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EGBs-GILTS CASH CLOSE: Services CPI Surprise Sinks UK Short End

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The UK curve bear flattened sharply Wednesday, with Gilts underperforming Bunds, as the April CPI report pushed back the expected timing for the first BoE cut.

  • An 0.5pp upside surprise to April services CPI was the key detail that triggered a short-end UK selloff as implied BoE cuts were pared sharply.
  • There is now a <10% chance seen of a reduction at the June MPC (vs a coin flip prior to CPI), with around 50% chance of a reduction by August (had been basically fully priced).
  • Just after the cash close, PM Sunak confirmed earlier rumours by announcing a UK election in July, but this brought little Gilt market impact.
  • EGBs were weighed down in the morning by UK CPI reverberations as well as supply (multiple EUR syndications), but pared some losses in late trade.
  • Influenced by UK developments, the German curve bear flattened, while periphery EGB spreads tightened modestly after having widened earlier in the session.
  • Thursday's schedule includes flash May PMIs and Eurozone negotiated wage data, and a panel appearance by BoE's Pill.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

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The UK curve bear flattened sharply Wednesday, with Gilts underperforming Bunds, as the April CPI report pushed back the expected timing for the first BoE cut.

  • An 0.5pp upside surprise to April services CPI was the key detail that triggered a short-end UK selloff as implied BoE cuts were pared sharply.
  • There is now a <10% chance seen of a reduction at the June MPC (vs a coin flip prior to CPI), with around 50% chance of a reduction by August (had been basically fully priced).
  • Just after the cash close, PM Sunak confirmed earlier rumours by announcing a UK election in July, but this brought little Gilt market impact.
  • EGBs were weighed down in the morning by UK CPI reverberations as well as supply (multiple EUR syndications), but pared some losses in late trade.
  • Influenced by UK developments, the German curve bear flattened, while periphery EGB spreads tightened modestly after having widened earlier in the session.
  • Thursday's schedule includes flash May PMIs and Eurozone negotiated wage data, and a panel appearance by BoE's Pill.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

Keep reading...Show less