EUROPEAN FIXED UPDATE: Gilts lead after data, benchmarks await NFP

USTs: +2 ticks, 112-29

• Contained into NFP. Holding in a very thin 112-28 to 113-00 band, but at a WTD high and comfortably above the week’s 112-15+ opening mark.


• NFP is expected to inch higher to 75k (prev. 73k) in August, though revisions to the series will undoubtedly draw attention, particularly as Trump has replaced the BLS head since the last report; ADP was 54k. Unemployment is seen at 4.3% (prev. 4.2%). Note, some Fed officials see the breakeven payroll rate between 30-80k.


• Into this, markets fully price a September 25bps cut and look for another move in December (-59bps implied by end-2025). Overnight, Fed’s Williams declined to comment on pricing around September. Both Williams and Goolsbee highlighted a cooling labour market.


• Attention around the print is on how the 10yr yield reacts, that point of the curve has been on a choppy but declining trend since peaking in recent months at 4.62% towards the end of May; approaches the release just above 4.15%, the lowest it has been since 4.13% at the end of April.


• ING is of the view that a print below 50k (exp. 75k) is needed to spur such a reaction, and the closer to 0 the more likely a test of 4% becomes (forecast range is 0-144k). However, they are of the opinion that such a move would be an overshoot.


• As a reminder, the Fed’s blackout window begins at midnight ET. However, we may still get updates relating to the Fed as the Treasury Secretary is expected to begin interviews for the Chair role today, as Trump pushes for Miran to be on the board for the meeting and finally as both Cook and Trump push for a decision on the housing case in time for the decision.

OATs: +20 ticks, 90.73

• Counting down to Monday’s confidence vote. The base case remains that PM Bayrou will lose. Thereafter, President Macron is likely to try and appoint a new PM in an attempt to bring the centrist bloc and the Left closer; current Finance Minister Lombard is a potential candidate.


• However, it remains to be seen if the Socialist Party would accept another PM from the centre and, irrespective of the choice, whether fiscal progress can actually be made. As such, and despite Macron clearly not wanting them and the fractured landscape unlikely to meaningfully change, fresh legislative elections cannot be ruled out.


• As such, the bias for OAT-Bund 10yr spread is likely to further widening, though the fall of Bayrou itself is likely already priced at this stage. The next major catalysts will be updates around Macron’s next PM candidate and then Fitch on Friday. Fitch currently has France at AA-, negative. In their last update, Fitch highlighted a “failure to implement a medium-term fiscal consolidation plan…” as a factor that could spur negative rating action.


• Over the last few sessions the OAT-Bund spread has been holding around the 80bps mark, desks highlight a risk of an extension towards 100bps in the event legislative elections are called. In terms of levels to be mindful of, last week’s peak was 82.19bps, shy of the YTD high of 88bps and then the 2024 90bps peak.

Bunds: +11 ticks, 128.55

• Trading in-line with USTs. Specifics for the EZ light, aside from more updates (downgrades) to the German growth outlook from domestic bodies. Elsewhere, China has announced preliminary anti-dumping measures on the EZ, though this has had no discernible effect.


• At the upper end of a 128.52-74 band, at a fresh WTD high and looking to 128.81 and 128.87 from last week.


• Price action for EGBs ahead will, in the absence of an unscheduled driver, be dictated by Payrolls.

Gilts: +28 ticks, 90.73

• Outperforming, higher by just over 40 ticks at most in 90.65-87 parameters.


• Despite the stronger-than-expected UK retail metrics for July, the ONS’ revision YTD data has trimmed the H1 monthly average by 10bps. Revisions which have seemingly provided some bullish impetus for Gilts.


• Though, ultimately, the revision is unlikely to change the BoE’s trajectory and the strength may just be more a case of Gilts continuing the move seen in the last few days and paring some of the recent pressure spurred by fiscal jitters.


• In-fitting with Bunds, price action will almost certainly be dictated by NFP for the rest of today. Note, UK press is and will likely continue to focus on the fate of Deputy PM Rayner, as the ethics body is set to provide opinion on her tax affairs this afternoon; while interesting, the ruling itself shouldn’t be a market mover, unless it sparks a more significant cabinet reshuffle than expected in the next few weeks.

05 Sep 2025 - 09:50- ForexEU Research- Source: Newsquawk