EUROPEAN FIXED UPDATE: Gilts inflated by CPI, JGBs dented by Ueda & USTs await CPI

USTs: +3 ticks, 107-14+

• In the green and at session highs of 107-16+. Yields lower across the curve with the long-end leading and the curve as a whole flattening a touch.


• The session’s main event is US CPI, the headline M/M is expected to remain at 0.3% with the core easing to 0.2% (prev. 0.3%); as a reminder, the PPI report was soft on headline and core (though, airfares jumped which will likely lift PCE).


• In terms of implications for the Fed, ING previews the data nicely: “When the Fed first cut in September 2024, it followed a run of 3-4 months of contained MoM readings in the 0.1% to 0.2% area. We would need to get back there for a few months before another cut is even considered.”.


• Into the release, markets fully price the first 2025 cut in September (-26bps) with just 31bps of total easing implied across the year.

Gilts: +78 ticks, 90.05

• Inflated by 68 ticks at the open and then extended another 12 to a 90.05 peak in the wake of a cool set of December inflation data.


• From the data, the main point of focus is on the Services metric which eased below market and BoE forecasts to the lowest rate since March 2022.


• A finding which will allay the concerns of the six MPC members who voted for unchanged in Dec.; as a reminder, one of their main justifications was that "... CPI inflation, wage growth and some indicators of inflation expectations had risen, adding to the risk of inflation persistence."


• On the BoE, market pricing has shifted dovishly with around an 85% chance of a February cut now implied (c. 60% pre-release) and two cuts just priced in for 2025 as a whole (c. 35bps pre-release).


• The jump in Gilts and associated pullback in yields, the 10yr from 4.89% at end-of-play on Tuesday to a 4.80% low this morning. A move which provides the Chancellor with some breathing room, though looming US CPI could pose a threat (reminder, post-NFP a broad hawkish move was seen in fixed).


• This morning’s auction has been in keen focus as a litmus test of demand (I/L on Tuesday was well-received, for reference), an outing which saw a sub-3x cover at 2.80x and as such slightly softer than the 2.87x prior; however, this is still a strong reception and particularly so in the current Gilt environment. Additionally, both tail metrics came in better than the prior.


• Modest two-way action on the results but with Gilts ultimately coming under some very modest pressure and veering back towards the 90.00 handle.

JGBs: +1 tick, 140.60

• JGBs came under pressure overnight after remarks from BoJ Governor Ueda in which he said he wants to discuss and decide on whether to increase rates at the January meeting. More broadly, he added that the US economy and momentum towards Spring wage talks are key points and branch managers' views on the latter have been encouraging.


• Remarks which took a 140.55 low, just above the week’s 140.51 base, posting downside of a handful of ticks. Since, the benchmark has moved back into the green as the overall fixed bias is bullish this morning.


• For the BoJ, market pricing is now in favour of a January hike with a c. 70% implied probability; further out, March is not quite fully priced (+22.3bps) with a hike not fully priced until the May meeting (+25.4bps).

OATs: +28 ticks, 121.05

• The censure motion which La France Insoumise (LFI) is to table currently will not pass as National Rally (RN) has stated it will not be voting in favour of the no-confidence motion. However, LFI has stated that all members of the NFP agreement who do not vote for censure are leaving the agreement and may be opposed by them at the next election.


• Currently, we await insight from the Socialist Party (PS) on how they will vote in this and how the potential pension reform process that Bayrou outlined on Tuesday has been received; Playbook’s sources indicate that around one third of PS members, those aligned with Deputy Faure, would support the censure motion.


• OATs are the marginal EGB outperformer as we await any update from PM Bayrou or PS on how the talks around pensions are going and if Bayrou will provide the Socialists with the points on reform they are demanding to stop them supporting the censure motion.


• On the censure motion, timing is currently TBC but it will most likely take place on Thursday.

Bunds: +8 ticks, 130.54

• Firmer on the session in-fitting with global peers. 2024 growth data for Germany was bleak as expected with the prelim. figures pointing to a consecutive year of contraction. Furthermore, forward-looking remarks from the Economy Ministry were also downbeat.


• At the top-end of a 130.32-74 band, if the upside continues then we look to 130.98 from Monday before the WTD high at 131.09.


• A handful of ECB speakers on the wires this morning but nothing that has fundamentally shifted the narrative.


• Docket ahead has dual Bund auctions in the immediacy before focus turns to US CPI. As a reminder, Tuesday’s Bobl auction was particularly strong and featured the largest nominal bids for Bobl taps since August 2020.

15 Jan 2025 - 10:15- Fixed IncomeData- Source: Newsquawk