STIR: Recent Data & Deflationary Nature Of Budget Should Insulate Front End
This week’s UK data, headlined by the monthly inflation report, lowered the bar for the BoE to resume its easing cycle in December. That outcome is now ~85% priced by markets, with two 25bp cuts almost fully priced come the end of April decision.
- Note that neither SFIZ6 nor SFIZ5/Z6 has managed to retest dovish cycle extremes owing to the increase in UK fiscal and political risk premium introduced over the last week or so (stemming from a u-turn on income tax rate hikes and questions surrounding the future of PM Starmer).
- Next week’s Budget is set to deliver a deflationary outcome. The recent rounds of fiscal news flow seemingly make it more difficult to underdeliver when it comes to fiscal tightening, which should insulate the short end from gilt-negative swings further out the curve (to some degree).
BoE Meeting | SONIA BoE-Dated OIS (%) | Difference vs. Current Effective SONIA (bp) |
Dec-25 | 3.758 | -21.2 |
Feb-26 | 3.680 | -29.0 |
Mar-26 | 3.590 | -37.9 |
Apr-26 | 3.488 | -48.2 |
Jun-26 | 3.441 | -52.8 |
Jul-26 | 3.383 | -58.6 |
Sep-26 | 3.367 | -60.2 |
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US DATA: Chicago Area Econ Surveys Point To Better Activity, Weak Otherwise
The Chicago Fed Survey of Economic Conditions (CFSEC)'s regional activity index rose to +15 in October from -14 prior, suggesting above-trend growth in the 7th Fed District. While this series is volatile, we note that this is the highest reading since March 2022, and comes with improvements in both manufacturing (+14 after -10) and nonmanufacturing (+16 after -19).
- This represents an indication of solid regional activity - but the subindices were actually quite poor across the board: hiring and capex intentions were negative (ie below average), while both labor cost and nonlabor cost pressures were also negative, suggestive of more moderate inflation.
- The indices roughly mirror the MNI Chicago Business Barometer (PMI) and national ISM Services/Manufacturing, though with more month-to-month volatility, so can be considered a positive in the services activity column after weak NY and Philly Fed surveys for October, as well as a solid manufacturing reading vs mixed NY / Philly.
- The latest Chicago Fed entry to the Beige Book covering September: "Economic activity in the Seventh District was little changed over the reporting period, and contacts expected a slight decrease in activity over the next year. Consumer spending increased modestly; construction and real estate activity increased slightly; employment was flat; nonbusiness contacts saw no change in activity; business spending declined slightly; and manufacturing activity declined modestly."
FED: US TSY 17W BILL AUCTION: HIGH 3.735%(ALLOT 52.62%)
- US TSY 17W BILL AUCTION: HIGH 3.735%(ALLOT 52.62%)
- US TSY 17W BILL AUCTION: DEALERS TAKE 30.74% OF COMPETITIVES
- US TSY 17W BILL AUCTION: DIRECTS TAKE 4.36% OF COMPETITIVES
- US TSY 17W BILL AUCTION: INDIRECTS TAKE 64.91% OF COMPETITIVES
- US TSY 17W BILL AUCTION: BID/CVR 3.27
US TSY OPTIONS: Large Nov'25 10Y Put Buyer
- +30,000 TYX5 113.75 puts from 16-17 - expiring this Friday
