BONDS: EGBs-GILTS CASH CLOSE: Weaker On Geopolitics
Jun-13 16:57
European yields rose Friday, but still closed lower for the week.
- Geopolitical risk was the dominant theme, with Israel's strikes on Iran overnight seeing Bunds and Gilts rally strongly on Friday's open.
- But from there, yields would head higher: with Iran not immediately retaliating, oil prices retraced and equities found their footing.
- In a lighter session for data, the UK BoE/Ipsos survey showed inflation expectations didn't pick up further in May, but medium-term readings remain elevated. Final May HICP prints from Germany, France and Spain were unsurprising, and while April Eurozone industrial production was below-consensus, this comes after Q1 distortions.
- The German curve bear steepened, while the UK's leaned bear flatter. On the week, Bunds and Gilts closed stronger, with some modest bull flattening in both the German (2Y -2.4bp, 10Y -4.1bp) and UK (2Y -7.3bp, 10Y -9.4bp) curves.
- Periphery EGB spreads closed slightly wider, with BTPs underperforming.
- Next week's schedule is highlighted by the BOE decision Thursday, preceded by UK CPI Wednesday.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is up 4bps at 1.856%, 5-Yr is up 5.7bps at 2.136%, 10-Yr is up 5.7bps at 2.535%, and 30-Yr is up 5.5bps at 2.987%.
- UK: The 2-Yr yield is up 7.4bps at 3.94%, 5-Yr is up 7.9bps at 4.064%, 10-Yr is up 7.3bps at 4.55%, and 30-Yr is up 6.7bps at 5.26%.
- Italian BTP spread up 2.2bps at 94.9bps / French OAT up 1.3bps at 72.2bps
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STIR: Next Fed Cut Only Fully Priced For Oct Ahead Of Thu Data Deluge
May-14 16:55
- Fed Funds implied rates have pushed to new recent highs over the past two hours, with the Dec 2025 rate at levels last seen on Feb 24.
- Cumulative cuts from 4.33% effective: 2.5bp Jun, 9bp Jul, 22bp Sep, 34bp Oct and 49bp Dec.
- The SOFR implied terminal rate is at 3.48% (SFRZ6) at what would be its highest close since Mar 27.
- Headlines have been relatively light for the sustained move, although the step did come after Bloomberg headlines that China is suspending export controls applied to 28 US entities in a sign of some further trade de-escalation as some eye the likelihood of a temporary pause of 20% “fentanyl” tariffs.
- The moves came some time before the US and Qatar announced an economic exchange worth at least $1.2trn but with only vague details in the White House statement.
- Tomorrow sees a particularly heavy morning, with retail sales, PPI inflation, jobless claims plus Empire & Philly Fed manufacturing reports all at 0830ET.
- Powell then talks on the framework review at 0840ET which could limit its market impact but will be watched closely nevertheless.
FOREX: USD Index Fully Reverses Monday Surge Before Stabilising
May-14 16:44
- Tuesday’s theme of a weakening US dollar extended today, helped lower by major equity benchmarks consolidating their recent strength and headlines surrounding trade talks providing an additional greenback headwind. The US and South Korea agreed to share a mutual understanding of the principles they hold for operating foreign exchange markets and to continue discussions on FX policy. The headlines spurred some USDKRW weakness, which then filtered through to a broader dollar move against G10 peers.
- Price action prompted the USD index to bridge the gap to last Friday’s close, notably eroding the entirety of the US/China tariff reprieve inspired rally to start the week.
- Hardest hit on Wednesday was USDJPY, which has traded in an impressive 206 pip range. The Japanese yen had been trading in a relatively weak manner amid the risk sentiment surge, however, discussions on FX policy being discussed between other administrations prompted some speculative yen appreciation. USDJPY traded as low as 145.61, and was down as much as 1.27% before stabilising. The move did fall just shy of last Friday’s close at 145.37. Amid a broader stabilisation for the greenback, USDJPY has pared roughly half the moves and stands around 146.50 as we approach the APAC crossover.
- Elsewhere, the likes of AUD and NZD are underperforming (down around 0.45%), although they still remain among the best performers in G10 this week. For AUDUSD, Monday’s move lower was considered corrective and another test above 0.6500 today reinforces the underlying bullish tone. Further strength would open 0.6528, the Nov 29 high, although there appears scope for a more protracted recovery towards the US election related highs at 0.6688.
- Thursday’s APAC session will be highlighted by the Australian unemployment report, before the focus turns to UK GDP. In the US, PPI and Retail Sales data are scheduled, which will be followed by Fed Chair Powell speaking.
US TSY FUTURES: BLOCKs: Jun'25 2Y Sale, 10Y Ultra Buy
May-14 16:28
- -6,916 TUM5 103-07.25, sell through 103-07.38 post time bid at 1218:29ET followed by
- +3,500 UXYM5 111-24, post time offer at 1220:20ET
