GILTS: Curve Bear Steepens, PGT Sees Strong Demand
Gilts hold lower on the day, with this week’s political developments in both France & Japan resulting in bear steepening of core global FI curves.
- Futures have pierced Monday lows, basing at 90.38 before recovering above 98.40.
- Bears remain in technical control, with initial support and resistance still located at 90.26 & 91.28.
- Yields 0.5-2.5bp higher, curve steeper.
- 10s last ~4.75%, still operating within the multi-week 4.60-4.80% closing range.
- Both 2s10s and 5s30s remain in their steepening trends, even after September’s flattening.
- The DMO’s GBP1.25bln sale of the 0.125% Jan-28 gilt via PGT saw strong demand metrics (aided by the easily digestible size), with the line rallying by 1bp in the time since the tender.
- Fiscal matters continue to dominate domestic news flow.
- Former BoE MPC member Saunders told BBG that inflation will provide the government with a net GBP5bln of additional revenue, although that is hardly positive news for households.
- Weakness in the long end has fed into GBP STIRs. SONIA futures flat to 2.5 lower, range lows in SFIZ5 and SFIZ6 remain untested on the day.
- BoE-dated OIS pricing just under 5bp of easing through year-end, we continue to suggest that markets are underpricing the odds of a Q4 rate cut.
- Little of note on the UK calendar for the remainder of the day. Note that BoE chief economist Pill will speak on Wednesday.
BoE Meeting | SONIA BoE-Dated OIS (%) | Difference vs. Current Effective SONIA (bp) |
Nov-25 | 3.961 | -0.1 |
Dec-25 | 3.919 | -4.8 |
Feb-26 | 3.814 | -15.3 |
Mar-26 | 3.786 | -18.1 |
Apr-26 | 3.712 | -25.5 |
Jun-26 | 3.691 | -27.6 |
Jul-26 | 3.644 | -32.4 |
Sep-26 | 3.632 | -33.5 |
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LOOK AHEAD: US Macro: PPI (Wed) and CPI (Thu) Inflation
US PPI inflation is released on Wednesday before CPI inflation on Thursday, an unusual ordering that should see core PCE implications dialled in after the CPI release rather than the usual wide range waiting for specific PPI details. PPI will be watched more closely than usual this month after a far stronger than expected jump in last month’s July report fired a warning short over tariff-based cost pressures starting to feed through. That included a 0.6% M/M increase in our preferred core series of PPI ex food, energy & trade services, which strips out items such as the then booming portfolio management & investment advice category following the strength in equity markets. It's too early to gauge an accurate sense of analyst expectations for August.
CPI inflation on Thursday will then be the last major release ahead of the Sep 17 FOMC decision. Consensus looks for core CPI at 0.3% M/M after the 0.32% M/M in July, another monthly increase comfortably above a pace consistent with 2% inflation. August should in theory start to see the largest tariff impacts along with September and possibly October. Returning to July’s report, core goods inflation was softer than expected, at a still solid (by core goods standards) 0.2% M/M for a second month running but about half that of 0.4% expected by analysts. Instead, non-housing core services surprised higher. The latter was a “dangerous” development in the words of a usually dovish Chicago Fed’s Goolsbee (’25 voter), who speaking after Friday’s payrolls report is still undecided on a September cut whilst looking for August inflation data “to get more information”.
LOOK AHEAD: US Macro: Payrolls Preliminary Benchmark Revisions (Tue)
- The BLS on Tuesday will publish preliminary estimates of benchmark revisions, based off QCEW data for Q1.
- These will give an indication of the actual benchmark revisions on the Mar 2025 level of payrolls due with the Jan 2026 payrolls report released in early February.
- Bear in mind that the final benchmark estimate tends to nearly always be more negative than the preliminary figure – see historical values to the right.
- That doesn’t mean they can’t be large again after last year’s historically negative revision that lowered the level of payrolls by ~600k. Initial estimates we’ve seen look for another large downward revision, with the smallest being worth -550k but with wide ranges higher.
FED: Barclays Adds A Cut To 2025 Fed View
Barclays analysts now expect three Fed cuts in the remainder of the year, adding October to their pre-existing call for 25bp reductions in September and December. "Given the disappointing August employment report, we expect the FOMC to see more elevated downside risks to the employment side of the mandate."
- As for a 50bp September cut, "we think that the FOMC will view [that] as sending too strong a signal that labor market conditions are deteriorating. Indeed, we think that participants such as Powell understand that the slower pace of payroll employment reflects at least, in part, slower labor supply, which does not translate into increased labor market slack."
- For 2026 they continue to expect 25bp cuts in March and June to 3.00-3.25%, but "we do not think the FOMC will be able to cut rates more than twice next year, as we think that activity will show some slight acceleration, with the economy adapting to the new tariff environment and fiscal policy providing some support, and the unemployment rate will revert down amid limited increase in labor supply."
