EGBS: Spreads Widen On Subdued Risk, Greek/Italian Supply
10-year EGB spreads to Bunds are biased wider, with risk sentiment subdued and sovereign supply from Italy and Greece weighing. The onset of German fiscal negotiations (see our earlier post for more colour) presents a risk factor for the broader EGB space, though we have previously highlighted the resilience of spreads to these developments since last Wednesday.
- Books are open for today’s dual tranche short-15/30-year GGB syndication. We pencil a size of E1-2bln for each line, but have very low conviction. 10-year GGB spreads are 3bps wider today at 83bps.
- Italy will also hold a 3/7/30-year BTP auction this morning. The BTP/Bund spread is 1.5bps wider today at 112.5bps, after failing to hold onto a move below 110bps yesterday.
- After reaching a multi-month low of ~65.5bps yesterday, the OAT/Bund spread has widened back to 69bps this morning. Although no longer the primary focus for EGB markets at present, it's worth remembering the political and fiscal risks facing the Bayrou Government in France.
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BOE: Mann seems to pays more attention to MaPS than models for neutral rate
- Key point for us (in addition to what we learnt in the FT interview) is that she doesn't point to the BOE's updated model-based estimates for equilibrium (2.25-3.75%) but she points to the MaPS survey that has the neutral rate at 3.00-3.50%.
- This suggests that is more in line with her thinking.
- And if she wants to stay restrictive we are 100bp above the upper end of the neutral estimate.
BOE: Mann initial highlights
- "It is not just the immediate policy decision that needs to be communicated. Providing insights on the future path matters for the activist policy maker. Notwithstanding the 50 basis point cut now, structural impediments to achieving the target on a sustained basis are not yet fully purged. The activist policymaker needs to maintain policy rate discipline and restrictiveness even after this immediate decision. This ensures that, as we move through the inflation hump, expectations remain anchored both in the near and longer term."
- "I expect that Bank Rate will average well above the nominal equilibrium rate implied by the estimates set out in the August 2018 Inflation Report. I note that respondents in our Market Participants’ Survey have been consistent in putting this longer-run average at about 3-3½ percent."
- "I chose 50 basis points now, along with continued restrictiveness in the future, and a higher long-term Bank Rate to 1) ‘cut through the noise’, 2) anchor expectations through the inflation hump, and 3) acknowledge structural impediments and macroeconomic volatility in longer term."
USDCAD TECHS: Trading Above Support
- RES 4: 1.5000 Psychological round number
- RES 3: 1.4948 High Mar 2003
- RES 2: 1.4814 High Apr 2003
- RES 1: 1.4600/1.4793 Round number resistance / High Feb 3
- PRICE: 1.4329 @ 08:30 GMT Feb 11
- SUP 1: 1.4270 Low Feb 5
- SUP 2: 1.4261 Low Jan 20 and a key support
- SUP 3: 1.4178 High Nov 6 ‘24
- SUP 4: 1.4120 Low Dec 11
USDCAD is trading closer to last week’s lows. For now, the latest move down appears corrective and the primary uptrend remains intact. The Feb 3 cycle high reinforces and strengthens bullish conditions. The break higher confirmed a resumption of the uptrend and opens 1.4814 next, the Apr 2003 high. Key support to watch lies at 1.4261, the Jan 20 low. A clear breach of this level would alter the picture and signal a reversal.
