[MARKET ANALYSIS] USTs are a little lower whilst Bunds digest Flash PMIs - which fuel stagflation woes

Global fixed income benchmarks are mixed this morning, with USTs (-3 ticks) slightly lower, whilst Bunds and Gilts move higher with gains of c. 20 ticks; German benchmarks have seen a dire set of PMI results, which continues to fuel fears of stagnation across the region.
USTs are off by a few ticks, but have been clambering off worst levels throughout the European session; currently towards the upper end of a 109-05 to 109-12 range. Wednesday saw sentiment lift amidst positive geopolitical newsflow, and this has continued into today’s session. Most recently, reports have suggested that Iran is in the process of responding to the text sent by the US, adding that it has “reduced the gaps to some extent”. This led to some pressure in the energy complex, in turn, lifting US paper.
The FOMC Minutes released on Wednesday were hawkish; many policymakers preferred removing the easing bias from the statement, whilst some see scope to further tighten if inflation remains persistently above target. Nonetheless, US benchmarks were little changed. Ahead, focus will be on the region’s PMI figures, and Fed speak from Fed’s Barkin.
Bunds trade firmer today and towards the upper end of a 124.71 to 125.12 range. Strength today has been facilitated by a) geopolitical optimism (see above), and b) a dire set of PMI metrics. In brief, the French figures were awful, with Manufacturing surprisingly slipping into contractionary territory and Composite/Services also deteriorating; the German metrics also indicated the downbeat Manufacturing environment, but were more or less in line with expectations. The EZ-wide figure concluded that activity in the region is softening across both the Manufacturing and Services; "The survey data indicate that the euro area economy looks set to contract by 0.2% in the second quarter”. The report concludes by suggesting that price gauges suggest inflation is running close to 4%, which, alongside slowing growth, “creates a deepening dilemma for policymakers”.
Gilts move higher alongside the pressure in the crude complex. The region had its own PMI metrics to digest. Manufacturing remained solid whilst Services surprisingly fell into contractionary territory. UK paper was choppy in reaction to the data, but ultimately little moved – perhaps as attention turns to Chancellor Reeves, who is due to speak at 11:30 BST. Reports suggest that she will announce targeted cuts to agrifood tariffs expected to save consumers more than GBP 150mln annually. She is also expected to announce free summer bus travel for children, and a GBP 400mln package for motorists and hauliers, including a postponed 5p fuel duty rise. Political analysts view her speech as an attempt to secure herself as the Labour Party’s long-term chancellor in the midst of recent political turmoil.