CZECHIA: Source Reports Flag Tense Atmosphere During ODS-STAN Talks

Bears look to force a clean break through yesterday’s low in gilt futures (91.63), trading as low as 91.56 as participants react to overnight/early London moves in wider core global FI markets.

• Next support located at the Apr 15 low (91.43).
• Yields 0.5-2.5bp higher, curve a touch steeper, curve moves presumably aided by the dovish takeaways from the wage metrics in the monthly labour market report.
• 2s struggle to push meaningfully above 4.00% after the first print above since mid-April. Mid-April highs have also helped cap the move higher in 10s and 30s, for now.
• 2s10s and 5s30s continue to continue to consolidate within their multi-week ranges, 13bp and 10bp below respective cycle closing highs that were lodged in April.
• GBP STIRs drift a little more hawkishly as gilts soften, SONIA futures now flat to -2.0, BoE-dated OIS showing 47bp of cuts through December vs. 49bp ahead of the gilt open.
• Comments from BoE Governor Bailey and hawkish dissenter Pill are due today.
• We will be watching to see if Pill repeats a line from the Agents’ briefing, which noted that if there are external shocks the pace of cuts could be adjusted. However, the setting and topic of the event may mean that Pill doesn’t touch on monetary policy/no headlines are seen (the speech will be at the London School of Economics conference in honour of Sushil Wadhwani).
• Supply-wise, the DMO will sell GBP1bn of the 0.625% Mar-45 linker this morning.

SX7E (20th June) 172p vs (18th July) 185p, bought the July for 3.2 in 6k vs 1.14k at 196.00.

The implied probability of a June ECB rate cut has pulled back to ~80%, after hovering between 90% and 100% over the last few weeks following the April decision. The temporary rollback in tariffs between the US and China has supported risk sentiment and reduced global easing expectations. However, the lack of progress on an EU/US trade deal still keeps Eurozone growth risks tilted to the downside, and the balance of ECB speakers since the April decision still leans heavily in favour of a June cut.

• The implied probability of a 25bp cut in July (not a projection meeting) is just ~25%, while the there is a ~40% implied probability of a 25bp cut at the September projection meeting. That leaves less than 50bps of easing priced through year-end.
• Euribor futures are -0.5 to -2.5 ticks through the blues, a touch off session lows following this morning’s softer-than-expected UK wage data.
• The German May ZEW survey is due at 1000GMT, while ECBspeak is due from Makhlouf and Knot. Escriva called for “agile policy responses” this morning.