EUROPEAN FIXED UPDATE: Initial divergence dissipates in a slight breather from recent dovish action

Analysis details (10:32)

• Once again, another session of differing performance for Gilts and EGBs with UK debt beginning on the backfoot to the modest benefit of the region's yields, as pronounced differences in the magnitude of 2024 easing action remain via market pricing. While losses of circa. 50 ticks in Gilts are noteworthy, it pales in comparison to recent action and Tuesday's JOLT lower in yields. For reference, USTs are also under modest pressure but again well within existing WTD extremes as participants seemingly take a slight breather from recent dovish action and ahead of ADP Payrolls (limited predictive power for NFP) in an otherwise light docket for the US.


• EGBs began the session modestly firmer, inching to fresh WTD highs with yields at similar new extremes; note, the focus has now switched firmly to the Mar’24 contract for fixed. Market pricing remains extremely dovish, with participants/notes continuing to focus on Schnabel's commentary from early Tuesday. Drivers this morning have been data related with a particularly poor outrun for Germany’s October industrial orders which printed markedly shy of consensus though the release is somewhat caveated by the influence of large-orders in the prior; nonetheless, the print sparked modest Bund upside which continued gradually until the current 135.18 high. Thereafter, Construction PMIs and EZ Retail Sales were unsurprisingly downbeat, but sparked no real market move.


• As it stands, Bunds have retreated from the aforementioned high after failing to test touted Fib resistance at 135.27. A retreat which occurred without a fresh fundamental driver for EGBs but does bring Europe more in-line with UK and US peers.


• Post-data, the docket is similarly light and as such we await any unscheduled ECB remarks as we head into the ECB quiet period before next week's announcement where fresh forecasts will be provided and, if recent commentary and data serves as a good guide, we could well see a marked improvement in the forecasts relative to the ECB's 2% inflation target. Furthermore, given a number of officials and most pertinently Schnabel, who heads up the purchase operations, do not expect any market disruption from an adjustment to PEPP activity, a discussion on it could potentially occur in December as opposed to the Q1-2024 Lagarde guided us towards.

06 Dec 2023 - 10:32- Research Sheet- Source: Newsquawk