SWAPS: Long-end EUR Vol Bounces, Risks May Favour 5/10y EUR Curve
Sep-29 14:34
The bounce in 3m30Y EUR swaption vol since the middle of September stands out relative to short/medium tenors, underscoring the confluence of risks facing the long-end of global curves. For investors still demanding carry, the 5/10-year portion of EUR curves may still present a better risk-reward than longer-tenors, even considering the already strong year-to-date performance.
- In the Eurozone, Germany has officially passed its 2025 budget, with Bundestag focus now on passing the 2026 budget by the end of November. While uncertainty remains around the implementation of announced expansionary policies in Germany, a debt financed fiscal impulse remains the base case, which should underpin long-end yields. Meanwhile, the ongoing Dutch pension fund transition continues to add background steepening pressure to the long-end of the EUR swaps curve.
- Elsewhere, French PM Lecornu’s interview with Le Parisien on Friday has done little to assuage political/fiscal concerns in the region’s second largest economy. Domestically induced volatility in France continues to present a spillover risk for semi-core/peripheral peers such as Italy.
- Outside of the Eurozone, well known long-end risks include fiscal/political concerns in the UK and Japan, alongside continued worries around Fed independence in the US. Although global long-end rates have seen a relief rally through September, broader steepening trends remain intact.
- The decline in EUR rates vol since the Liberation Day spike in early April has been most pronounced at the short-end. This reflects increased certainty around the landing zone for the current ECB easing cycle., Most Governing Council members now consider rates to be in a “good place”, with another cut having to be clearly motivated by incoming data.
Figure 1: EUR 3m Swaptions Vol Across Tenors
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RATINGS: S&P Upgrades Portugal To A+ From A
Aug-29 20:28
S&P has upgraded Portugal's long-term credit rating to A+ from A, with a stable outlook (had been positive).
- This is the 7th S&P upgrade for Portugal, from a low of BB in 2012-15. Only four ratings are higher (AA-, AA, AA+, AAA). This is the same rating as Slovakia, and just above Spain (A) per S&P.
- Per Bloomberg: "*S&PGR UPGRADES PORTUGAL TO 'A+' ON LOWER DEBT; OUTLOOK STABLE"
STIR: Still Eyeing September And December Cuts
Aug-29 20:16
With few market-moving data points this week, implied Fed rate cuts essentially held onto their post-Jackson Hole upward repricing, adding a couple of basis points of easing for good measure heading into the Labor day weekend.
- Indeed, the lack of movement is somewhat remarkable given this week's extraordinary "firing" of Fed Governor Cook, which is currently being fought out in the courts. In all it probably added to the dovish tone on the near-term rate outlook post-Jackson Hole but not substantially so, at least so far.
- The current path sees a September rate cut priced with nearly 90% implied probability, with 56bp of cuts through end-year (a cumulatively priced second cut in December) and 83bp through March 2026 (3+ cuts).
MACRO ANALYSIS: MNI US Macro Weekly: One Week, Two Labor Days
Aug-29 20:10
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- A busy pre-holiday week for data brought mixed economic signals and little net change in Fed easing expectations, putting next week’s labor day – Friday with its nonfarm payrolls report, of course, with apologies to Monday’s federal holiday – in focus for the FOMC and market participants alike.
- Second-quarter GDP was revised up by more than expected in the second reading, to 3.3% Q/Q SAAR, driven by better-than-previously estimated domestic demand but still leaving 1st half growth in slightly weaker territory vs last year. That said, the Atlanta Fed's Q3 GDPNow estimate jumped to 3.47% (though the implied contribution from net exports in the quarter looks somewhat dubious, as we explain).
- The other major release of the week was July's Personal Income and Outlays report, which showed a modest uptick in income and spending on the month. However, the broader trends remain mixed at best, as real disposable income growth remains soft and services consumption is failing to regain traction.
- Core PCE inflation was close to expectations in July as the Y/Y accelerated to 2.9% for its fastest since February as it moves further away from recent lows of 2.6% having stalled above the 2% target. Recent trend rates are a little hotter but the median FOMC member will still need to see a further acceleration to meet their 4Q25 forecasts from June.
- Labor data were mixed. Latest jobless claims were in line to slightly better than expected, with initial claims trending a little higher but still impressively low whilst continuing claims are broadly plateauing after sharper increases in 1H25. But within the Conference Board consumer survey, the labor differential edged lower again, suggesting a continued upward trend in the unemployment rate.
- Elsewhere: regional Fed activity surveys were individually mixed, but combined generally showed an improvement in both manufacturing and services activity albeit with continued upside price pressures.
- Consumer sentiment (UMichigan and Conference Board surveys) and housing activity remained soft.
- Apart from Gov Waller again making the case from rate cuts, other FOMC colleagues who commented this week were a little more guarded when it came to the need for easing, to our ear.
