GILTS: Firmer As Equities Soften, Politics Still Dominates Headlines

Gilt yields have edged higher on cues from the U.S. long end stemming from the latest threats to Fed independence.

• The U.S. DoJ served Fed Chair Powell with subpoenas threatening criminal indictment linked to the renovation of the central bank’s headquarters.
• There is some counter from signs of further softening in the UK labour market.
• Gilt futures traded as low as 92.30 before recovering, last -8 at 92.40.
• Initial support at the Jan 8 low (91.84), while Fibonacci resistance is clustered in above Friday highs (92.57, 92.72 & 92.91).
• Bulls remain in technical control despite this morning’s shallow pullback.
• Gilt yields 0.5-1bp higher, curve steeper.
• Bulls continue to look to the ’25 low in 10s (4.363%), which equates to 92.69 in futures today. That yield level protects rising triangle support (4.335% today).
• SONIA futures effectively unchanged, with the downtick in the long end reversing early dovish moves. ~46bp of BoE easing priced through December, next 25bp cut still not quite fully priced until the end of June.
• The latest KPMG-REC Report on Jobs showed a further deterioration on the quantities side, while there were some mixed signs on wage pressures.
• We think that the wage signal in this survey is of lesser importance to the MPC than the Agents' Pay Survey or the DMP data. Meanwhile, the continuing softening on the quantities side is notable.
• Little of note on the UK macro calendar for the remainder of the day. The BoE will sell GBP800mln of short bucket gilts from its APF this afternoon.

Fig. 1: UK 10-Year Gilt Yields (%)

• Greenback has stabilised at the session's lower levels, helping keep EURUSD propped toward 1.1700 and GBPUSD above the Friday high of 1.3451. Resultantly, the USD is weaker against all others in G10. The sustainability, and potential extension, of this USD weakness will take the lead from the US curve - which trades bear steeper so far Monday. Following Powell's video statement, it seems Trump's next comments on the topic are the primary market risk - even as the President denied knowledge of the filings over the weekend.
• The primary beneficiaries have been CHF and EUR as today's move slows, but only partially reverses, the YTD rally in USDCHF and YTD weakness in EURUSD. EUR's growing status as a haven is clear in the today's market reaction - and this will likely remain the case through near-term periods of market fragility, even as the outside pricing of ECB hikes further out the curve has faded.
• Despite the broad USD weakness, JPY has failed to receive a meaningful boost to start the week, with a brief flurry down to 157.52 well supported during APAC hours. Domestic factors are certainly playing their part here, as Friday’s reports of PM Takaichi dissolving the Lower House and associated speculation that she could call for a snap election continues to rise. The Yomiuri newspaper has reported that Feb. 8 or Feb. 15 are likely dates for this to occur.
• Technically, last week’s breach of 157.89 for USDJPY was a meaningful development, confirming a resumption of the medium-term uptrend. The next significant topside target will be 158.87, last year’s high and a key resistance. Support to watch lies much lower down at 155.35, the 50-day EMA.
• Typically for a Monday, there are no major data releases scheduled. This should keep focus on any potential comments concerning the Fed's subpoenas from Trump. The President is due at several public events later today, and also holds a call with the Mexican President. Central bank speak today includes Fed's Bostic, Barkin & Williams as well as ECB's Villeroy.