GILTS: Key Support Pierced In Futures

• US EIA: CRUDE OIL STOCKS EX SPR -3.86M TO 422.2M JUL 11 WK
• US EIA: DISTILLATE STOCKS +4.17M TO 107.0M IN JUL 11 WK
• US EIA: GASOLINE STOCKS +3.4M TO 232.9M IN JUL 11 WK
• US EIA: CUSHING STOCKS +0.21M TO 21.4M BARRELS IN JUL 11 WK
• US EIA: SPR -0.3M TO 402.7M BARRELS IN JUL 11 WK
• US EIA: REFINERY UTILIZATION WEEK CHANGE -0.8% TO 93.9% IN JUL 11 WK

• Commerzbank says that domestic demand faltered in June and while exports held up, the trade outlook in H2 is highly uncertain as US tariffs for trading partners have yet to be finalised. They expect Beijing to provide further support to real estate in the July Politburo meeting given the renewed weakness in the sector. Their concern is that once the stimulus stops, the macro picture will worsen. It is likely that the stimulus would only provide a temporary boost without lifting the underlying domestic demand weakness.
• DBS believes that weak private sector credit demand calls for easing. They expect additional 20bp LPR and 50bp RRR cuts to support growth in H2. Short-term 2-year CGB yields should face downward pressure. Long-term yields should remain supported by growth optimism from fiscal policy initiatives. Potential stimulus measures from the Politburo meetings, such as urban redevelopment projects, cash handouts, tax cuts and removal of restrictions on auto purchases, may lead to increased long-term bond issuance, likely resulting in a steeper yield curve.
• Goldman Sachs now expects China’s real GDP growth to fall from 5.3% y/y in H1 to 4.3% y/y in H2, due mainly to the adverse impact of US tariff increases and a much higher base (especially for Q4). With H1 real GDP growth still solid, they do not think policymakers see the immediate need to launch broad-based, significant stimulus in the near-term (including at the July Politburo meeting). Instead, GS expects incremental, targeted easing to help stem the property downturn and mitigate labour market pressures in H2.
• MUFG expects the government to further implement announced policy plans, but largely, fiscal stimulus is likely to remain reactive. They expect China GDP growth to decelerate to 4.2-4.3% y/y by Q4 this year. In their view, the growth deceleration and a narrower current account surplus is likely to put moderate pressure on CNY, with USDCNY reaching 7.25 by Q3. Risks for USD/CNY exist in both directions.
• SocGen says that despite a strong H1, the outlook is set to sour in H2 as export frontloading fades and the impact of US tariffs becomes more visible. Renewed weakness in house prices and the fading impact of subsidies also cast doubt over the sustainability of the consumption recovery. More stimulus towards housing and domestic demand will still be needed to achieve this year’s GDP target, likely after the summer. But for the upcoming July Politburo meeting, policymakers will likely be in a wait-and-see mode.

TD Securities recommended a 5s30s gilt flattener late on Tuesday, targeting a move to 110bp, with a stop set at 160bp.

• They noted that “2025 trading biases have been dominated by duration bears.”
• In terms of reasoning and looking ahead, they believe that “we will need some significantly weak data for markets to drift from 2 BoE cuts to the 3 cut scenario” (for ’25). Noting that “cracks in growth/labour markets are emerging, but the move has been rather slow”.
• Elsewhere, they believe that “Chancellor Reeve's fiscal buffers are more likely to be rebuilt via taxes/spending cuts rather than more supply. Furthermore, any small increases in issuance are likely to come via bills”.
• TD also highlight “the BoE has continued to signal a slowdown in QT pace”, which should help promote flattening.