EUROPEAN FIXED UPDATE: Weighed on by developments around geopols/defence, US ISM Manufacturing next

Bunds: -65 ticks, 132.55

• A softer start for benchmarks as sentiment in Europe has shrugged off the Zelensky-Trump fallout with Chinese PMIs and the APAC handover seeing a stronger start to the session which has been exacerbated by blockbuster performance in European defence names on reports/remarks around spending.


• Action which weighed on Bunds to a 132.32 low overnight. Thereafter, the benchmark lifted around 60 ticks off worst levels and back towards its 132.91 high as the strength seen around the European equity open tempers a touch.


• Final Manufacturing PMIs saw modest upward revisions though the bloc remains firmly in contractionary territory and while there are signs of a recovery in Germany, uncertainty remains very elevated.


• More recently Flash EZ Inflation measures printed slightly hotter than expected and spurred a modest hawkish reaction sending Bunds back to within 20 ticks of the mentioned low, pressure which was also potentially spurred by a pick up in risk sentiment around the same time; note, the Services Y/Y figure moderated to 3.7% (prev. 3.9%). No real move in ECB pricing.


• Back on the initial action, significant focus around reporting in Le Figaro that French President Macron has urged member nations to increase defence spending to in excess of 3% of GDP. Calling for some EUR 200bln to be able to invest “in a first instance”.


• Reporting which has weighed on benchmarks given the potential additional issuance ramifications. In addition to renewed/continued energy price pressures given the setback in relations between the US and Ukraine and associated pushback to the resumption of gas flows through Ukraine.


• Given this, EGBs find themselves pressured across the board though Bunds are the standout underperformer as they are also weighed on by a Reuters source report that coalition talks in Germany include specific defence & infrastructure funds of EUR 400bln and EUR 500bln each; funding which they aim to approve in the current parliament (i.e. before March 24th).

USTs: -4 ticks, 110-30+

• A touch softer/near-unchanged as the latest geopolitical/defence developments don’t have quite the same ramifications for the US as they do for Europe. Currently at the mid-point of a 110-28+ to 111-03 band.


• US newsflow is very much focused on the fallout from Trump-Zelensky, as we await concrete details into a potential Italian-led gathering, and the implementation of tariffs on Canada and Mexico tomorrow.


• Ahead of this, participants are attentive to any signs of an 11th hour deal and what Canada and/or Mexico have had to concede to achieve it; ING writes that the nations being forced to impose 10% tariff measures on China is one possibility.


• That aside, the schedule features ISM Manufacturing PMI which will be scoured for tariff-related movements in input prices, as this could be indicative of a resurgence in inflation in the months ahead. Thereafter, Fed’s Musalem (2025 Voter) speaks; on February 20th he said he expects inflation to wane, but acknowledged upside risks.

Gilts: -44 ticks, 93.00

• Softer, trading in-fitting with European peers. As such, the benchmark is at the bottom end of a 92.99 to 93.39 band.


• Focus remains on the discussed geopolitical/tariff landscape. For the UK specifically, we look to tomorrow’s SOTU address from POTUS for any clues that Starmer managed to secure a UK-exemption to future tariffs in his meeting.


• In the meantime, any indications that the reporting from European peers around additional defence spending or specific funding allocations for defence could spur the UK into making further commitments on top of the increase outlined in the Commons in February. A point of focus given the fiscal implications as we now count down to the March OBR forecasts.


• February’s Manufacturing PMI was revised marginally higher but remains well into contractionary territory with internal commentary bleak, e.g. "Weak demand, low client confidence and rising cost pressures are accelerating the downturns in output and new orders, while the Autumn Budget's changes to the national minimum wage and employer NICs are driving up inflation fears and intensifying the downward trend in staff headcount".

03 Mar 2025 - 10:20- ForexData- Source: Newsquawk