SONIA OPTIONS: Upside Z5 Structure Trades

Flow in SFRH6/Z6 goes against the recent theme of flattening, although it could represent some profit taking with paper paying -42.5 on ~9K.

• The spread registered all-time lows at -43.5 today.
• The spread has sold off from the -10.0 that printed in mid-April, with some attributing the latest leg of the move to speculation that Fed Chair Powell’s successor (Powell’s term is set to conclude in May ’26) will take a more activist approach to rate cuts, in line with President Trump’s preferences.
• SFRH6/M6 & SFRH6/U6 flattener flow has stood out in recent sessions.

• There's continued buying along the Euribor strip, mentioned earlier some were targeted in the ERZ5, now ERU5 (12k), ERZ5 (5k), ERH6 (5k) all in Good size, to bring that part of the strip back in the Green.
• While the curves have generally been flatter, the short end is leading some of the latest bid.
• The German Bund is only testing Yesterday's high at 131.14, but initial resistance is a little further out, up to 131.47.

As MNI noted this morning following the New Residential Construction report (and yesterday's NAHB homebuilders sentiment), residential construction looks like it is going to be an increasing drag on economic growth. The latest Atlanta Fed GDPNow estimate for Q2 GDP growth has been lowered to the weakest since May 27, at 3.4% Q/Q SAAR (3.5% prior), because residential investment is now seen contracting by 4.4% Q/Q annualized in the quarter - vs a -2.8% estimate yesterday and -0.6% in Q1. 

• That would be the weakest residential investment growth since Q4 2022 and implies a 0.2pp drag on quarterly growth.
• Overall, the Atlanta Fed's GDP estimate has fallen fairly steadily since peaking at 4.6-4.7% at the start of June. See details below.