Recouping Losses On Equity Weakness And No Commitment To Sep Hike From Lagarde

As flagged elsewhere, the (fairly limited) downtick in wider equity markets allowed the Bund space to find a bit of a base this morning, even ahead of this morning’s dual auction & despite the ESM’s RFP announcement. Bund futures did show through yesterday’s base, before correcting from worst levels to sit flat on the day last. Meanwhile, the major German cash benchmarks sit flat to 2bp richer, bull steepening, with the impending supply weighing on the long end. 10-Year peripherals are a little wider vs. Bunds once again, with BTPs and Greek paper widening the most (10-Year BTP/Bund spread is shy of recent wides, lodged yesterday).

• ECB rhetoric since yesterday’s close has continued to flag the need for further policy tightening, with little in the way of meaningful insight from Greece’s Stournaras (who wouldn’t commit to the degree of further tightening required, outside of expectations for hikes to finish at some point in ‘23), while Executive Board member Schnabel continued to highlight the need to focus on core inflation alongside more work to do, while Bundesbank chief Nagel suggested that the ECB may be approaching the final stages of its rate hiking cycle, pointing to an identical understanding of policy with President Lagarde.
• Lagarde subsequently stressed that the Bank has “more ground to cover,” while noting that outright APP asset sales haven’t been discussed and highlighting significant upside risks to the inflation outlook. The Nikkei interview with the ECB President noted that “Lagarde gave no indication of a September interest rate hike, which has become a topic of discussion”, which seems to have triggered some support for EGBs in recent trade, while allowing ECB-dated OIS pricing to ease a touch (still not pricing 2 full 25bp hikes, with terminal rates priced for the Sepmeeting ).
• Smooth passage of Gilt supply will also be lending cross-market support.