EUROPEAN FIXED UPDATE: New WTD lows in a continuation of the bearish supply-side dynamics, NFP looms

Analysis details (10:38)

• Overall, comparably contained trade but bearish drivers continue to dictate action given an absence of fresh catalysts pre-NFP. As it stands, EGBs and USTs are pressured and at incremental lows for the week as the majority of price action remains driven by supply-side dynamics from the US.


• For EGBs, Bunds have dipped to a WTD trough of 131.37 despite a lack of fresh drivers since the European trading day formally commenced. Though, there was a marked move lower alongside the very strong German industrial orders print; however, the adjusted measure paints a more pessimistic picture for the bloc’s largest economy, in-line with other data points being indicative of a stagnation/contraction. While the move lower chimes with the headline, it does not correspond to the details – though, it is hard to determine if the move was data-driven given the choppyness often seen at 07:00BST. To recap, Bunds began as high as 133.05/06 before dropping alongside other core counterparts on Monday’s Treasury estimates and then the Fitch/Quarterly Refunding developments on Wednesday. If further WTD lows are printed in today’s session, which features NFP as the standout remaining catalyst, then we look to support at 130.99 and 130.82 from the 12th and 11th of July.


• Interestingly, an ECB research piece shows that underlying inflation measures appear to have peaked in H1 and the vast majority of such measures are showing signs of easing, in a welcome finding for the ECB ahead of the September projections; particularly the finding that “persistent and common components of inflation appear to have started to decline for services”. Albeit, the Bulletin makes clear that inflation remains high overall.


• Crossing to Gilts, the benchmark is pressured but less so than its EGB peers after yesterday’s policy announcement and as some desks pare their terminal rate views; BNP Paribas now looks for a 5.50% BoE peak vs 5.75% earlier. As it stands, market pricing via Reuters ascribes just under a 70% chance of a 25bp hike in September while the Sep’23 SONIA contract has 25bp fully priced and thereafter around an 80% implied probability for another move of the same magnitude is illustrated by the Dec’23 contract.


• Stateside, USTs have also dipped to an incremental WTD trough, moving below Thursday’s 110.05+ base by just half a tick thus far. Action which occurs amid limited specific catalysts ahead of the July NFP report, newsquawk preview available. Ahead of this, Pantheon writes that their take is the release will not be soft enough to convince the hawks to give up on a September hike but nor will it be hot enough to bring the doves onside for further tightening, as such the next CPI releases are key.

04 Aug 2023 - 10:38- Research Sheet- Source: Newsquawk