STIR: 7bp OF BoE Easing Still Priced For Tomorrow

Gilts open lower on global cues, after the JGB curve steepened as a new PM was elected and with OATs struggling as French political risks deepen.

• Futures pierce Thursday’s low, basing at 90.51.
• Bears remain in technical control at this stage, particularly with UK fiscal risks lingering. Initial support and resistance in futures still located at 90.26 & 91.28, respectively.
• Yields 2-6bp higher.
• 10s still comfortably within their recent 4.60-4.80% range, last 4.73%.
• 2s10s and 5s30s stick within their respective multi-week ranges, trading ~7bp and ~10bp below their cycle closing highs. Steepening trends intact.
• BoE-dated OIS still shows ~5bp of easing through year-end and is not discounting the next 25bp cut until the end of the April MPC.
• We continue to believe that markets underprice the odds of a Q4 rate cut.
• Comments from BoE Governor Bailey are due today.
• They will be closely scrutinised (even though he spoke as recently as Friday), particularly after Deputy Governors Ramsden & Breeden failed to push back against the idea of rate cuts last week.
• We have previously suggested that Bailey and those two Deputies would probably have to join dovish dissenters Dhingra & Taylor if we were to see a cut in Q4.
• Lower tier construction PMI data is due today.
• Elsewhere, the BoE will sell GBP775mln of short bucket gilts from its APF (3- to 7-Year).

The 10-year OAT/Bund spread has pierced the December 2024 closing high of 87.8bps following Lecornu’s resignation. The spread is now 7bps wider on the session.

• While the timing of Lecornu’s resignation has come as a surprise,  his prospects were appearing bleak amid opposition from both sides of the political spectrum during his short (less than 1 month) tenure in office.
• President Macron is now faced with a familiar dilemma in needing to appoint another PM (or face calling a fresh legislative election). Our Political Risk team will provide more colour in due course.
• Clearly, the EC’s deadline for 2026 budget drafts (October 13th) is extremely unlikely to be met by France, further delaying hopes of needed fiscal consolidation.  

• EUR extends losses on the back of that resignation: EUR/USD now through earlier lows as well as the Oct02 low at 1.1683. French equities also see weakness - with the CAC40 easily the underperformer in Europe.
• Lecornu's resignation opening up more criticism from other parties: National Rally's Bardella says the government have shown they have understood "nothing" regarding the country's problems.
• Next major support in EURUSD crosses at 1.1646, the late Sept low. Weakness through here snaps the weak uptrend posted off the August 1st low.