STIR: Next Fed Cut Seen In July, Hawkish Musalem Ahead

Gilts remain locked in a narrow range, with offshore cues (Friday’s late rally in wider core global FI markets & feedthrough from the German election) mostly offsetting thus far.

• Futures continue to hover around 92.50, after stabilising around that level shortly after the open.
• The bullish technical cycle in the contract remains intact, although it has moderated.
• Initial resistance located at the 50-day EMA (92.83), while initial support comes in at the Feb 20 low (91.78).
• Yields ~1bp lower across the curve.
• Expect futures roll activity to continue to dominate ahead of Thursday’s first notice for H5, with estimates pointing to just over 26% roll completion at present.
• Comments from BoE’s Ramsden (13:15 GMT) and Dhingra (18:00 GMT) are due later today, with plenty of BoE-speak due throughout the week.
• BoE-dated OIS is little changed on the day, showing 52.5bp of cuts through year-end.

• The smooth passage of the German election results has allowed markets to trade with a sense of normalcy after EUR came under pressure into the Friday close - but the victory for Merz' CDU/CSU and the likely formation of a coalition with the SPD has steered markets clear of any abrupt U-turns on policy - leaving the EUR to very modestly outperform this morning.
• January highs have capped the topside for EURUSD and broader bearish conditions continue to signal scope for a test of a significant cluster of support in EURJPY. For EURUSD, spot is edging lower and narrowing the gap to Friday’s close at 1.0459. A deeper reversal would place the focus on initial firm at 1.0401, the Feb 19 low.
• A sharp dose of equity selling at the European open has subsided, with the bounce off lows helping markets maintain their preference for JPY and CHF selling - with both currencies at the bottom of the G10 table today. The key for sentiment ahead remains the state of the Russia-Ukraine peace talks and the timing of a Putin-Trump meeting in Saudi Arabia.
• Schedules show both the French and UK leaders set to head to Washington this week, at which they'll look to assert Europe's interests and moderate Trump's divisive tone toward Moscow and Kyiv. Macron and Starmer's ability to do so could prove market-moving this week.  
• Typically for a Monday, datapoints are few and far between, with just the Chicago and Dallas Fed national activity indices. As such, more focus may be paid to the ongoing BoE research conference, at which BoE's Ramsden and Dhingra are set to speak - with balance sheet policy a particular focus.

Details of the German election vote split has limited downside in Bund futures this morning. Although the CDU is in a strong position to form a 'grand coalition' with the centre-left Social Democrats (SPD), debt brake reform will only be possible with support from the far-left progressive Die Linke party. 

• Bund futures are -10 ticks versus Friday’s settlement levels at 132.28, up from a session low of 132.02. Friday’s rebound in futures appears corrective for now, with key short-term resistance defined at 132.97, the Feb 13 high. Initial firm support is 131.26, the Feb 19 low and the bear trigger.
• German cash yields are now little changed on Friday’s close, with the curve lightly steepening.
• The German February IFO survey was mixed versus expectations, but directionally mirrored Friday's flash PMI release across manufacturing/services sectors. Eurozone final Jan HICP confirmed flash estimates at 2.5% Y/Y for headline and 2.7% Y/Y for core.
• 10-year EGB spreads to Bunds are up to 0.5bps tighter on the day.
• EU-bond and Belgian OLO supply is due this morning.
• The remainder of today’s regional calendar is light.