EUROPEAN FIXED UPDATE: Pronounced two-way trade as energy & inflation vie for the limelight

Analysis details (10:34)

• A session of pronounced two-way action for fixed benchmarks to start a week where focus will increasingly (re)turn to central bank updates. The first half of the session saw one-way traffic for Bunds, which got as high as a test of the 50% fib of Friday's parameters at 152.85, a move that was driven by a haven bid amid the deterioration in broader sentiment given, in particular, the announcement of three unscheduled days of Nord Stream 1 maintenance and the associated uncertainty to energy security that brings.


• Since then, as the 152.85 Fib held, a pronounced pullback has occurred and sent Bunds negative on the session and to a low print of 152.05, matching Friday's trough. A move that began without a fresh catalyst/fundamental driver; but, one that could well have been sparked by the aforementioned energy-related update as market participants alter their focus from sentiment implications to the inflation backdrop. Note, that the associated yield upside as EGBs dip into negative territory has assisted in bringing EUR/USD circa. 15 pips back above parity and thus pushed Dutch TTF Oct'22 back from a potential breach of the EUR 300/MWh mark. On the topic of inflation, the ECB's German representative Nagel spoke over the weekend and, perhaps unsurprisingly given his known hawk stance, said the ECB must continue to hike, even if the risks of a recession grow given the inflation backdrop. Remarks which chime with commentary from peer Schnabel, and broader hawkish Central Bank speak, last week.


• Turning to the UK, Gilts have moved in tandem with peers given that UK-specific newsflow is fairly light and very much focused on the domestic energy situation, unsurprisingly given Friday's scheduled Ofgem cap update looms. Specifically, Gilts lifted to 113.60 initially before pulling back to below the figure. Most recently, Citi has increased its UK inflation forecast to 18.6% in January 2023 vs prior view of above 15% in Q1 2023, an increase that accounts for last week's pronounced wholesale gas price upside and electricity upside. Evidently, this view is perhaps already somewhat stale given the Nord Stream 1 announcement and associated energy action. Finally, amid the above action, the BTP-Bund yield spread has widened to circa. 230bp taking it back to the top-end of last week's parameters with fresh newsflow on the Italian political front relatively limited/incremental with just over one month until polls open.


• For the session ahead, the docket is sparse and as such action is likely to be dictated by fresh developments to the key themes of energy and Central Bank guidance; albeit, the speaker docket for the week is light until Jackson Hole commences on Thursday.

22 Aug 2022 - 10:34- Fixed IncomeResearch Sheet- Source: Newsquawk