EGBS: Bund Futures Off Lows, But Buoyant Euro Equities Still Weighing

In contrast to the EZ, the UK flash services PMI surprises to the upside at 53.2 (51.0 exp and prior). Also in contrast the flash manufacturing PMI surprises to the downside. There is also a decent upside surprise to the flash composite PMI. A real contrast between the sectors here with services seeing overseas demand while manufacturers are impacted by global economic uncertainty and tariff concerns. The other big point to pick out here is that both services and manufacturers are noting costs being passed on from higher payroll costs and NIC contributions. This allies with the MPC Minutes on Friday - and adds to evidence that whereas 2024 was dominated largely by services inflation, in 2025 non-energy goods inflation will be watched much more closely too.

• "Service sector growth was bolstered by renewed improvements in both domestic and overseas sales."
• "Manufacturers experienced severe headwinds to demand from rising global economic uncertainty and potential US tariffs. Weak international demand resulted in the fastest decline in manufacturing export sales since August 2023. Moreover, manufacturers reported the steepest downturn in production volumes for nearly one-and-a-half years."
• "Input cost inflation eased further from January’s nine-month high but remained much higher than the long-run survey average. Service providers recorded a much steeper rise in input prices than manufacturers, largely reflecting intense wage pressures and efforts by suppliers to pass on higher payroll costs. Manufacturers also noted that vendors had sought to pass on greater employment costs and rising raw material prices (especially metals)."
• "Robust increases in average prices charged were subsequently reported across the private sector economy in March. The overall rate of output charge inflation was unchanged since the previous month. A slight slowdown in the service sector offset an acceleration in factory gate price inflation to its strongest since April 2023. Forthcoming increases to National Insurance contributions and the National Minium Wage were cited as the main reasons for higher output prices, but there were also sporadic reports of discounting to stimulate sales."

Bund futures rallied after the German flash March services printed weaker-than-expected at 50.2 (vs 52.0 cons, 51.1 prior), a sign that underlying demand conditions remain subdued. Stronger-than-expected manufacturing prints in France and Germany capped upside though, with Bunds not able to close the opening gap at 128.48 (currently -11 ticks at 128.37). Beyond the opening gap, initial resistance in Bunds is the 20-day EMA at 128.83. 

• Overnight weakness came on reports that US President Trump’s April 2 tariff announcement will be more targeted – as opposed to broad-based – than currently expected.
• German yields are up to 1bp higher on the session. The DFA has announced that there are no changes to auction sizes in Q2 for either capital markets or for Bubills. This was broadly as expected.
• Supply is due from the EU at 1030GMT, which will also be limiting rallies in Bunds.
• Earlier, ECB Executive Board member Cipollone provided characteristically dovish comments, suggesting the case for an April rate cut has grown.
• 10-year EGB spreads to Bunds are generally tighter on the session (BTP/Bund is 1.5bps tighter at 109.5bps), even as European equities move away from session highs. IRISH bonds underperform. 

• UK FLASH MARCH MANUF PMI 44.6 (FCAST 47.2, FEB 46.9)
• UK FLASH MARCH SERVICES PMI 53.2 (FCAST 51.0, FEB 51.0)