EUROPEAN FIXED UPDATE: Gilts gap lower post-GDP, BTPs attentive to Centre-right updates

Analysis details (10:55)

Core benchmarks are little changed overall on the session and particularly when compared to price action seen earlier in the week, as newsflow has been light with the European schedule almost entirely devoid of catalysts. Initial action saw modest pressure across core counterparts led by Gilts, after their open, in wake of the morning’s June GDP metrics, which were better than expected amid contributions from consumer-facing services. As such, Gilts dipped from 116.25 at the open to a low of 115.71; however, SONIA action is a touch more mixed, with dovish action at the front-end as the data points to an economic downturn. Albeit, incrementally more hawkish pricing is seen further out given the BoE has already flagged a pronounced downturn and contraction for the entirety of next year and as the MPC’s attention remains affixed to inflation. Amidst Gilt pressure, Bunds dipped to a 154.88 trough but now reside towards the mid-point of a circa. 90 tick range but remain negative overall. If the selling pressure intensifies, support is touted at 154.75 while and upside move would encounter resistance firstly at the psychological 156.00 and then at 156.36, which is the 50% fib of Thursday’s move. For European participants, specific newsflow has been limited and June Industrial Production not sufficient to spark any action despite notably beating expectations, with the broader risk tone firmer but capped by China ADS updates. Action which has served to provide incremental support to fixed benchmarks. Moving to their Italian counterpart, BTPs are marginally lagging core benchmarks though the BTP-Bund spread is steady and somewhat tighter than the 210bp mark it has been affixed to recently. A very modest narrowing which comes as the Centre-right coalitions draft plan was release and seemingly does not have any of the main “right-wing” concerns within it, as the coalition seemingly drops anti-EU policies. Though, it is worth making clear this is a draft and given the likely presence of Salvini and Berlusconi within the gov’t participants will need to remain attentive to whether such ideas/policies reappear. Finally, USTs are moving with aforementioned peers as the docket is similarly devoid stateside though of course we are attentive to the possibility of unscheduled Fed speak in wake of recent inflation numbers. Treasuries are around a tick or two lower while the yield curve is mixed and currently does not exhibit on over flattening/steepening bias.

12 Aug 2022 - 10:55- Research Sheet- Source: Newsquawk