OAT: French OAT Basis trade

Bund futures have consolidated the early rally, which came on the back of softer-than-expected UK labour market data and weak European equity sentiment. Futures are +36 ticks at 130.66, with initial resistance at 130.99 (yesterday’s high). The technical picture remains unchanged, with the ECB-driven pullback still appearing corrective - for now - and the trend condition remaining bullish.  

• Regional headline flow has been light. ECB speakers (Villeroy, Rehn) have not shifted sentiment, nor did the stronger-than-expected June Sentix survey (0.2 vs -5.5 cons, -8.1 prior).
• The German curve has bull flattened, with 30-year Bund yields down 3bps and Schatz yields down 1bp. Germany will sell E4bln of the 2.40% Apr-30 Bobl at 1030BST.
• Meanwhile, the Netherlands sold 10-year DSLs earlier and the ESM is holding a E2bln WNG long 3-year syndication. Finland will sell RFGBs at 1100BST.
• 10-year EGB spreads to Bunds are within 1bp of yesterday’s closing levels. Overnight, French President Macron did not rule out another dissolution of the National Assembly to hold snap elections (he is legally allowed to do so as of July). While this has had limited impact on OAT spreads intraday (+1bps at 68bps), it serves as a reminder that French political (and fiscal) risks are still lurking in the background.
• Broader macro focus remains on the outcome of US-China trade talks, which have entered their second day.

• There has been a lot of discussion of how much to read into the huge fall in the UK HMRC RTI flash payrolls print that was released for May this morning. The print came in at -109k which if realised would be the third worst print since the series began back in mid-2014. Only the two "peak Covid" months of April 2020 and May 2020 saw larger falls.
• Looking at the hedgehog chart below, however, it shows that we do need to view a flash print with a bucketload of salt. There were large false negative prints seen, particularly in March 2024 (flash -67k) and April 2024 (flash -85k) that were revised much higher when the following month's data was released (and in fact the latest estimates for both of those months now are positive).
• However, what is also evident is that if we ignore the flash data and only look at the second estimates of the data, revisions are a lot smaller. And for third releases of the data there are even smaller revisions.
• So by the second (and definitely by the third) print of the data, we think there is a decent read. What is significant here is that if we exclude the nine months in the peak-pandemic period between March 2020 and November 2020), the April print would be the worst in the series (ignoring flash) and the March print would be the next worst print. So there is a clear trend emerging of a softening labour market here. Note that all of the previews that we read that mentioned the payrolls prints looked for upwards revisions here, not downwards.
• We do know that the MPC look at the PAYE RTI data. And we have also seen soft wage data (see our earlier coverage for more on that), vacancies have fallen more and the LFS unemployment rate has also ticked up.
• This is unquestionably a soft labour market print this morning and the trend in payrolls growth (even excluding the horrible flash number) will be a concern for MPC members.

• GBP has broken lower on the back of a poorer-than-expected labour market report. Average weekly earnings came in softer-than-expected at 5.3% vs. Exp. 5.5% and the monthly change in payrolled employees dropped sharply: to -109k vs. Exp. -20k, with the April figure also subject to a downward revision. As a result, the UK jobs picture and the latest insight into wage growth have been marked lower relative to the Bank of England's projections, raising the odds of a more activist approach from the MPC.
• As a result, BoE OIS markets have returned closer to 2 x 25bps rate cuts for this year, with September close to fully priced for the next cut. Risks to this position, however, include revisions to these numbers in subsequent releases, which have a track record in correcting data outliers.
• Weakness in GBP came in two phases this morning, first on the soft payrolls data, and then again on the SONIA open, with GBPUSD nearing 1.3462, its 20-day EMA. A clear break of this average would suggest potential for a
  deeper correction and expose the 50-day EMA for direction, at 1.3299. EURGBP meanwhile has cleared 0.8440, its 50-day EMA and key resistance, exposing 0.8541, the May 2 high.
• The USD trades firmer against broader G10, with the corrective relief for the USD Index isolating the downtrendline drawn off the early February high as next resistance, today at 99.575.
• There are no remaining key data releases due Tuesday, and no further central bank speakers (the Fed remain inside the pre-decision media blackout period), keeping focus on the resumption of trade talks between US and Chinese trade negotiation teams in London.