OAT: 70bp Containing OAT/Bund Downside For Now, 2026 Budget Outcome Remains Key
Over the past 30-days, OATs have outperformed EGB peers on cautious budget optimism. The 70bp level continues to provide support to the 10-year OAT/Bund spread for now, but agreement on the 2026 budget would pave the way for a move towards 65bps (the level seen before ex-PM Bayrou’s announcement of a confidence vote in August). In the near-term, a reduction of political uncertainty should carry greater weight for OATs than any fiscal slippage from negotiations/compromises. However, fiscal dynamics remain very relevant for the medium-term outlook.
- Budget negotiations will be in focus throughout December. Yesterday, Socialist leader Faure said that “We are pursuing an approach that could lead to a compromise” even though “we are not there yet”. This cautious optimism has helped the OAT/Bund spread narrow back towards ~72bps over the last two weeks.
- The 2026 Social Security budget (PLFSS) is back in the National Assembly from today, with a key vote scheduled for December 9 ahead of the December 12 deadline for final adoption. Under Art. 46, the National Assembly would have the final say on the PLFSS, bypassing the Senate.
- If the National Assembly can find an agreement on the PLFSS, it would be a positive signal for the Revenue section of the budget (which is currently being reviewed in the Senate).
- At first glance, this morning’s French core state budget data looks positive. The E136.2bln deficit was the smallest October reading since 2019. We will follow up with more details in due course.
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AUSSIE 10-YEAR TECHS: (Z5) Returns Lower
- RES 3: 95.982 - 76.4% retracement Sep’24 - Nov’24 downleg
- RES 2: 95.960 - High Apr 7 (cont.)
- RES 1: 95.900 - High Oct 17
- PRICE: 95.670 @ 16:16 GMT Oct 31
- SUP 1: 95.510 - Low Sep 3
- SUP 2: 95.415/95.300 - Low May 15 / Low Jan 14
- SUP 3: 95.275 - Low Nov 14 (cont) and a key support
Aussie 10-yr futures slipped lower Wednesday on the back of hotter-than-expected Australian inflation. This returned prices lower despite nascent signs of a technical recovery as recently as last week. The sustainability of the pullback will be dependent on prices holding above key short-term support at 95.510, the Sep 3 low. Near-term resistance remains 95.780, the Sep 12 high. A clear break of this level signals scope for a continuation higher and opens 95.960, the 76.4% retracement level for the Sep’24 - Nov’24 downleg.
AUSSIE 3-YEAR TECHS: (Z5) Struck by Strong CPI
- RES 3: 97.796 - 1.618 proj of the Sep 3 - 12 - 15 price swing
- RES 2: 96.780 - High Jun 26 (cont)
- RES 1: 96.700 - High Sep 12
- PRICE: 96.375 @ 16:13 GMT Oct 31
- SUP 1: 96.280 - Low May 15 (cont.)
- SUP 2: 95.900 - Low Jan 14 (cont.)
- SUP 3: 95.760 - Low 14 Nov ‘24
Having bounced well on the back of the mild US CPI print, Aussie 3-yr futures reversed course Wednesday on strong domestic inflation data containing RBA cut pricing through 2026. This keeps prices well below prior resistance at 96.615, the Sep 12 high, and refocuses attention on 96.280 as the next major support.
FED: Gov Waller: Still Advocating For A December Rate Cut
Gov Waller, one of the FOMC's more prominent doves, makes clear in an appearance on Fox Business that he supports a follow-up rate cut in December. He makes reference to Chair Powell's press conference comment that the Fed could skip a cut at the December meeting due in part to a lack of official government data during the federal shutdown (Powell: “what do you do if you are driving in the fog? You slow down").
- Waller says today: "Right now, we know that the labor market has been weak... We know inflation is going to come back down. Inflation expectations are anchored, and in that world, the standard of central bank wisdom is to look through it and proceed with worrying about the labor market. So in my view, we should just look at what the data is telling us and proceed on policy that way.... So this is why I'm still advocating that we cut policy rates in December, because that's what all the data is telling me to do. The fog might tell you to slow down. It doesn't tell you to pull over to the side of the road. You still have to go. You may want to be careful, but it doesn't mean to stop, and ... the right thing to do with policy is to continue cutting."
- This is of particular interest since he appeared to suggest he would have a more cautious outlook on further easing after cutting in October.
