GILTS: Sell Off Stalls, Support In Futures Untested
Core global FI markets have stabilised as hawkish impulses from the U.S. PMI data peter out, with gilt futures unable to challenge initial support levels (4.75% yield equivalent at 90.46 and outright support at the Aug 1 low of 90.43).
- Yields 4-5bp higher across the curve, 10s under the most pressure.
- Spread to Bunds ~2.5bp wider on the day around 197.5bp. Breaks above 200bp have not been sustained in recent times, with ongoing fiscal issues in the UK somewhat countered by the fiscal loosening in Germany.
- GBP STIRs more hawkish on the day in the wake of this morning PMIs.
- SONIA futures flat to -5.0.
- BoE-dated OIS shows 5bp of easing for November and 9bp through year-end. Dec pricing sits around the most hawkish level registered since late May.
- We still (just about) lean towards a November cut at this stage, although the recent run of domestic data and the August meeting outcome have made that a much closer call vs. a couple of weeks ago.
- Little of note on the UK calendar ahead of the long holiday weekend, with comments from BoE Governor Bailey due from Jackson Hole on Saturday.
BoE Meeting | SONIA BoE-Dated OIS (%) | Difference vs. Current Effective SONIA Rate (bp) |
Sep-25 | 3.977 | +0.9 |
Nov-25 | 3.921 | -4.7 |
Dec-25 | 3.874 | -9.3 |
Feb-26 | 3.779 | -18.8 |
Mar-26 | 3.742 | -22.5 |
Apr-26 | 3.672 | -29.5 |
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US DATA: Richmond Manufacturing Weakness Overshadows Services Improvement (1/2)
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."
SOFR OPTIONS: Midmorning Options: Put Interest Rises
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)
GILT AUCTION PREVIEW: On offer next week
The DMO will sell GBP5bln of the 4.375% Mar-28 Gilt (ISIN: GB00BSQNRC93) at its auction next Tuesday (Jul 29)
