EUROPEAN FIXED UPDATE: Limited pressure into PCE, Gilts await further details on the latest Government u-turn

USTs: -4 ticks, 111-28

• A contained/slightly softer start to the day for USTs. Benchmark pulling back from Thursday’s 112-03 MTD high, but only marginally with the current trough at 111-27, comfortably clear of Thursday’s 111-21 base.


• Overnight, newsflow was dominated by US-China trade updates. As it stands, the Wednesday signing Trump referenced appears to have been firming up some of the Geneva/London talk commitments, not anything fresh; a view corroborated by China’s MOFCOM since. Nonetheless, we remain attentive to any weekend update and await Trump’s appearance on Fox on Sunday in that light.


• An interview that will also be sought for updates on domestic politics. As much of the Reconciliation Bill hit a hurdle on Thursday when Parliamentarians decreed sections of it clash with the Byrd rule (prevents excessive or irrelevant additions to bills vs the original text). Nonetheless, Senate Republicans seem to hold some hope of a Friday vote; but, it remains to be seen.


• Finally, but short-term most pertinently, the US PCE figure for June is due. At his post-FOMC press conference, Chair Powell estimated total PCE rose 2.3%, with Core at 2.6% in May. As a reminder, both the May CPI and PPI reports came in beneath market expectations. Money markets are currently fully pricing in the first rate cut by September, with 29bps of easing priced. However, for July 6bps is currently priced, implies a c. 25% probability of a 25bps rate cut at the meeting.

Bunds: -5 ticks, 130.43

• In-fitting with the above. Under modest pressure in the European morning into the region's first inflation figures for June. Before those, no reaction to ECB’s Knot who said to the FT that the possibility of a 25bps cut by end-2025 was "difficult for me to exclude”.


• Firstly, the French figures came in hotter-than-expected across the board sparking a modest hawkish reaction. Specifically, this sent Bunds down from near the 130.66 high to around 130.44.


• Thereafter, the Spanish figures were released and also came in hotter-than-expected though the core remained steady at 2.2% Y/Y as the upside was primarily due to elevated fuel prices. Around 20 minutes after the release, Bunds saw another bout of pressure to a 130.20 session low. Downside may have also been partially due to the MOFCOM statement on US-China removing restrictions, very much as expected.


• Overall, while the inflation prints have weighed on Bunds and left them lower on the day by around 20 ticks they have had no discernible impact on market pricing; continues to near-enough price one more 25bps cut in 2025.


• Ahead, focus on the stateside events outlined in USTs, before a text from ECB’s Cipollone.

Gilts: -11 ticks, 93.14

• Opened higher by a few ticks and then extended a handful more to 93.36, catching up to the late-Thursday performance for USTs/Bunds, before conforming to the broader bias and slipping slightly. However, action has been minimal with Gilts comfortably above the 93.00 mark and shy of today and Thursday’s open at 93.32.


• No notable data or BoE officials scheduled. Instead, UK newsflow has been focussed almost entirely on the government’s u-turn on welfare reform. This about-face means Chancellor Reeves will need to find around GBP 1.5bln of additional funding. While not a significant sum on its own, it does follow the winter fuel u-turn; expected to cost just over GBP 1.2bln.


• In more detail, the Resolution Foundation estimates the combined additional fiscal requirement from updates to welfare, i.e. PIP and components of Universal Credit, and the winter fuel allowance will cost around GBP 4.5bln.


• In sum, the policy changes alongside other commitments the government has been making on defence, increasing borrowing figures (PSNB in May the highest ex-COVID print since records began) and softer-than-expected April GDP all add to the narrative that the Chancellor will be forced into tax rises by the time of the Autumn Budget.


• Thus far though, Gilts have been unreactive to the development and while the benchmark has at points this morning marginally underperformed peers, it has not done so with any real conviction.


• For the day ahead, focus on any further fallout from the u-turn (particularly if it proves insufficient for the Labour rebels) and then the outlined US events.

27 Jun 2025 - 10:00- Fixed IncomeData- Source: Newsquawk