EU FINANCIALS: Sabadell - Q2 Earnings Headlines

Lower oil prices following the announcement of the Israel-Iran ceasefire and lack of a meaningful Iranian reaction to the U.S. bombing of its nuclear facilities result in a modest dovish move for GBP STIRs.

• Some counter comes from broader risk-on price action that accompanies the news.
• BoE-dated OIS contracts covering meetings through ’25 are little changed to 1.5bp more dovish, showing 19bp of easing for August, 25.5bp through September, 41bp through November and ~50bp through year-end. Recent dovish extremes of ~55bp of cuts through year-end remain unchallenged.
• SONIA futures are flat to +2.5.
• A raft of BoE speak is due today with Bailey (x2), Pill, Ramsden, Greene & Breeden all set to speak. Note that Breeden will speak at the UK Finance Digital Innovation Summit, so may not comment on monetary policy. Meanwhile one of Bailey’s appearances, as well as Pill’s appearance, will take place at a conference that looks back to the gold standard era, so may not reveal much new.
• Elsewhere, lower tier CBI trends data will cross this morning.

Sellside analysts whose comments we've seen this morning, on balance, appear to be in-line with MNI's view that the budget figures seen in the press yesterday point towards the issuance ramp-up being quicker than projected by some:

• Berenberg: On the press figures "While these are not set in stone (and parliament will likely make some amendments to the government’s draft before passing the 2025 budget in September), they may give some hints towards the direction of travel."
  • Defence spending (according to the NATO definition) would rise [...] to 3.5% in 2029 already. We had so far anticipated that it would take until 2031 to get there."
• Commerzbank: "From what has emerged from the budget draft so far, the funding prospects for coming years are huge with [...] The pace of the increase also seems brisk"
  • "If the DFA had to raise these additional amounts all during H2, it would probably have to resort to flexible instruments like during the pandemic (BuBills, repo taps plus sales of own holdings). We doubt, however, that this is the case. As the provisional budget management runs through September, this means rather less than more spending, so that the bulk of the increase should start becoming funding relevant from next year."
  • "For today's DFA announcement we see modest upside risk. When setting up the Q3 calendar, the DFA will not know all the budget planning details, but it may prefer to err on the high side with the option of reducing rather than raising the funding volumes in Q4"
• JP Morgan: "Deficits are larger than had been speculated about in last week’s very limited press coverage. These figures are large, but there are questions about what exactly is included, whether it can all be mobilised and how much of it before year-end. For example, the deficit plan for this year appears to include a €9bn capital injection into the German railway company, large transfers to the existing Climate and Transformation Fund and other transfers to plug existing holes in social budgets. Some of these are intra-governmental transfers or financial transactions, rather than new spending."
  • "Despite these caveats, the political signal still feels determined on both defence and on infrastructure."
  • "It is hard to link these partial numbers to our forecast for the general government deficit in the national accounts definition. But they do suggest that the deficit is likely to widen already this year and even more next year. We therefore continue to see a widening from 2.8% of GDP in 2024 to 3.1% in 2025 and 4.1% in 2026."

• The DFA is due to announce the German Q3 issuance plan this morning, likely at 9:00BST /10:00CET based on previous quarters.
• It is likely that there will be an increase in issuance relative to the annual 2025 plans with the re-introduction of a 7-year Bund (with a Nov-32 maturity most likely).
• There is also scope to increase the issuance sizes particularly across 10-year or less maturities.
• There had originally been some talk of a 50-year Bund – but we think that the timing for that may not be particularly attractive at present and so we think that may be more a story for 2026 or when demand at the ultra-long end appears more resilient.
• Note that there is very unlikely to be a full update to the funding target for the rest of the year, with the DFA likely to leave Q4 funding needs until September.
• We haven't seen a huge amount of expectations for the volume of the funding increase from the sellside but we think around E15bln.
• Looking at 2025 as a whole German net issuance will be E82bln according to matching media reports seen yesterday. In the previous draft budget from last Summer, planned net issuance was E51bln - that is an additional E30bln that has to be funded somehow.
• Assuming these E30bln will be split equally across the two remaining quarters, this would imply roughly E15bln upside per quarter until the end of year - against the currently planned E99.5bln Q3 and E75.5bln Q4 (excl. green bund and syndicated issuance, source).