EGBS: Bunds Rise Alongside Gilts Following UK CPI

Bund futures have inched back towards intraday highs following this morning’s run of flash PMI data and ECB-speakers, trading in a tight 30 tick range. 

• Bunds are +5 ticks at 134.69, still 130 ticks below levels seen prior to last week’s ECB decision.
• The Eurozone December flash PMIs were a little mixed, with the manufacturing components seeing renewed weakness but the services components rebounding above November’s levels and consensus estimates. Bund futures have largely shrugged off the increase in inflationary pressures noted in the German and EZ PMIs.
• Meanwhile, ECB President Lagarde delivered a speech explaining the bank’s decision to drop its pledge to keep policy “sufficiently restrictive”. Passages around services inflation screened dovish.
• Vice President de Guindos echoed Lagarde’s sentiment that the trajectory of the ECB’s rate path is clear, while Kazimir struck a somewhat more cautious tone.
• The 10-year OAT/Bund spread is 1bp wider today at 79bps, off earlier highs of ~80.5bps, as markets digest Moody’s off-cycle ratings downgrade late Friday.
• The remainder of today’s focus will be on new French PM Bayrou’s attempts to form a government, and the German no-confidence vote (results expected around 1500GMT/1600CET).

Gilts have rallied this morning, with weakness in crude oil, soft retail sales data out of China and further global growth headwinds in the form of the details of the flash PMI data driving the move.

• UK PMI data also provided some inflationary worry, resulting in a knee-jerk, limited hawkish move that faded.
• Futures as high as 94.50, last +13 at 94.45, moving away from Friday’s late low.
• Technically, futures traded sharply lower last week, resulting in a move through support at 95.49, the Dec 4 low, and 95.17, the Nov 28 low.
• A continuation lower would expose key support at 93.40, the Nov 18 low.
• Key resistance and the bull trigger at 96.54, the Dec 3 high. Initial resistance is at 95.16, the 20-day EMA.
• Yields 2-3bp lower, long end outperforms at the margin.
• 10s outperform Bunds by 1bp, spread sticks to multi-week range, last 214bp.
• SONIA futures -0.5 to +3.5.
• BoE-dated OIS shows 0.5bp of easing for Thursday, 20bp of cuts through February, 28bp through March and 78bp through December ’25, little changed to 2.5bp more dovish on the day.
• UK inflation & labour market data will set the tone ahead of Thursday’s BoE decision. Our preview of the data will cross later today, with our BoE preview set to be released tomorrow.

• GBP trades well, rising against all others in G10 on the back of a better-than-expected UK Services PMI print, which tipped GBP/USD to a new daily high at 1.2671. The release showed some similar themes to the EZ PMIs across the morning, with average prices increasing at the fastest pace for nine months, particularly in services.
• Prices of raw materials and fuel were cited, but the increase of costs for businesses from the Budget is also being seen as a hugely important factor and could limit the potential for more dovish dissents at the MPC meeting this week.
• CHF is on the front foot, reflecting the downstep for European equity futures at the open. The EuroStoxx and DAX futures are lower by ~0.3%, but it's France's CAC-40 future that leads losses, off by and 0.7% and dragging on US markets ahead of the open.
• The greenback is mid-range alongside the JPY, while softer oil prices are providing a headwind for oil-tied currencies - and most notably the NOK.
• The US empire manufacturing release, prelim December PMIs and Canadian housing starts data are the Monday highlights. ECB speak is heavy, with appearances from ECB's Wunsch, Escriva and Schnabel still to come.