OPTIONS: Call Structure Activity Remains Predominant In European Rates

A new survey from Gallup has found, “Partisans’ preferences for reducing the federal budget deficit have differed sharply in the past and continue to today. Democrats have historically been most likely to prefer equal spending cuts and tax increases, and a 41% plurality of Democrats now favor that approach...

• “Conversely, the broad majority of Republicans continue to favor spending cuts, either exclusively (38%) or mostly (42%). Independents’ preferences are currently roughly in line with the national average, as they have been in prior readings.”
• Gallup concludes, “Americans’ desire to rein in government spending, paired with their reluctance to reduce major entitlement programs or raise broad-based taxes, mirrors the same clash of views preventing lawmakers from reaching a budget agreement.
• “Republicans are focused on spending cuts, and Democrats lean toward a combination of spending cuts and tax increases. The fiscal gridlock now driving the government shutdown reflects not only partisan differences in Congress but also a divided public that offers little clear guidance for bipartisan compromise, something that Americans want.”

Figure 1: Partisans' Preference for Reducing Federal Budget Deficit

Source: Gallup

Powell in Q&A discusses what data the FOMC is looking at amid the federal gov't shutdown, pointing out that you can for example "add up" state jobless claims reports "and get a pretty decent estimate", and ADP payrolls. 

• "I will say generally the alternative data that we look at is better used as a supplement for the underlying governmental data, which is the gold standard. And it won't be as effective as the main course as it would have been as a supplement.... in the employment space, there's some pretty good substitutes, less so in the inflation space and and in the economic activity space."
• On missing federal government data, Powell suggests that "we're going to make our decisions according to the FOMC schedule, but I think it will be a lot better once we start getting, for example, the September employment report is going to be very important report, and we're not on track to have that, there would still be time for us to get that. We will get, of course, the September inflation, the CPI and PPI reports. So that's a positive. But, you know, we don't comment on fiscal matters, but from our standpoint, we'll start to miss that data, and particularly the October data. If this goes on for a while, they won't be collecting it, and it could become 
  more challenging"
• Further to his speech commentary on the balance sheet, Powell says on what they're watching for when considering ending QT: "So we have a we have a nice spider chart and five main indicators, one of which is repo levels. And I think overall what they're showing is that we're still at ... abundant reserves... a little bit above ample reserves. So but we're beginning to see ... a little bit of tightening in money market conditions, particularly repo rates have moved up.... the pace of runoff is now very, very slow. So we're going to be watching all those factors very carefully. And we're not so far away now. But there's a ways to go."
• Asked if the Fed would look at any specific action on MBS to address mortgage rates or housing affordability, Powell says the Fed doesn't target housing prices.

Gilts and OATs were standout performers in an eventful session Tuesday.

• Core FI saw an early bid amid renewed deterioration in Sino-U.S. trade relations.
• The tone was helped with data coming in on the soft side early too: the UK labour market report included disappointments on the wage growth, vacancies and LFS fronts (MNI's review of the data here), spurring a deepening of BOE cut pricing. Meanwhile, the German ZEW  survey readings underperformed across both expectations and current conditions.
• In the session's key development, OAT spreads to Bund tightened sharply on prospects for early elections to be avoided, after French PM Lecornu pledged among other matters to suspend the 2023 pension reforms to 2028. OAT gains extended into the cash close with 10Y yields hitting 2 month lows as the Socialists said they will not vote for a no confidence motion in the government.
• On the day, Gilts outperformed Bunds with both the German and UK curves closing bull flatter.
• OATs outperformed in the periphery/semi-core space, with 10Y spreads to Bund falling below 80bp.
• After the cash close we await commentary from various French political leaders who are expected to weigh in on the Lecornu speech.
• Wednesday's calendar includes Eurozone industrial data, with multiple ECB and BOE speakers including Ramsden, Breeden, and Villeroy.

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is down 0.9bps at 1.935%, 5-Yr is down 1.5bps at 2.202%, 10-Yr is down 2.6bps at 2.61%, and 30-Yr is down 3.2bps at 3.192%.
• UK: The 2-Yr yield is down 4.9bps at 3.901%, 5-Yr is down 6.3bps at 4.038%, 10-Yr is down 6.8bps at 4.59%, and 30-Yr is down 6.9bps at 5.394%.
• Italian BTP spread down 1.5bps at 78.3bps / French OAT down 4bps at 79.8bps