STIR: Hawkish Move In EUR STIRs As Long End Sells Off
Hawkish adjustments in EUR STIRs this morning, accompanied by weakness further out the curve, with little in the way of a meaningful fresh driver since European trade got underway.
- ECB-dated OIS shows ~1.5bp of easing for September, ~4.5bp through October and ~11.5bp through year-end. ~15.5bp of cumulative easing is showing through March i.e. just over 60% odds of another 25bp cut being delivered this cycle.
- Euribor futures are 1.0-5.5 lower, strip steepens. ERZ5 tests the July low, a break would expose the April 9 base. ERZ6 also tests its July low, a break would expose its mid-May low.
- Markets continue to digest the U.S. tariff announcements and await today’s NFP release out of the U.S.
- A reminder that yesterday’s national level CPI/HICP data failed to present any meaningful downside surprise, which allowed the markets to cement their recent hawkish swing re: the ECB.
- Flow-wise, the ERH7 vs. ESTR spread activity highlighted earlier dominates, was initially driven by a seller of the spread.
- Elsewhere, ongoing demand for the ERH6 98.31/98.43 call spread vs. the ERH6 97.93/97.81 put spread, with turnover in that strategy taking volume to ~50K of new risk on the week.
- Final manufacturing PMIs for the larger European economics and Eurozone HICP data headline the regional calendar today.
- Spanish manufacturing PMI was slightly firmer than expected.
ECB Meeting | €STR ECB-Dated OIS (%) | Difference Vs. Current Effective €STR Rate (bp) |
Sep-25 | 1.903 | -1.6 |
Oct-25 | 1.872 | -4.7 |
Dec-25 | 1.806 | -11.3 |
Feb-26 | 1.794 | -12.6 |
Mar-26 | 1.764 | -15.5 |
Apr-26 | 1.769 | -15.0 |
Jun-26 | 1.775 | -14.4 |
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EUROPEAN FISCAL: France YTD Budget Deficit Tracks Below 2023/2024 Outturns
The French year-to-date budget deficit widened to E94bln in May, a step up from E69.3bln last month but comfortably below the E113.5bln seen in May 2024 and E107.2bln in May 2023. Although fiscal consolidation appears to be progressing from this perspective, last week the French government said it needs to find an extra E5bln of spending cuts to achieve its 5.4% deficit to GDP target. That's on top of the E40bln in savings required to meet its 4.6% 2026 target, with proposals set to be announced this month before a vote in the autumn.
- The press release notes that expenditures were E189.6bln in May, down from E197.6bln a year ago. Meanwhile, revenues were E137.8bln, up from E126.1bln a year ago.
- Yesterday, PM Bayrou survived a no-confidence vote following a breakdown in talks over controversial pension reforms pushed through by President Emmanuel Macron in 2023. This was an expected outcome, with the far-right RN party abstaining from the vote.
- With the National Assembly set to go on its summer recess from mid-July until September, the Bayrou gov't is likely safe until the 2026 budget process gets underway.
- Alternatively, from 7 July (one year after the last election) President Emmanuel Macron could look to dissolve the National Assembly and hold a snap election. This would be an even riskier move than in 2024, with his centrist alliance polling poorly and at risk of further seat losses.
GILTS: A Little Lower, Supply & Comments From BoE's Taylor Due
Gilts follow peers lower at the open, with questions surrounding U.S. & UK fiscal fragility remaining evident.
- Futures through yesterday’s low but not managing to close yesterday’s opening gap higher (93.11), basing at 93.24 before retaking 93.30.
- Bulls remain in technical control.
- Initial resistance at yesterday’s high (93.76), while initial support of note comes in at the 20-day EMA (92.78).
- Yields 0.5-1.5bp higher, bear steepening.
- Curves pare a little of the Tuesday flattening that followed comments from BoE Governor Bailey, flagging the potential for a slowing of QT and related adjustments based on the recent steepening of the curve.
- SONIA futures incrementally softer as gilts weaken, 0.5-2.0 lower on the day.
- Comments from BoE dovish dissenter Taylor (11:30 London) are due today.
- On the supply front, the DMO will come to market with GBP5.0bln of the 4.375% Mar-28 gilt.
SILVER TECHS: Still Looking For Gains
- RES 4: $39.026 - 1.382 proj of the Apr 7 - 25 - May 15 swing
- RES 3: $38.246 - 1.236 proj of the Apr 7 - 25 - May 15 swing
- RES 2: $38.000 - Round number resistance
- RES 1: $37.317 - High Jun 18 and the bull trigger
- PRICE: $35.904 @ 08:01 BST Jul 2
- SUP 1: $35.799 - 20-day EMA
- SUP 2: $34.657/31.651 - 50-day EMA / Low May 15
- SUP 3: $30.915/28.351 - Low Apr 11 / 7 and the bear trigger
- SUP 4: $27.686 - Low Sep 6 ‘24
A bull cycle in Silver remains in play. The metal has recently traded through resistance at $34.903, the Oct 23 ‘24 high and a key bull trigger. The break of it marks an important medium-term bullish development. Sights are on the $38.00 handle next. On the downside, initial support to watch lies at $35.821, the 20-day EMA. It has been pierced, a clear break of it would open $34.711, the 50-day EMA.
