JGBS: No Lasting Reaction To Ueda News

• As noted earlier, April CPI and PPI data suggest that China's exit from factory-gate deflation is looking like a structural shift toward reflation. They are consistent with the PBoC's current liquidity approach, which suggests limited need for significant liquidity injections and fading hopes for rate cuts.
  • Indeed, ING says that recent data will likely keep the PBoC on pause for now. Unlike many central banks globally, China's next move remains more likely to be a cut than a hike, in their view. It looks increasingly likely that such a move won't happen until at least the second half of the year, barring a significantly sharper-than-expected deterioration in activity data ahead.
  • Goldman Sachs also believes that April inflation data point to continued oil-driven reflation in China. They note that overall, upstream sectors contributed around 81% of the rebound in y/y headline PPI inflation. Incorporating the stronger-than-expected April PPI print (+2.8% y/y), they revise up their 2026 full-year headline PPI inflation forecast to 2.0% y/y.
  • Meanwhile, JP Morgan have also revised their full-year PPI and CPI inflation forecasts up to 2.5%y/y (from 1.3%) and 1.1%y/y (from 1.0%), respectively. However, given still weak domestic demand, possible downside risks to exports, and existing oversupply in some sectors, they believe that China’s PPI deflation pressure may persist and PPI deflation could re-emerge. Besides higher energy costs, pass-through to CPI remains limited with a time lag, so it may still take time for it to edge up closer to the NPC target of around 2%.

Gilts sold off at the open, following the latest rally in oil after President Trump rejected Iran’s counter proposals, deeming the offer to be unacceptable. Oil has since topped out, allowing core bonds to base.

• Futures pierced, but failed to extend meaningfully through, Thursday’s low (87.13), basing at 87.10 before a recovery to 87.30. More meaningful support isn’t seen until the May 5 low/bear trigger (85.76).
• Bears remain in technical control, with recent gains considered corrective.
• Initial resistance located at the 50-day EMA (88.49).
• Yields 4-5bp higher, curve marginally steeper. 10s back towards 5.00% after bulls failed to force a meaningful break below 4.90% last week.
• Gilt/Bunds wider owing to relative beta to energy price moves and perhaps an element of lingering political risk. Spread at 193bp after failure to hold below 190bp last week.
• BoE-dated OIS pricing 66bp of hikes through Q127 vs. ~61bp late last week. 25bp still fully priced through July.
• Comments from BoE’s Greene made it sound like she was more likely to vote for a hike in June than not, in our view (she didn’t vote for a hike in April).
• Outside of geopolitics and the related swings in commodity prices, UK focus will be on the fallout from the local elections given ongoing questions surrounding the future of PM Starmer.
• Labour MP West has outlined the need for a change of leadership, alongside a threat of an imminent leadership challenge being launched (if no one else does the same).
• PM Starmer’s ongoing speech hasn’t done much for markets and hasn’t provided much in the way of meaningful, fresh ideas.