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[MARKET ANALYSIS] PMIs initially helped fixed income off lows, but an inflationary UK release has superseded

The PMIs initially supported fixed income, but a subsequent UK release indicating inflationary pressures has caused a marked selling in Gilts and Treasuries.

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[MARKET ANALYSIS] PMIs initially helped fixed income off lows, but an inflationary UK release has superseded

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  • Initial action was somewhat contained, as the morning was dominated by European earnings and the digestion of overnight/late-Wednesday geopolitical updates. On the latter, the main development was pushback against the three-to-five-day deadline from Trump to Iran.
  • Following the European cash equity open, modest upside was seen on the French PMIs, where the metrics were mixed vs expectations, but more pertinently, the commentary noted that "the passthrough to prices charged for goods and services remains contained", i.e. no significant second-round effects at this point. On the release, Bunds notched a 125.42 high and OATs to 119.30.
  • Thereafter, the German metrics were lower across the board, aside from an in-line manufacturing print. A release that spurred Bunds to a 125.55 peak, though still lower by 16 ticks on the day. Concerningly, the German series pointed to "signs of widening inflationary pressures".
  • Overall, the EZ figures were lower on a services and composite level vs consensus, while the manufacturing print beat. Internally, the series showed the "biggest surge in cost pressures" since 2000 ex-COVID. Given this, Bunds fell from the aforementioned peak by around 10 ticks into the UK data, as yields picked up across the curve but particularly at the short end as the curve flattens.
  • Onto the UK, where the PMI release appears to have sparked some across-the-board selling in fixed income, taking USTs back to 111-00, though above the 110-31 trough. Bunds down to 125.38, but above the 125.06 base. The UK series was firmer across the board, sending Gilts lower in a knee-jerk by 15 ticks and then further to a 87.02 low, lower by over 80 ticks on the day, on the internal commentary. Commentary that pointed to some renewed momentum in the economy, though caveated, and more pertinently to significant price rises.
  • For the BoE, the data will add to calls for tightening. However, the majority of Threadneedle St. will likely, on balance, take the view that they can wait for more data before acting, particularly given the hits to business and employment confidence.
Context

This shift suggests the market is recalibrating expectations for central bank policies, particularly regarding potential tightening from the BoE, as inflationary signals complicate the outlook amid persistent economic momentum.

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