EUROPEAN FIXED UPDATE: Marginally bearish trade into a packed afternoon

USTs: -4 ticks, 112-08

• A modestly softer start to the day. Newsflow thus far has been light and the morning’s price action is seemingly just a slight pullback from the marginal extension above post-NFP highs seen on Monday, rather than any overt bearish move.


• Thus far, USTs are down to a 112-07+ low, pulling back from Monday’s 112-14 peak but still clear of the WTD 111-31+ base. As a reminder, Friday saw a much more extensive 110-23+ to 112-14 range.


• The main update this morning has been between the EU and US, with the EU saying a joint statement on trade is now pretty much ready and they are just waiting for the US to get back to them. Though, the official caveated that the statement will not be legally binding, as expected.


• Ahead, a busy US docket with ISM Services, RCM TIPP, Atlanta Fed’s GDPNow and a 3yr Note auction all scheduled. Additionally, POTUS will be appearing on CNBC at 13:00BST. From Trump, we are attentive to any clues as to who the Fed board, and by extension Chair, nominees will be after Trump said on the weekend that he would be making an announcement on it this week, in addition to the new BLS head.


• More generally, the theme at the tail-end of last week was a steeper yield curve, as the BLS report took 2s10s back to mid-July levels above the 50bps mark. As it stands, this steepening is continuing to gradually unwind from extremes post-NFP, but remains above the 50bps mark and very much at the upper-end of Friday’s 40.2bps to 54.1bps range.


• On 2s10s, ING writes that it is still only a 50bps curve but could very easily get to 100bps with both ends of the curve contributing via a drag lower from the front end and pressure to the 10yr from the upcoming price-rise environment.

Bunds: -2 ticks, 130.25

• Began the morning on the front foot, with Bunds up to a 130.60 peak with gains in excess of 30 ticks at one point. However, this has been gradually paring across the morning with the benchmark down to a 130.16 trough with downside of just over 10 ticks at most.


• Initial upside was seemingly an extension of the strength seen on Monday, with the benchmark picking up into the European cash equity open. Thereafter, a modest pullback began into the morning’s Final PMIs. Though, to be clear, the PMIs do not appear to have driven the action.


• In brief, the final releases have been subject to two-way revisions. For the bloc as a whole, both Composite and Services were subject to modest revisions lower.


• On prices, the German series highlights that service sector costs increased at the slowest pace since February 2021 a point HCOB describes as being welcome for the ECB. As a reminder, the ECB described policy as being in a “good place” and would not be swayed by “minor deviations” with respect to inflation; given this, markets have near-enough removed any chance of a cut in September and imply just 13bps of additional easing by end-2025.


• PPI printed in-line with consensus, no sustained reaction scene on the release though the subsequent UK auction result (strong, see below) appears to have lifted the fixed complex from lows across the board.


• Ahead, supply from Germany is due with EUR 5bln of a Schatz line on offer. Supply that may be factoring into the pullback from highs seen this morning, and as such we wait to see how the EGB environment trades post-results.

Gilts: -3 ticks, 92.64

• UK specific newsflow a little light once again as we count down to the BoE later in the week. Markets currently almost fully price in a rate cut, though the actual decision is unlikely to be that simple with a three-way split very possible.


• On the hawkish side, the argument was neatly outlined by former MPC member Haskel to CityAM who highlighted above-target inflation and “remarkably sticky” services inflation as the key drivers behind his call for rates to be held at 4.25%. Adding, the case for a cut would be lower wage growth and a weak demand outlook, writing that the higher unemployment rate would have “moderated wage growth”.


• On the demand outlook, today’s Final PMIs showed that “...service providers remain upbeat overall regarding the year ahead business outlook” with improved optimism M/M amid receding tariff concerns and expected H2 BoE rate cuts.


• As it stands, markets imply 24bps of easing in August with 48bps in total by end-2025, i.e. cuts are near-enough priced for the August and December gatherings.


• In terms of today’s action, Gilts opened a tick lower at 92.64 before extending to a 92.84 peak acknowledging the initial upward bias seen in EGBs. Thereafter, gradually drifted across the morning to a 92.48 low with downside of just under 20 ticks at most. Supply this morning was strong, with a 3.33x b/c (prev. 2.89x), helping lift the benchmark from the above low by around 15 ticks and back to essentially unchanged on the session.

05 Aug 2025 - 10:20- ForexEU Research- Source: Newsquawk