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[MARKET ANALYSIS] Fixed income trades with a slightly bearish bias post-Fed, and ahead of the BoE and ECB

The fixed income market is showing a slightly bearish bias following the Fed's recent hawkish signals.

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[MARKET UPDATE] Crude pressured without a clear driver, Brent for July falls from just above USD 112/bbl to sub-110/bbl before rebounding modestly

[MARKET ANALYSIS] Fixed income trades with a slightly bearish bias post-Fed, and ahead of the BoE and ECB

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  • Overall, a contained session for fixed benchmarks. USTs lifted off overnight 110-07+ lows across the European morning, up to an 110-14 high but with gains of just a few ticks at most. Action that comes as the space eases off the hawkish lows delivered after the Fed and Powell (recap on the board).
  • Ahead, the US is focused on PCE, consensus chimes with the guidance from Chair Powell last night. Recent pricing data has shown that energy was the primary driver, with the core offering some relative relief as such. Though, PCE-related PPI components suggest service pressures remain sticky. Policy implications would be in line with the direction of the series, though a cooler print would likely provide only temporary relief given the clear signs of persistent price pressures elsewhere.
  • Bunds in the red, though only by c. 10 ticks. Got to a 110-07 base before rebounding a touch, though only as high as 124.70 and in the red at all points. EZ Flash HICP sparked no real reaction, sticks to the narrative that price pressures remain broadly confined to the headline measures.
  • Ahead, the ECB is expected to maintain rates, a decision merited by the relatively limited amount of data, no overt signs of second-round effects and uncertainty on the duration of the shock and degree of pass-through. Currently, pricing implies c. 70bps of tightening by end-2026, commencing in July. During the ECB, pricing around June will be in focus with 19bps currently implied; as a reminder, we are attentive to the statement and/or President Lagarde potentially pointing to the June MPR as a period where sufficient information may be available to make a policy decision.
  • Gilts gapped lower by 29 ticks and then slipped another five to an 85.90 low, an open that took out Wednesday's 85.98 base and notched a fresh contract low. Amidst this, the UK 10yr yield got to a 5.09% peak, nearing but not testing the recent 23rd March peak at 5.12%. Ahead, attention on the BoE, where a hold is expected, and while 9-0 is technically the base case , dissent on both the dovish and hawkish side of things is very possible. Overall, we are mainly after hints from the MPC itself, and the individual statements and press conference around the timing of the next move, though neither the statement nor Bailey are likely to be that explicit at this stage
  • Full previews for the BoE and ECB are available in the research suite.
Context

Ahead of the upcoming BoE and ECB meetings, market attention is likely to focus on how these central banks will respond, especially given lingering inflation pressures indicated by upcoming PCE data and recent trends in energy costs. With yields adjusting and expectations of policy moves being cautiously priced in, traders should remain vigilant to potential shifts in sentiment stemming from these key announcements.

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