EUROZONE T-BILL ISSUANCE: W/C July 13

The House Appropriations Committee has released the text of the lower chamber’s USD$1.07 trillion FY2027 spending bill for the Department of Defense. The bill will be considered in the subcommittee tomorrow at 09:00 ET 14:00 BST, during a closed markup.

• The topline spending number is significantly lower than the USD$1.5 trillion requested by the Trump administration in April, which included major new investments in missile defence systems, “drone dominance, and space superiority."
• Acting Pentagon Comptroller, Jules W. Hurst III, said in April, "The FY27 defense budget will be the largest investment in military capabilities in over a generation. This budget allocates over $750 billion ... just in capability development and procuring weapons systems."
• When releasing the budget request, the White House envisaged Congressional Republicans legislating at least USD$350 billion via budget reconciliation, the special parliamentary process that skirts the Senate filibuster. Theoretically, that would have allowed the GOP to hike defence spending without the need for Democratic votes.
• In light of troubles passing the immigration enforcement reconciliation bill, that strategy appears to have collapsed, leaving the Trump administration with a major shortfall in defence spending toplines. Indeed, senior Republican appropriators said yesterday that a third reconciliation bill is unlikely. See: US: Senators McConnell And Collins Appear To Rule Out Reconcilliation 3.0
• Punchbowl noted this morning, “With defense spending in shambles, prospects are growing more and more likely for a continuing resolution that would lock in base DOD funding levels at $890 billion…”

Swings in wider macro sentiment have driven gilts for much of the session, with Trump’s threats against Iran providing some pressure through the early London afternoon, before spillover from the U.S. CPI data (inline to slight softer than expected) and reports suggesting U.S.-Iran talks were ongoing provided some counter.

• Futures remain in a bit of a holding pattern, last -7 at 87.67.
• Initial support and resistance located at 87.28 and 88.65, respectively. A short-term bullish pattern remains intact within a longer run bearish theme.
• Yields ~1.5bp higher across the curve.
• BoE-dated OIS little changed on the day, showing just under 60bp of hikes through April
• Little of note due on the UK calendar until Friday’s GDP data & BoE Agents survey release.
• The Agents survey is a more qualitative and less quantitative survey than the DMP, but MPC members still place a decent amount of weight on it as it gives a good insight into more micro issues.
• We will be watching the consumer prices section which last time noted that contacts looked for food prices to rise to 6-7% by the end of the year. The April survey included a box on fuel and energy impacts (we will be watching to see if there is an update). The survey also noted that it was still too early to see any impact of a Middle East effect on pay and noted that “around four-fifths of 2026 pay settlements are now agreed” with pay settlements running around 3.5%.

Senior Deputy Gov Rogers fields a question from MNI's Greg Quinn on why the updated statement wasn't as explicit as the previous one on keeping the policy rate about where it was if the Bank's core scenario played out. 

• Rogers: "We were continuing to balance both risks we've described" - namely, oil prices on the upside for inflation, but trade uncertainty weighing on growth on the downside. "What we're telling you today is we see those risks continue to be about where we saw them last time. The economy continues to be about where we saw where we thought it was last time, which means we've got the rate where we think it needs to be right now. We've got a forecast in a few more weeks, and we'll be taking all the data in and see where we're at then."
• On the topic of CUSMA/USMCA trade talks, Macklem says "negotiations are ongoing, they're probably going to play out over a number of months, so yes, that uncertainty will continue to weigh on the economy". He cites the upcoming Business Outlook Survey to "see how things are evolving" for Canadian businesses.