Mizuho EMEA Multi Asset Strategy Daily

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USTs enter Tuesday back under pressure, with the post-NFP rally now largely reversed as oil, supply and a more hawkish Fed backdrop collide (Hammack said that “some number” of rate hikes may be needed). The overnight news out of the Middle East has not helped. Prospects for a quick reopening of Hormuz have dimmed further, with President Trump now demanding compensation from Iran just as Tehran is sticking to its own conditions around sanctions, the US blockade and reparations. Brent is holding just below $88pb after Monday’s 5% move, and the key point for markets is not that crude is making new YTD highs (because it is not), but that the broader energy complex is looking much less benign. TTF gas and crack spreads are much closer to the highs. For rates, that leaves the market in an awkward holding pattern into this week’s key data (US CPI). The front end probably consolidates around current levels into CPI unless we get another escalation headline, with September now leaning back towards a hike again. Hammack’s message that policy is not meaningfully restrictive only reinforces the sense that the Fed will not rush to look through a renewed energy shock. But the bigger pressure point remains duration. 10Y UST yields are testing 4.70% again, 30Y TIPS are rising again towards the YTD highs, corporate supply is relatively heavy, and UST refunding begins this week’s leg with the $58bn 3Y auction - all arguing that rallies are likely to be sold for now. A soft CPI can still help tactically, but the question is whether it will be enough to fully offset energy and supply pressure ahead of September.

Bunds are again around the YTD highs, with 10Y yields around 3.18% and the cycle peak at 3.218% now very much in sight. The market is not getting much help from the data calendar today, and yesterday’s stronger Sentix barely mattered relative to the move in energy. The issue is that the ECB is in our view unlikely to need a full hiking cycle. A move towards 3% depo rate is the maximum policy rate we see the ECB delivering and, for that, we do need 1) the data to justify 3x hikes (we are not there yet with growth in the Top 3 EGBs below trend), 2) the ECB to sound more hawkish and worried about current developments, and 3) a few months to see if underlying inflation pressures build and become entrenched. Thus, with 1y1y OIS back close to 2.80%, the bar for a further repricing is higher, but not impossible if oil, gas and refined products keep moving together.

GBP rates are also back near key psychological levels: ~4.98% in 10Y Gilt yields, SONIA 1y1y slowly grinding towards 4.50%, and the 10Y Gilt-Bund spread now back ~180bp (after slightly tightening during the last few weeks). It seems fair given the UK mix of still-live inflation risk, growth not weak enough to kill the hiking debate, and a fiscal backdrop still full of uncertainties that is keeping term premium sticky. Andy Burnham is expected to make a media appearance today (around 11am London time). The near-term setup is therefore not very friendly for duration, unless UK GDP surprises to the downside and kills some of the rate-hike expectations. If we take the BoE’s communication at face value, the hikes priced in the SONIA strip look excessive. But until the UK GDP report, GBP rates will probably trade as a higher-beta version of the global oil story.

Relatively quiet and mixed day in Asian equities, with Japan on holiday.

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