EUROPEAN INFLATION: Nuanced Developments in German CPI in January [1/2]

French political developments ahead of PM Bayrou’s general policy address at 1400GMT/1500CET have dominated EGB-specific news flow this morning. Although Socialist leader Faure suggested an agreement with his party and the ruling government was possible this morning, the PM has since pushed back on changes to Macron’s pension reform law.

• That helps the 10-year OAT/Bund spread widen back above ~83bps, up from an intraday low of 82bps earlier. The spread remains 1bp tighter today though.
• Bund futures have moved further away from session highs, now -14 ticks at 130.68. Alongside the aforementioned French developments, a bid in European equities and supply-related pressure has weighed on major EGB futures.
• 10-year peripheral spreads to Bunds have tightened on the equity rally. The BTP/ Bund spread is 2bps tighter at 118.5bps, down from yesterday’s intraday high of almost 124bps. Italian November industrial production was stronger-than-expected at 0.3% M/M (vs 0.1% cons), but the underlying trend remains weak.
• The spread has been set for today’s 10-year GGB and 3/30-year EU-bond syndications. The EU syndication will have a joint size of E11bln, in line with MNI’s expectations. E5bln of the new 2.40% Apr-30 Bobl was also issued this morning.
• ECB’s Holzmann continued to express a preference for a cautious easing cycle, given persistent core inflation pressures.
• The US calendar is headlined by PPI at 1330GMT.

The early bid in gilts fades alongside a similar move in wider global FI.

• Pressure around EU/EGB syndications, a move off lows in oil and continued questions surrounding medium-term French political and fiscal risks initially pushed bonds away from session highs. Oil has pulled back since.
• Gilt futures last flat at 89.30 vs. highs of 89.72.
• Bearish technicals intact, initial support & resistance located at 88.96/90.31.
• Yields little changed to 1.5bp lower on the day, curve steeper.
• 10s spread to Bunds 1.5bp tighter around 225bp.
• Decent demand at the latest 30-Year I/L auction did little to counter the pullback, although the DMO will have welcomed such results given the weakness in bonds seen in recent weeks alongside questions surrounding the UK’s fiscal health. Yield levels on offer will have aided takedown.
• BoE-dated OIS prices 42bp of cuts through ’25 vs. 44bp early today. Hawkish cycle extremes situated at 39bp.
• SONIA futures -1.5 to +1.0.
• Chancellor Reeves will appear in the Commons later today (around 12:30 London), with MPs set to question her on the UK’s fiscal outlook after the recent increase in market-based fiscal risk premia.
• Beyond that, tomorrow will see the latest round of CPI data (expect our full preview later today), comments from BoE dovish dissenter Taylor and an auction of the GBP4.00bln of the 10-year 4.25% Jul-34 gilt.

ERZ5 98.125/98.25/98.375/98.50c condor vs 97.50/97.375ps, bought the Condor for -1.5 in 6k.