EGBs-GILTS CASH CLOSE: Bellies Outperform As PMIs Sink Rate Hike Pricing

The bellies of the German and UK curves outperformed in a significant overall rally Wednesday as soft August PMIs signalled recessionary conditions and called into question how much further the ECB and BoE would raise rates.

• Gilts outperformed overall but it was Eurozone PMI data that provided the initial shock. A sharp contraction in German services activity highlighted a poor Eurozone reading (30-month low 48.3 v 50.5 expected), then the UK report piled on with the lowest Services PMI since January 2021 (48.7).
• Whether the ECB hikes next is now at best a 50/50 proposition per market pricing, while a full 25bp hike has been removed from the BoE's hike path in the past few sessions. More cuts past the peak are now expected as well (by 9bp for each of the central banks).
• Hedging around the pricing of the Finnish and EFSF syndications may have provided a little bit of downside impetus in early afternoon trade, but supply was no match for macro as today's driving force.
• Periphery EGB spreads closed mixed, with Italy and Spain outperforming (0.7bp tighter to 10Y Bunds) and Greece underperforming.
• Thursday's data includes French sentiment and UK CBI distributive trades, but attention will turn quickly to US data (incl jobless claims) and the start of the Jackson Hole symposium.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany:

• Germany: The 2-Yr yield is down 11.3bps at 2.974%, 5-Yr is down 13.5bps at 2.519%, 10-Yr is down 12.8bps at 2.517%, and 30-Yr is down 9.5bps at 2.63%.
• UK: The 2-Yr yield is down 17.3bps at 4.973%, 5-Yr is down 19.3bps at 4.49%, 10-Yr is down 17.7bps at 4.468%, and 30-Yr is down 13.9bps at 4.696%.
• Italian BTP spread down 0.7bps at 165.2bps / Greek bond up 2.9bps at 132.6bps