[MARKET ANALYSIS] Fixed bearish and at fresh WTD lows into US PPI

• In short, a bearish start to the final session of the week for fixed income, awaiting US PPI for further insight into PCE after the week’s CPI release and commentary from Fed’s Waller, who added 50bps into the discussion around December.
• Into that, USTs are at a 105-07 WTD low, off by over two full points on the week as a whole. Amidst this, the 10yr yield is at a 5.135% high, the highest since October 21st. PPI is the day’s main event, before a handful of Fed speakers, with pricing via the CME for December fully implying a hike, with an 88% chance of 25bps and a 12% chance of 50bps.
• Bunds also lower, holding around a 121.92 base with downside of around 50 ticks. Also at a WTD base, and just over 100 ticks lower for that period as it stands. Specifics today are a little light, final inflation measures not moving the dial while ECB speak hasn’t been too pertinent for policy, as we approach an expected December hike.
• Gilts in-fitting, and under pressure as such. 85.14 is today’s base, also a WTD low and off by about 150 ticks vs Monday’s open. Specifics also somewhat light this morning, awaiting a signal from the US events. For the UK, next week is significant as the Milburn NEET review hits, and will be scoured for what (if any) welfare adjustments PM Burnham makes; and, potentially more pertinently, the Labour Party’s opposition to such moves. Also, Burnham has a key speech on Monday ahead of his visit to the EU on Friday; the latest reads suggest the details are still being finalised, but there should be some progress on relations with the bloc.

Producer prices are the last hard input before dealer models update PCE deflator estimates, since components such as healthcare services and portfolio management costs feed directly into the Fed's preferred gauge; after a CPI week, a surprise in PPI has historically been the trigger that converts a tentative repricing of the coming meeting into a firm one. The notable feature is the shape of December pricing: a hike fully implied but with a live tail on the 50bp increment rather than a settled 25, a distribution that in past tightening phases has tended to resolve in steps on each remaining data point rather than smoothly. A sitting governor putting the larger increment into public discussion, as Waller has, has in prior cycles been how the committee conditions the market for an outcome beyond the base case, though single-speaker framing has also been walked back by colleagues. The selloff extending to the long end, with the 10yr at its highest level since late last month per the note, points to a mix of policy repricing and term premium rather than a pure front-end event. Bunds and Gilts trading as satellites of USTs in the absence of domestic catalysts is the established pattern when US inflation data is the global impulse. For Gilts specifically, the coming week's fiscal and political calendar arrives with the global rate backdrop already adverse, the configuration under which UK-specific risk premia have tended to build rather than dissipate.