ISRAEL: Shas Seriously Considers Leaving Coalition As Gov't's Majority Dwindles

Gilts sell off, looking to global peers for cues.

• Equity markets have recovered from the initial spike lower seen at the Asia open, weighing on bonds.
• Meanwhile, inflationary risks surrounding the Israel-Iran situation provide another bearish factor (albeit markets remain sensitive to risk-off impulses if any escalation does occur).
• Futures trade as low as 92.23, breaking Friday’s low, before a recovery to 92.35.
• The recent uptrend had taken the contract into overbought territory.
• Bears now target the 20-day EMA (92.04), which provides the first firm support level.
• Yields 1.5-4.0bp higher, curve steeper.
• 2s10s in multi-week range, ~63bp last.
• 5s30s back above 120bp.
• Wednesday’s (not the Tuesday initially flagged in our STIR bullet) CPI data and Thursday’s BoE decision were covered in greater detail earlier.
• 45bp of BoE easing priced through year-end vs. ~46bp ahead of the gilt open.

Equity Triple Witching is in Focus for Global Investors on Friday, Rolling/Closing their June Positions.

ROLL PACE: The Pace for the EU is as of Friday:

US:

• SPX: 26%.
• NDX: 20%.
• DOW: 25%.

EU:

• VGA: 16%.
• DAX: 8%.
• FTSE: 19%.

ECB-dated OIS price 21bps of easing through year-end, 3bps more hawkish than yesterday’s close. The inflationary risks stemming from continued Israeli/Iranian tensions over the weekend appear to have driven the move, while core FI is also pressured by the latest uptick in equity benchmarks. For the Eurozone inflation outlook and therefore the ECB reaction function, the most important risk to monitor is whether the latest escalation impacts actual global oil/gas supply or disrupts key shipping routes in the region. Overall, we think the ECB remains comfortable with current market pricing that implies a high chance of one more 25bp cut this cycle. 

• Over the weekend, President Lagarde re-iterated that heightened dampens investment and that "we are within reach of the 2% medium-term inflation target" in an interview with Xinhua News Agency.
• Meanwhile, Vice President de Guindos told Reuters that “inflation is going in the right direction”. In particular, he noted that the “risk of [inflation] undershooting is very limited in my view”. This suggests he also views the risks of overshooting as similarly limited.
• De Guindos highlighted that trade policies are “by far the most relevant factor of uncertainty that we considered in our projections”. Speaking on the risk of disinflationary trade diversion, he stated, with a slightly more dovish tone that ECB’s Schnabel, that “I don’t know whether it’s going to be a big risk, but undoubtedly this is something that we have to monitor and take into consideration.”
• See above for commentary on Nagel’s latest, uncontroversial, remarks.
• Euribor futures are -2.0 to -4.0 ticks versus Friday’s settlement, with the greens/blues leading the selloff.
• ECB’s Cipollone is scheduled to speak today, while final Q1 Euro area labour costs won’t be too interesting to markets.