UK FISCAL: Market reaction shows concern over fiscal rules
- With Gilts and GBP holding a large part of their daily weakness, markets are clearly still speculating on whether Reeves will be removed as Chancellor and whether that means the fiscal rules are dead and hence whether that means we will have a lot more spending (and hence issuance down the line).
- There is a chance that the market fallout has been overblown this, and that Starmer (whose office has said she has his full support) just chose his words poorly. There are some journalists now stating that there was a bust up with the speaker which upset Reeves.
- If Starmer was considering dismissing Reeves he has seen a taste of what the market reaction is likely to be if she is replaced by a Chancellor whose rules are not so stringent. So this could possibly cause some further thoughts on the issue.
- If there is a change in Chancellor the messaging needs to be clear that fiscal discipline will remain to avoid further downside to UK markets (likely a replacement will need to be named straight away).
- Markets were already on edge to some extent after the number of concessions needed to get the welfare bill second reading through the Commons and the other recent U-turns e.g. on Winter Fuel payments. It seems that the market is very concerned about the ability of the government to enact spending cuts.
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EUROPEAN INFLATION: Analysts Continue to Centre on 2.0% Y/Y May Headline HICP
Updated analyst tracking estimates point to only slight downside risks to consensus for tomorrow's May release of Eurozone flash HICP (10:00 BST). The median estimate we've seen over the weekend of 2.0% Y/Y matches the broader Bloomberg consensus although with a few looking for a 1.9% print. MNI's tracker eyes 1.9%.
- Citi see headline 1.9% ("albeit with risks of 2.0%"), core 2.4% as national-level data came in in line with their original Eurozone aggregate forecast.
- HSBC see headline at 1.9%, core 2.4% (cutoff appears to have been ahead of the Spain and Germany results).
- Goldman Sachs see 1.95% headline, 2.37% core after German, Italian and Spanish data.
- Barclays see headline 1.96% Y/Y and core 2.43%.
- ING see headline at 2.0%, core 2.5%.
- Lloyds see headline at 2.0%, 2.4%
- Morgan Stanley see headline at 2.0%, core 2.4% "forecast revision today is probably largely attributable to airfares, but, most likely, the non-volatile components of services inflation remained relatively sticky"
- Société Générale see headline 2.0% ("risk of a slightly weaker print"), core 2.4% "most of the easing in May is likely to come from this Easter effect unwinding"
- TD Securities see headline 2.0%, core 2.4% as they "have seen disinflation continue across major member states in May".
Ahead of the EZ-wide release, the Netherlands will be the last key national-level print, scheduled for tomorrow 05:30 BST, and is expected for a 0.3pp deceleration to 3.8% Y/Y. Remember that in April, the Netherlands saw an outsized 0.7pp 'beat' in headline at 4.1%, which was driven by services inflation speeding up by 1.6pp vs March.
EGB OPTIONS: Option Package in Buxl, Bund, Bobl, Schatz
- DUU5 107.30p, sold at 21.5 in 6.75k
- DUU5 107.20p, sold at 17.5 in 6.75k.
- UBU5 119.00p, sold at 280 in 500.
vs
- RXU5 130.00p, bought for 115 in 2k.
- OEU5 117.75p, bought for 64.5 in 4k.
GILTS: Citi Still Look For Further Curve Steepening
Citi note that “the 5s30s curve has become range-bound, with a propensity to ‘twist’. It has been resistant to flattening in the May sell-off, despite the DMO’s cut to 15-Year+ issuance”.
- Theu go on to suggest that the “supply reduction may yet be undone by QT. Meanwhile, the upcoming Spending Review will likely reiterate the fiscal challenge”.
- Ultimately, they suggest that “with little left to take out of MPC cut pricing, in our view, bear-flattening pressure may fade. All in, our bias remains for further steepening well beyond the forwards”.
