OAT: Spread To Bunds Threatens '25 High
OAT/Bunds a little over 1bp wider at 86.2bp, threatening to register the highest close of ’25.
- The January closing high (86.3bp) protects the Dec ’24 closing high (88.4bp).
- Sell-side comments that we have read generally play down the odds of a meaningful break above 90bp in the spread, unless we receive further OAT-negative news (namely via some form of election/increased odds of RN coming to power).
- Commerzbank note that “if Lecornu fails to find a new team backed by LR and the Socialists over the next couple of days, the most likely scenario now seems to be Macron appointing a PM from the centre-left. We consider this more likely than him dissolving parliament again or stepping down himself. While fiscal dynamics remain very challenging and the political situation deadlocked, opportunistic demand from domestic banks and foreigners should inhibit a sustained widening above 90bp vs. Bunds, while we expect the BTP convergence to extend further out on the curve”.
- Goldman Sachs suggest that “OAT/Bunds already trades near the widest levels in years, the OAT-idiosyncratic component vs. EGBs has risen substantially and France has experienced the largest rise in country risk among major markets since elections last year. In our view, this suggests near-term election risks have largely been pre-empted by current pricing. As a result, we would expect OAT/Bunds to remain near current levels until uncertainty abates, rather than significantly wider. We maintain our target of 70bp at year-end, albeit with upside risks”.
- Mizuho suggest that the appointment of a new PM (pointing to a 35% probability of such an outcome) would trigger a “relief rally” that would push OAT/Bunds back towards ~75bp. Meanwhile they suggest that legislative elections (they ascribe a 55% probability to this outcome) risk a break above 90bp in the spread owing to odds of RN winning. Finally, they believe that a snap Presidential election (10% probability) could risk a break above 100bp, owing to RN’s chances of victory, along with the party’s expansionary fiscal preferences.
- ING can see “French spreads experiencing more widening pressure as uncertainty lingers and new legislative elections loom, but also as the market is looking at increasing tail risks such as an early end to Macron’s presidency. If that latter fear gains more traction, we think the OAT/Bund spread could start to venture well beyond 90bp”.
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LOOK AHEAD: US Macro: PPI (Wed) and CPI (Thu) Inflation
US PPI inflation is released on Wednesday before CPI inflation on Thursday, an unusual ordering that should see core PCE implications dialled in after the CPI release rather than the usual wide range waiting for specific PPI details. PPI will be watched more closely than usual this month after a far stronger than expected jump in last month’s July report fired a warning short over tariff-based cost pressures starting to feed through. That included a 0.6% M/M increase in our preferred core series of PPI ex food, energy & trade services, which strips out items such as the then booming portfolio management & investment advice category following the strength in equity markets. It's too early to gauge an accurate sense of analyst expectations for August.
CPI inflation on Thursday will then be the last major release ahead of the Sep 17 FOMC decision. Consensus looks for core CPI at 0.3% M/M after the 0.32% M/M in July, another monthly increase comfortably above a pace consistent with 2% inflation. August should in theory start to see the largest tariff impacts along with September and possibly October. Returning to July’s report, core goods inflation was softer than expected, at a still solid (by core goods standards) 0.2% M/M for a second month running but about half that of 0.4% expected by analysts. Instead, non-housing core services surprised higher. The latter was a “dangerous” development in the words of a usually dovish Chicago Fed’s Goolsbee (’25 voter), who speaking after Friday’s payrolls report is still undecided on a September cut whilst looking for August inflation data “to get more information”.
LOOK AHEAD: US Macro: Payrolls Preliminary Benchmark Revisions (Tue)
- The BLS on Tuesday will publish preliminary estimates of benchmark revisions, based off QCEW data for Q1.
- These will give an indication of the actual benchmark revisions on the Mar 2025 level of payrolls due with the Jan 2026 payrolls report released in early February.
- Bear in mind that the final benchmark estimate tends to nearly always be more negative than the preliminary figure – see historical values to the right.
- That doesn’t mean they can’t be large again after last year’s historically negative revision that lowered the level of payrolls by ~600k. Initial estimates we’ve seen look for another large downward revision, with the smallest being worth -550k but with wide ranges higher.
FED: Barclays Adds A Cut To 2025 Fed View
Barclays analysts now expect three Fed cuts in the remainder of the year, adding October to their pre-existing call for 25bp reductions in September and December. "Given the disappointing August employment report, we expect the FOMC to see more elevated downside risks to the employment side of the mandate."
- As for a 50bp September cut, "we think that the FOMC will view [that] as sending too strong a signal that labor market conditions are deteriorating. Indeed, we think that participants such as Powell understand that the slower pace of payroll employment reflects at least, in part, slower labor supply, which does not translate into increased labor market slack."
- For 2026 they continue to expect 25bp cuts in March and June to 3.00-3.25%, but "we do not think the FOMC will be able to cut rates more than twice next year, as we think that activity will show some slight acceleration, with the economy adapting to the new tariff environment and fiscal policy providing some support, and the unemployment rate will revert down amid limited increase in labor supply."
