

• Pressured, but faring slightly better than peers following a strong 20yr JGB auction and after in-line/softer PPI.


• However, the main focus overnight was a Bloomberg sources piece that the BoJ is said to see a good chance of a January rate hike, though this is contingent on there not being a major market rout after the inauguration of US President-elect Trump.


• As it stands, pricing implies around an 80% chance of a hike on January 24th, Trump’s inauguration is on the 20th while Japanese CPI is on the 23rd.

16 Jan 2025 - 10:00- Fixed IncomeData- Source: Newsquawk