EUROPEAN FIXED UPDATE: Initial UK CPI impetus lost as benchmarks pullback modestly

Analysis details (10:45)

• Core fixed income began the session in the green and towards the best levels printed on Tuesday in the wake of cooler than expected US CPI, a release which sparked a marked re-pricing of Fed rate expectations and has had a knock-on dovish impact on pricing for other economies. However, as the morning progresses and we near the commencement of US trade benchmarks have slipped from best within Europe, a move that is seemingly UST led in a slight paring of Tuesday’s significant action. Ahead, the US docket features further price impetus via PPI alongside retail data before Fed’s Barkin (2024 Voter).


• The highlight thus far of Wednesday's session has been the release of UK CPI for October, metrics which came in softer than expected and were sufficient to lift Gilts (on the reopen) above the 97.00 handle and by extension Tuesday's 96.92 peak, to a current 97.12 session high. A figure which eclipses most near-term resistance and leaves only 97.50 before 98.00 and thereafter prior marks from H1. As such, more insight can be derived from yields with the UK 10yr down to a 4.12% trough bringing the 4.00% mark back into view, a level that hasn't been lost since May when yields globally were in an upward trajectory given, among other points, global banking concerns i.e. Credit Suisse/SVB. As mentioned, EGBs are off best with Gilts in-fitting and now languishing just under the unchanged mark at the low-end of 96.58-97.12 parameters.


• Back to UK CPI and in particular the BoE, the release has resulted in market pricing for the first 2024 rate cut being brought forward to July vs August pre-release. More broadly, markets now fully price in three 25bp cuts across 2024 which would take the bank rate down to 4.50% from its current 5.25%. A repricing that has been driven by the headline figure moving below 5.0%, and thus attaining the gov'ts target to halve inflation before end-2023, and as the BoE's key all services measure was cooler than the prior and lower than the Bank had forecast.


• Elsewhere, and before the mentioned UST driven pull-back from best levels, Bunds received a circa. 15 tick boost on the German Constitutional Court ruling that the transfer of circa. EUR 60bln of unused COVID debt into the climate fund is illegal i.e. the second supplementary budget act of 2021 is now void. A ruling that comes after opposition parties challenged the 2022 transfer (retroactively for FY21), alleging that it allowed the debt brake to be circumvented. The uptick in Bunds on this was driven by the ruling implying that domestic issuance will be circa. EUR 60bln less than expected by 2027, with the fading of the move thereafter likely a result of the relatively modestly impact on each FY between now and 2027.


• Finally, the periphery outperforms core peers as it benefits further from the dovish repricing post-data though the key BTP-Bund yield spread is a handful of bp above Tuesday’s and the recent <175bp trough.

15 Nov 2023 - 10:40- Research Sheet- Source: Newswires