FED: St Louis's Musalem Sounds Wary Of Upside Inflation Risks

Core European curves closed mixed Monday, with divergent short-end performances in EGBs and Gilts.

• Political headlines were prevalent with the German election not delivering major surprises with conservative Merz potentially forming a "grand coalition", while there was continued uncertainty over US-Ukraine-Russia negotiations.
• Equity weakness spilling over from Friday's weak US stock close helped buoy core FI. Data was not particularly impactful (Eurozone final January inflation in-line, German IFO mixed).
• 2025 ECB OIS-implied rate cut pricing deepened by 2bp to 81bp, most since Feb 13; BOE pricing was static at 53bp of cuts.
• Consequently, German short-end outperformed its UK counterpart, conversely Gilts outperformed Bunds across the rest of the curve.
• Periphery/semi-core EGBs were mixed too, with Spain underperforming on supply (15Y syndication mandate).
• BOE's Dhingra (who earlier in the day was reappointed to the MPC through Aug 2028) speaks after the cash close (MNI's Gilt Week Ahead is here).
• Tuesday's schedule includes final German GDP and UK CBI sales, with the data highlight likely to be the ECB's negotiated wages indicator. We also hear from ECB's Centeno and Schnabel, and BOE's Pill.

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is down 1.7bps at 2.088%, 5-Yr is down 0.5bps at 2.236%, 10-Yr is up 0.7bps at 2.477%, and 30-Yr is up 3.2bps at 2.753%.
• UK: The 2-Yr yield is up 0.1bps at 4.228%, 5-Yr is down 0.8bps at 4.245%, 10-Yr is down 0.7bps at 4.564%, and 30-Yr is down 0.5bps at 5.16%.
• Italian BTP spread flat at 114.2bps / Spanish up 0.9bps at 63.5bps

• RES 4: 1.2811 High Dec 6 ‘24 
• RES 3: 1.2805 2.0% 10-dma envelope
• RES 2: 1.2767 50.0% retracement of the Sep 26 ‘24 - Jan 13 bear leg 
• RES 1: 1.2691 High Feb 24
• PRICE: 1.2620 @ 15:51 GMT Feb 24
• SUP 1: 1.2563 Low Feb 19     
• SUP 2: 1.2518 50-day EMA
• SUP 3: 1.2440 Low Feb 13  
• SUP 4: 1.2333 Low Feb 11 and a key support    

A bull cycle in GBPUSD remains in play and the pair again traded to a fresh cycle high on Monday - although faded into the close. Fresh gains confirm a resumption of the uptrend and maintain the current sequence of higher highs and higher lows. An extension would strengthen the bullish condition and open 1.2767, the 50.0% retracement of the Sep 26 ‘24 - Jan 13 bear leg. Initial firm support to watch is 1.2518, the 50-day EMA.

The latest Tsy quarterly futures from March'25 to June'25 below. Heavy session volumes as overall percentage complete nears 50% before June takes lead quarterly next week Friday. Current roll details:

• TUH5/TUM5 appr 1,671,900 from -6.75 to -6.0, -6.62 last, 49% complete
• FVH5/FVM5 appr 2,406,300 from -3.75 to -2.75, -3.5 last, 46% complete
• TYH5/TYM5 appr 1,540,100 from -0.50 to 0.00, -0.25 last, 46% complete
• UXYH5/UXYM5 appr 1,052,200 from 4.25 to 5.0, 4.5 last, 38% complete
• USH5/USM5 appr 545,700 from 5.5 to 6.5, 5.5 last, 45% complete
• WNH5/WNM5 appr 771,000 from 4.0 to 5.0, 4.0 last, 50% complete
  • Reminder, March futures won't expire until next month: 10s, 30s and Ultras on March 20, 2s and 5s on March 31. March options expired last Friday.