EUROPEAN FIXED UPDATE: Modest pressure ahead of the FOMC

USTs: -4 ticks, 109-25

• Relatively contained trade ahead of the FOMC. USTs marginally in the red within a slim 109-24+ to 109-30 band, which is entirely within Tuesday’s 109-17 to 109-31+ parameters. As it stands, yields are marginally bid across the curve which has a very slight steepening bias.
• Into the Fed a 25bps cut is priced with just over 95% probability. Thereafter, attention turns to January and whether a pause is possible, markets certainly think so with (assuming a 25bps cut today) just a 12% implied probability of January cut.
• While a pause is certainly possible and justified in January, it remains to be seen how explicit the statement and Chair Powell thereafter will be about this.
• Elsewhere, participants are attentive to a potential technical adjustment to the reverse repo rate which is currently 5bps above the floor of the Fed’s 4.50-4.75% FFR band. If an adjustment occurs, it is expected to bring the reverse repo rate in-line with the floor of the FFR band i.e. a 30bps cut to it, assuming the FFR is cut by 25bps.

Bunds: -23 ticks, 134.61

• In the red but off lows. Down to a 134.65 trough in the European morning, with catalysts driving it slim at the time. Since, lifted off this and back towards but yet to breach the 134.82 overnight peak.
• A slide and text release from ECB’s Chief Economist Lane spurred no sustained reaction, with the Chief Economist keeping his options open around the 2025 policy path proceeding more quickly/slowly than implied if necessary with the assessment to be data and transmission dependent.
• On transmission, Lane highlighted that while rate cuts are transmitting through, financial conditions along the transmission chain remain restrictive.

Gilts: -16 ticks, 93.06

• Gapped higher by just over 10 ticks as markets digested the largely in-line to slightly cooler-than-expected release for some metrics. While a slight dovish reaction was seen at the open, this has pared with markets ascribing essentially no probability to a December BoE cut.
• The uptick in headline inflation from the prior rate, while in-line with market expectations, means the BoE is almost certainly going to leave rates unchanged in December as inflation is still showing signs of persistence above the 2.0% target (though, Dhingra will likely continue to dissent and vote for a cut).
• Since, Gilts have pulled back and have moved modestly into the red in-fitting with Bunds and USTs. Though, this is very limited in nature and has only sent them to the low-end of a 93.04 to 93.38 band, dipping below Tuesday's low by a tick.