ECB 50bp talk hitting German curve; UK labour market data helping gilts

There has been some divergence between core fixed income markets this morning.

• The biggest moves have been seen in EGBs following first a Reuters and then a Bloomberg sources story that suggested the ECB would discuss both 25bp and 50bp hikes at its meeting this week. This follows forward guidance that had pretty explicitly signalled a 25bp hike this week (although the hawks have been a lot more open to a 50bp hike this week in their recent public commentary). Market pricing for this week's meeting has increased from a less than 20% probability of a 50bp hike to around a 40% probability. This has led to a bear flattening of the German curve. Schatz yields had at one point been move than 10bp higher on the day.
• Gilts on the other hand are higher today after slightly disappointing UK labour market data. The very front-end of the SONIA strip has been pulled lower since the ECB sources story, with 51bp now priced for the August meeting (from 48bp yesterday) but the terminal rate has not shifted, gilt yields are lower across the curve, although off the more extreme levels seen at the open.
• Against this backdrop, US Treasuries have seen the smallest moves with the curve steepening marginally today.
• Looking ahead we have US housing data as well as the Mansion House speeches (from BOE's Bailey and Chancellor Zahawi) as well as the next round of the Conservative leadership contest where we will be whittled down to three candidates.
• TY1 futures are down -0-7+ today at 118-07+ with 10y UST yields down -0.5bp at 2.982% and 2y yields down -2.7bp at 3.151%.
• Bund futures are down -0.33 today at 151.59 with 10y Bund yields up 2.1bp at 1.232% and Schatz yields up 5.1bp at 0.548%.
• Gilt futures are up 0.26 today at 115.27 with 10y yields down -2.8bp at 2.127% and 2y yields down -2.3bp at 1.943%.