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[MARKET ANALYSIS] A modestly bearish start for fixed while the UK's CPI didn't definitively solve the March vs April debate

The modest bearish start in fixed income suggests mixed sentiment as traders process recent CPI data from the UK, which, while hot, leaves the timing of potential Bank of England rate decisions unresolved.

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[MARKET ANALYSIS] A modestly bearish start for fixed while the UK's CPI didn't definitively solve the March vs April debate

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  • A bearish start for fixed income, though only modestly with USTs lower by a handful of ticks in a narrow 112-30+ to 113-05+ band. US specifics thus far are a little light as we continue to digest the better-than-expected data on Tuesday and Fed speak that was a little hawkish from voter Barr, weighing on the complex. More insight will be derived from the FOMC Minutes this evening, which follows a 20yr auction and Fed's Bowman.
  • The main focus point this morning is Gilts, though the benchmark is little changed as things stand. Opened lower by 17 ticks and then fell one more to a 92.03 trough in reaction to the morning's CPI data, as while the headline Y/Y was in-line with market consensus, it was hotter than the BoE's view; additionally, core and services figures came in hotter than the market forecast. However, the net takeaway from the release is that it doesn't definitely solve the March vs April debate, with the decision in March looking like another 5-4 with Bailey to tie-break.
  • Today's data shows inflation progressing to target, and while some components were hotter-than-expected, the series, alongside the dovish unemployment/wage data earlier this week, doesn't stand in the way of a March cut. However, on the flip side, Bailey could justifiably argue he wants to see another set of data to be sure, i.e. waiting until April. Reflecting this, marked pricing remains torn between March and April, and as such, Gilts have reverted back to opening levels and are flat. Note, Retail Sales and Flash PMIs on Friday might provide the final input and sway pricing either way.
  • Bunds are little moved in a 129.15-39 band, no move to the morning's Final French CPI series. The main point of focus for the EZ is reporting in the FT, among others, that ECB President Lagarde could step down before her term ends in October 2027. The FT outlines, citing sources, that this would ensure both French President Macron and German Chancellor Merz are in power and have a significant say in appointing a successor.
Context

The lack of clarity from the CPI report means market expectations remain divided about whether the BoE will act in March or April. As fixed income traders await further guidance from the upcoming FOMC Minutes and additional economic prints, particularly Retail Sales and Flash PMIs, we can expect continued volatility in the Gilts and Bunds markets.

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