EUROPEAN FIXED UPDATE: Gilts outperform, EGBs largely unaffected by HICP, USTs digest trade updates & Kato's remarks into NFP

USTs: +5 ticks, 112-00

• Contained into NFP. Newsquawk preview available. The headline is expected to show a marked cooling in the pace of Payrolls to 130k (prev. 228k), with a range of 25-195k. The report will be scoured for signs of Trump’s tariffs and associated reciprocal measures impacting the US labour market.


• The Fed has stuck to a wait-and-see approach, suggesting they see monetary policy as well positioned at this point in time and are looking to see how the tariffs/responses impact on hard data prints. As a reminder, soft data has come in on the weaker side recently with focus on how hard data will hold up.


• Into the release, markets imply around a 5% chance of a cut in May with a 25bps move not priced until July (-36bps). We are currently in the blackout period ahead of next week’s FOMC and as such will not get insight from Fed officials on the data until the meeting; however, US administration officials and likely Trump himself will comment on the data. As a reminder, Trump continues to call for lower interest rates.


• USTs holding around 112-00 in 111-23+ to 112-01+ confines, a tick below Thursday’s base but some way clear of that session’s 112-20 peak; the high occurred in the early US morning, before the ISM release. Yields are softer across the curve and flatter overall being led by the long-end, while flatter today 2s10s remains steeper by around 4bps WTD.


• Data aside, attention has been on two other points. Firstly, US trade relations with constructive reports in the FT around EU concessions to address the trade deficit with the US in addition to reports that the US has reached out to China to seek talks alongside constructive MOFCOM language. Updates on trade helped the risk tone shrug off poorly received results from Amazon and Apple.


• Secondly, the Japanese Finance Minister stated that Japan’s holdings of USTs could be “among such cards” used in trade negotiations, though Kato added “whether we actually use that card, however, is a different question”. Commentary which is in contrast to Kato’s language from early-April when he ruled out using USTs as a bargaining chip. We are yet to see a response from US officials on the change in stance.


• No real reaction in USTs at the time of Kato’s remarks, however they may have added to the very slight bearish-bias in APAC trade, alongside the mentioned trade progress with the EU and more pertinently China.

Bunds: -12 ticks, 131.66

• Opened near enough unchanged at 131.75 after the Labour Day holiday. Just after the resumption of trade they lifted to a 131.81 peak for the session before slipping as low as 131.34 in the early European morning as participants reacted to the US-China updates overnight. Thereafter, lifted around 25 ticks from that low but remained in the red and held around that mark into data.


• No real reaction to Final PMIs, subject to upward revisions. The EZ figure ticked up to 49 and HCOB described the manufacturing situation as stabilising, though caveated that it remains fragile given US tariff policy and the prospect of Chinese goods being more readily available within the bloc, presenting fresh competition.


• EZ HICP came in hotter across the board and the ex-Food & Energy measures eclipsed the forecast range alongside Services jumping to 3.9% (prev. rev. 3.5%). While hotter than the newswire consensus, not necessarily a major surprise given the bias from France, Germany and Spain earlier in the week; particularly the jump in core inflation seen from the latter two.


• As such, Bunds knee jerked lower but remained well within earlier confines and have since pared the entire move and are back to holding off lows but remain in the red by around 10 ticks. For the ECB, the release hasn’t spurred any move in market pricing which implies an 85% chance of a cut in June and fully imply one by July with just over two seen by end-2025

Gilts: +37 ticks, 93.91

• Opened lower by around 20 ticks, catching up to the slight bearish bias in APAC hours on the points outlined in USTs. Thereafter, the benchmark began to inch its way higher and is currently modestly outperforming at the top-end of a 93.30-91 band, just eclipsing Thursday’s 93.88 high.


• Specifics for the UK have been a touch light aside from the local elections. Within this, the most pertinent update has been the Runcorn & Helsby by-election where Reform overturned a very strong Labour hold. Not necessarily a driver for UK assets in the immediacy, but one to watch in case the swing prompts a change in policy approach from Labour.


• In terms of the slight outperformance, there isn’t a clear or overt headline driver behind it and instead it may be a function of Gilts not being capped/weighed on in the way that USTs and EGBs are by progress on trade talks. Specifically, while there has been progress between US-China and US-EU, there has been essentially no significant update on US-UK ties.


• Though, the outperformance is modest in nature as markets look ahead to the US NFP report, afterwards Gilts can begin to look at the May BoE which currently has a 25bps cut almost priced and just under four cuts, including May, by end-2025. Looking ahead to the BoE could also be factoring into the Gilt action and associated softer UK yield environment that we are currently seeing.

02 May 2025 - 10:20- ForexEU Research- Source: Newsquawk