GILTS: Sell Off Stalls, Support In Futures Untested

The Richmond Fed's Fifth District surveys of services activity showed continued improvement in July, similar to other regional Fed reports seen already this month. However manufacturing activity appears to have taken a major step back.

• The Services composite index rose to -8 from -14, and the 6-month outlook up to 6 from -5 prior, each marking the best levels since February and the 3rd consecutive improvement. Local business conditions, revenues, and demand all picked up in an overall solid survey.
• But in stark contrast, the Manufacturing index fell to -20 from -8, which marked the joint-worst level since the early Covid pandemic period in 2020. New orders fell to -25 from -12, worst since August 2024; shipments fell to -18 from -5 and employment fell to -16 from -6. Expectations however improved to -2 from -7, reverting to May's level (-2).  There was a bit of a divergence with local conditions, which improved to -11 from -17, but overall this was a very weak report.
• It's difficult to know how much to read into the regional manufacturing weakness, which is at odds with improvements elsewhere in July (NY, Philadelphia regions), and with what appears to be a stabilization in the services survey.
• The Richmond Fed's submission to the national Beige Book notes that from late May to early July, "Manufacturing activity in the Fifth District experienced a modest decline.... Multiple contacts experienced significant challenges to their business due to being unable to maintain stable pricing... To cover added costs due to tariffs, a couple of manufacturers added surcharges to their sales prices. Manufacturers with less international exposure reported some increased business activity."

Low delta calls continue to trade - but option desks note rise in low delta put structures fading the rebound in underlying futures this morning. Projected rate cut pricing gains slightly vs. early morning (*) levels: Jul'25 at -1.2bp, Sep'25 at -16.1bp (-14.9bp), Oct'25 at -29.2bp (-27.7bp), Dec'25 at -46.7bp (-44.5bp).

• +5,000 0QV5 97.00 calls vs. SFRV5 96.37 calls, 8.0 net, short Oct over
• +15,000 SFRU5 95.81 put vs. SFRZ5 95.87 puts, cab net
• Block, +15,000 SFRU5 95.75 put vs 95.81/95.87 call spd, 0.025
• +10,000 SFRU5 95.87/96.12 call spds vs. 95.62/95.75 put spds, 1.0 net
• -10,000 SFRU5 95.68/95.81 put spds 5.62/splits
• +1,000 SFRV5/SFRX5/SFRZ5 95.75/96.00 2x1 put spd strip, 19.75 (ongoing interest)

The DMO will sell GBP5bln of the 4.375% Mar-28 Gilt (ISIN: GB00BSQNRC93) at its auction next Tuesday (Jul 29)