EUROPEAN FIXED UPDATE: Pronounced PMI price action, US metrics and supply due

Analysis details (10:50)

• Initial leads from the APAC session were primarily a continuation of the price action seen in Monday’s session, with core benchmarks modestly subdued as the energy backdrop stoked further inflationary concerns. However, the release of the August Flash PMI metrics for the EZ and in particular the initial French and German metrics have firmly taken over the EGB narrative.


• Firstly, the French release saw the composite measure unexpectedly fall into a contraction for the first time in a year and-a-half as a further downturn in manufacturing offset an incremental increase in services. On this, Bund Sep’22 spiked higher from 151.76 to a fresh session peak of 152.40 before immediately pulling back and settling just below pre-release levels. A move that seemingly stalled at the touted 152.40-45 resistance band ahead of Monday’s 152.84 peak. Subsequently, the German Flash metrics were somewhat mixed on face-value, though a pronounced pullback in EGBs was seen thereafter with the Bund dropping from 151.54 to a fresh session base of 150.55; a drop that brings into play support at 150.19 before the 149.69 mark highlighted by Futurestechs.


• Amidst this, the associated 10-year yield has whipsawed by circa. 10bp between 1.24% and 1.34%. Similar directional action was seen across the board for both core and periphery debt, though magnitudes were somewhat more contained as the regions eyed their respective data points and key risk events towards the tail-end of the week.


• For the UK, the reaction to a substantial slump in manufacturing during August which saw the measure drop from 52.1 into an unexpected contraction at 46 was comparably muted given the sizeable moves listed above, and as internal commentary was positive on the inflation narrative which is clearly the BoE’s focus and taking priority over the growth backdrop. For reference, Gilts reside at the lower end of 112.86-111.89 parameters, extremes which occurred on the French and German metrics.


• Turning to the periphery, where the story is much the same as yesterday though the BTP-Bund spread has widened slightly to 235bp as we await election updates and commentary from Panetta later in the session.


• Finally, USTs have been dictated by EGB action thus far but, now that the morning’s risk events have passed, have detached themselves somewhat and regained a positive foothold ahead of their respective PMIs. Currently, the US yield curve is modestly flatter with much of the action at the longer end thus far, though the 10yr benchmark has only lifted a few ticks into positive territory. Reminder, supply features this week and commences with a USD 44bln 2yr sale.

23 Aug 2022 - 10:50- Research Sheet- Source: Newsquawk