SPAIN AUCTION RESULTS: Solid Bono/Obli auction

Weakness in gilts extends on the firmer-than-expected PMI data, adding to pressure that followed the firmer-than-expected wage data earlier this morning.

• The PMI data doesn’t alter expectations for a BoE rate cut on Thursday, but if it is repeated over the next few months it would add to the hawks' argument that inflation could be stickier than expected.
• Gilt futures to fresh session lows at 90.87.
• Initial technical parameters in the contract remain unchanged
• Recent price action in futures highlights 90.53, the Nov 25/26 low, and 91.93, the Nov 27 high, as the important short-term directional triggers.
• Yields 2-3bp higher, curve a little steeper on the day.
• Gilt/Bunds ~4bp wider on the day at 168bp, after the spread failed to break below the September ’24 closing low (162.01bp) during the recent round of narrowing.
• SONIA futures now flat -3.5, also trading a little steeper after the data, with the front end pinned by ongoing expectations for a cut on Thursday.
• BoE-dated OIS prices 22bp of easing for Thursday and 60bp through end ’26 (vs. ~61.5bp late yesterday).
• S&P Global comments alongside the PMIs affirm the above ideas, noting that “the sluggish growth and worrying jobs data from the flash PMI data therefore suggest that the odds remain in favour of a further cut to interest rates at the December MPC meeting, but that the path to further rate cuts in 2026 remains very data dependent, as policymakers await confirmation that price pressures are going to soften materially as the year proceeds”.
• Tomorrow’s CPI data presents the next key domestic input for STIR pricing, with U.S. NFP data due in the interim.

GBP adds to the morning's gains on the back of that PMI print, with GBPUSD comfortably clear through yesterday's highs and narrowing the gap with major resistance into 1.3438 - the multi-month high.

• While GBPUSD's gains looks to be the focus, EURGBP is offered and has further to run: price is now testing 50-dma support into 0.8759, and sees selling pressure via both legs after the German PMI miss earlier today.
• Prices aren't moving here on shifting rate expectations (OIS pricing is still locked in for a 25bps BoE cut on Thursday), but on dimming prospects of easy policy through 2026 and beyond. This is often a key part of the curve for EURGBP in particular, which had benefited from growing expectations that the next move from the ECB would be a rate hike, rather than the assumed rate cut.
• What does this mean for EURGBP into year-end? Key short-term support has been defined at 0.8721, the Dec 9 low. A break of this level would signal scope for a deeper retracement, towards 0.8706, a Fibonacci retracement.

Both services and manufacturing PMIs a little consensus. The details are a little concerning for the doves here (and will definitely not be encouraging for the hawks) with costs pressures (inc wages) being passed through as margins are already squeezed. We don't think this changes much for this week's meeting, but if it is repeated over the next few months it adds to the hawks' argument that inflation could be stickier than expected.

Highlights from the press release:

• "Stronger inflationary pressures were signalled at the end of 2025. Input costs increased sharply and at the fastest pace since May. At the same time, prices charged inflation rebounded to the highest seen since August."
• "Survey respondents noted a range of factors pushing up business expenses, including strong wage inflation, higher fuel bills and rising technology costs. Moreover, pressure on margins from stronger input cost inflation contributed to a rebound in prices charged inflation from the five-year low seen in November."
• "A renewed upturn in new order intakes helped to boost private sector output in December. The rise in new business was the strongest for 14 months and mainly reflected a solid improvement in demand across the service economy. Survey respondents commented on improved confidence among clients and a gradual turnaround in sales pipelines. New work from abroad also picked up in December, which ended a 13-month period of decline."