GILTS: Twist Steepening Extends, April Yield Highs Intact Further Out

The 10-year OAT/Bund spread widened after BBG reported that President Macron is exploring the idea of a snap election as soon as the fall.

• The spread widened 2bps to 78bps on the initial headline before moderating back to 77bps at typing.
• From the piece:
  • "Emmanuel Macron is exploring the possibility of dissolving parliament and holding snap elections as soon as this fall as a return to international prominence helps boost the French president’s popularity at home".
  • "The discussions are merely consultative and no decision has been made".
  • "Among the options being considered is waiting until next year before dissolving parliament to hold legislative elections at the same time as a planned municipal vote in 2026, said one of the people, who spoke on the condition of anonymity. The person told him it was a bad idea".
• French political risks have taken somewhat of a backseat in recent weeks, superseded by German fiscal and US tariff developments.
• Last week, Finance Minister Lombard noted that France will need to find an additional E40bln of savings to meet its 2026 budget target of 4.6% GDP. These headlines were not major market movers.
• Earlier, we highlighted that Goldman Sachs think “the more important test [for OATs] will come in the summer when the government formalises the budget proposal and negotiations with other parties start in earnest against a backdrop where elections are possible again”.

• It's potentially a big week for the BOE. Today we heard from external member Megan Greene who has long been on the more hawkish side of the spectrum but today in her comments on Bloomberg TV didn't use the word "cautious" or "gradual" as she had done in her previous remarks.
• Tomorrow we will hear from Chief Economist Huw Pill (also previously more on the hawkish side) and it will be interesting to see whether he uses any of the words "gradual", "careful" or "cautious" in his remarks, or indeed if he mentions monetary policy at all. He will be giving a speech at Leeds University on the BOE's research agenda (BEAR) and balance sheets.
• We will also be looking to see if there are any specific comments on the inflationary impacts of tariffs. Breeden said at the recent MNI Connect event that they were negative for growth but the impact on inflation was unclear. Greene said that originally today but then said later that there was a bigger disinflationary impact likely.
• After gilt markets close tomorrow we will hear from Governor Bailey at the IIF Global Outlook Forum. The timing of this event is a little uncertain - the IIF website states 12:25ET (17:25BST) for the start of a networking lunch with Bailey comments, but the BOE's website states Bailey's appearance is scheduled for 18:15BST. Again, if he changes tone it could be potentially noteworthy.
• Finally tomorrow we will hear from Breeden - but we don't think we will hear more on her views that we heard in the MNI Connect webcast two weeks ago.
• Looking later in the week, Lombardelli is a panellist at the Peterson Institute on Thursday with the topic ‘Review of monetary policy strategy by central banks’ (14:25 hrs BST) while Greene will appear in a fireside chat with the Atlantic Council on ‘Inflation, growth, and monetary policy’ (20:15BST Friday).

The Cleveland Fed doesn’t produce a business activity index like some regional Feds do but it has published some tariff-focused questions it asked respondents in its District through Feb 6-13 (see in full here). Whilst this predates the significant escalation in tariff announcements since Apr 2, almost half of those affected were already passing anticipated cost increases on. There were however suggestions of it continuing to become harder to pass these cost increases on. 

• 64% of respondents saw tariffs impacting their business, with 24% unsure and 12% seeing no impact.
• The highest shares expecting an impact were retail (82%), mfg (75%), construction (70%) whilst professional and business services were the least likely to be impacted (21% yes vs 36% no).
• Of those expecting an impact, 85% expected an increase in input costs vs 75% expecting an increase in selling prices.
• That question doesn’t offer magnitudes but there are hints elsewhere at the continued reduction in pricing power noted in multiple editions of the Fed’s Beige Book (to be updated tomorrow) and most recently today’s Philly Fed non-manufacturing survey. Specifically, whilst 38% see no change in their ability to pass on price increases compared to one year ago, 36% find it “somewhat harder” and 12% “significantly harder” vs 13% somewhat and 1% much easier.
• This tallies with 60% of respondents expecting demand to decrease (31% saw no change, 9% an increase) and 22% expecting employment to decline (75% no change, 3% increase).
• That said, 46% of respondents were already passing anticipated cost increases through to customers (in answer to "What actions, if any, are you taking in anticipation of tariffs on imports?”). Also of note considering the Trump administration's plan to boost domestic production, 29% suggested they were finding new domestic suppliers but just 4% anticipated bringing outsourced production or processes in house.