EU CAPITAL GOODS: Schneider (SUFP: A2/A) Moody's Upgrade

As noted earlier, member state permanent representatives to the EU have approved the plan E150B Security Action For Europe (SAFE) loans, which is a pillar of the European Commission's ReArm Europe programme intended to allow member states to bolster their armed forces and defence capabilities. EU Affairs ministers will now need to give final signed off at the General Affairs Council meeting on 27 May, which is seen largely as a formality. Politico reports "Two of the diplomats said that Hungary abstained, but since the regulation was adopted with qualified majority Budapest wasn't able to block the initiative."

• The Commission faces the prospect of being sued by the European Parliament for using Art. 122 of the TFEU to bypass a vote among MEPs on the loans. The clause has previously been used in response to the COVID-19 pandemic and in the immediate aftermath of Russia's full-scale invasion of Ukraine, but the Parliament's Judiciary Committee ruled this utilisation was unjustified.
• In line with MNI's reporting from 15 May, Politico claims that the final draft of SAFE text "also makes the participation of non-member subcontractors easier. It now says that "common procurement involving subcontractors" that are allocated between 15 percent and 35 percent of the value of the contract and "that are not established or don’t have their executive management structures" in the EU, or in one of its partners like Norway and Ukraine, "should be eligible." A separate EU-UK agreement will be required allow British firms to participate. 

• In the FI space, recent gains in Bund futures undermine a bearish theme and suggest the move down between Apr 22 - May 15, has been a correction. An extension higher would strengthen the reversal and open 130.86 next, the May 9 high. Further out, scope would be seen for a move towards 132.03, the Apr 7 high. Key short-term support has been defined at 129.13, the May 15 low. A break of this level would reinstate the recent bear cycle.
• A bear cycle in Gilt futures remains in play and recent weakness strengthens a bearish theme. 90.92, 76.4% of the Apr 9 - May 2 rally, has been cleared, paving the way for an extension towards 89.99, the Apr 9 low and the next key support. Resistance to watch is 92.30, the 20-day EMA.

MBA mortgage applications fell 5.1% (sa) last week as mortgage rates increased for a second week although were again spared a sharper increase as mortgage rate to swap spreads narrowed again.

• MBA composite mortgage applications fell 5.1% (sa) last week after a 1.1% increase the week prior. They stand at ~50% of 2019 levels.
• Both new purchases and refis saw similar sized declines, with new purchases at -5.2% after 2.3% (61% of 2019 average) and refis at -5.0% after -0.4% (39% of 2019 average).
• The 30Y conforming rate increased 6bp after a 2bp increase the previous week, with 6.92% the highest since mid-Feb.
• However, mortgage lenders again didn’t fully pass through higher swap rates over this period, with the average 10Y swap rate over the week some 16bp higher after an 11bp increase the previous week.
• It sees the mortgage rate to 10Y swap spread at 296bp for a 19bp tightening from the 315bp in early May that had been its widest since Feb 2024.