EGBs-GILTS CASH CLOSE: Sell-Off As Rate Cut Expectations Pull Back

European core FI fell sharply Thursday despite apparently softer-than-expected inflation data continuing to trickle through.

• After some richening early in the session, Bunds and Gilts resumed the theme of the week: a reversal of late 2023 bullishness. Today's negative price action brushed off in-line French and German inflation data, eyeing fairly heavy supply (Spain/France/Portugal/UK) with stronger than expected US labor market data helping extend the sell-off in the afternoon.
• There are now just 151bp in ECB cuts priced in 2024 (with March no better than a 50/50 chance of a 1st hike) vs 166bp Wednesday, with the first BoE cut seen in June and 132bp of cuts in 2024 (vs 147bp Wednesday).
• The curve sell-off was led by curve bellies (5Y Germany +12bp, 5Y UK +10bp), with German instruments slightly underperforming overall.
• Periphery spreads widened in another risk-off session, led by Greece.
• Looking ahead to Friday, US payrolls will be the highlight, but Eurozone / Italian inflation data will take focus in the morning.
• Given the data so far (which represents over 60% of the Euro area basket), headline HICP looks set to come in slightly lower than the consensus coming into the week of 3.0% Y/Y, with the core expectation of 3.4% looking roughly correct at this point.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 11.9bps at 2.533%, 5-Yr is up 12.1bps at 2.064%, 10-Yr is up 10bps at 2.124%, and 30-Yr is up 7.2bps at 2.35%.
• UK: The 2-Yr yield is up 9.3bps at 4.196%, 5-Yr is up 10.7bps at 3.687%, 10-Yr is up 8.8bps at 3.727%, and 30-Yr is up 6.8bps at 4.362%.
• Italian BTP spread up 1.3bps at 169.1bps / Greek up 5.4bps at 113.3bps