FINANCIALS: Nationwide - New Issue - €650M WNG 10.25NC5.25 Tier 2 - Books

Goldman Sachs note that “the vote split at the MPC meeting had a hawkish tilt, with limited support for cuts relative to previous meetings. We continue to expect gradual, quarterly cuts but progress on wage disinflation remains slow. Given headline inflation is set to rise later this year, it may only take a handful of hawkish data surprises to blow the BoE off course - this limits the appeal of longs in the UK front-end”.

• Instead, they see “flattening risk on the UK curve, with the upcoming Spring Statement likely to demonstrate a commitment to fiscal prudence by rebuilding lost headroom in coming years”.
• They look for overall gilt remit of “around £305bln”, although concede that “recent slippage on borrowing estimates may skew the risk slightly higher”.
• Zooming out, they suggest that this is already likely priced given the recent bear steepening on the curve.
• Finally, they note that focus on the DMO’s issuance maturity profile, which they “expect to continue to skew away from the long end towards the belly”.
• Netting all of this together, they point to further 10s30s curve flattening.

Hard to pin down a driver for the early outperformance in gilts vs. Bunds, with UK yields 2.5-4.5bp lower on the day

• Plenty of risk events evident for UK markets this week, as detailed earlier, but little in the way of overt fresh catalysts to identify.

The German services PMI fell to its lowest since November at 50.2 (vs 52.0 cons, 51.1 prior), but this was slightly offset by the strongest manufacturing reading in 31 months (48.3 vs 47.0 cons, 46.5 prior). This helped the composite reading reach a 10-month high of 50.9 (vs 51.1 cons, 50.4 prior).

Despite this, the details of the PMI screen dovish – particularly for services, which accounts or ~70% of gross value added in Germany.  Underlying services demand remains weak, while both input cost and output charge inflation cooled in March.

There was an uptick in confidence on hopes of a boost in infrastructure spending following the recent fiscal announcements.

Key notes from the release

•  “The upturn in manufacturing was driven in large part by stronger demand in the sector, with goods producers reporting a first – albeit modest – rise in new orders since March 2022. Where an increase was recorded, some firms remarked on stronger domestic demand and clients trying to build up stocks”.
• “Services firms meanwhile recorded the steepest drop in new business in just over a year, citing a wait-and-see attitude among customers amid a backdrop of market uncertainty”.
• “March seeing a tenth successive monthly decline in employment. The rate at which workforces fell eased since February, however, reflecting a slowdown in the pace of manufacturing job shedding to the weakest in nine months. Services employment once again rose slightly”.
• “Turning to prices, March’s flash data showed a cooling of inflationary pressures across the eurozone’s largest economy. This reflected developments in the service sector, where firms reported the slowest increases in input costs and prices charged for five months”.
• “Growth expectations increased in both monitored sectors and remained stronger in manufacturing than in services. Reports from surveyed businesses highlighted positivity around a boost in infrastructure spending and hopes of a general upturn in economic conditions”.