EUROPEAN FIXED UPDATE: Tentative tone provides Gilts with some retail therapy

Analysis details (09:45)

• EGBs slumped in the early European morning after strong UK Retail data with Bunds dropping to a 132.83 trough on the re-open of Gilt trade when the benchmark slipped to a 94.13 trough. While the move was pronounced, it was much less so when compared to the post-CPI price action and as such market pricing hasn’t become much more hawkish with 100bp of further tightening implied by end-2023; though, notably, the probability of a 50bp hike in June has lifted incrementally.


• Since, core benchmarks have experienced a modest bid with this being seen most evidently in USTs given they only slipped a handful of ticks into negative territory on the above price action. Currently, USTs are at the top-end of a 112.15+ to 112.26 range with the associated yield dipping below 3.80%. The slight bid this morning occurred without a fresh fundamental driver but alongside a broader easing of the risk tone as attention refocuses on the debt ceiling into the long weekend. As such, Bunds and Gilts have pared back the morning’s downside and are now essentially unchanged and toward the top-end of respective 132.83-133.29 and 94.13-94.78 parameters.


• ECB’s Lane spoke on inflation returning to target and while the initial remarks were in-line with May’s meeting the subsequent remarks were more interesting, with Lane highlighting some upside risks to wage growth – a timely remark ahead of next week’s Flash HICP release.


• Looking ahead, the debt ceiling remains the overarching theme/potential driver though we are also due to get PCE inflation for April on which Credit Suisse writes "The PCE deflator is likely to confirm that gradual disinflation continued in April, but the run rate remains above the Fed’s target". For more on the debt ceiling and PCE, click here.
  

26 May 2023 - 09:45- Fixed IncomeResearch Sheet- Source: Newsquawk