EGB/Gilt: PMIs Point To Contraction

European government bonds have rallied sharply this morning, spurred on by a weak set of PMI data which point to a contraction in economic activity.

• Following yesterday's ECB meeting, Peter Kazimir has stated that the September rate hike may be 25bp or 50bp. His comments dilute the possibility of a larger than 50bp hike and come after the ECB abandoned specific guidance for September - both of which are likely in response to the deteriorating growth outlook.
• German preliminary PMI data for July show a broad contraction in activity across the main sectors of the economy, while in France the manufacturing PMI pushed below 50 at the same time that the service sector held on in expansion territory. Overall, for the wider region, the euro area composite PMI came in at 49.4 vs 51.0 expected and down from 51.3 the previous month.
• All of the UK readings meanwhile, remained above 52.
• Bunds have rallied through the morning with the curve bull steepening. Cash yields are down 10-20bp with the 2s30s spread narrowing 10bp.
• OATs have similarly made strong gains with yields 11-21bp lower on the day.
• Even with the political crisis simmering in the background, BTPs have outperformed core EGBs with yields down 14-27bp.
• Gilts have underperformed the broader regional rally with yields 10-13bp lower.
• Supply this morning came from the UK (UKTBs, GBP3.5bn).