Strategy Daily

Evelyne Gomez-Liechti | Multi-Asset Strategist (Mizuho International Plc) |

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The post-FOMC bounce in USTs looks more like an oversold correction than the start of a sustained duration rally. The hawkish repricing had become difficult to extend without further acceleration Tier1 data, while the Fed’s willingness to lean against inflation has helped restore some credibility and encouraged short-covering. However, the fundamental case for owning duration remains weak. Claims remain firm, Q3 growth estimates are being revised higher, and today’s industrial production data should offer another test of how resilient activity remains. Meanwhile, oil has fallen for a third session, with Brent near $104pb as hopes of a partial restart of Saudi Arabia’s East-West pipeline reduce the immediate risk of a larger supply disruption. However, this is not a clean de-escalation. Trump has described the Iran conflict as approaching another crossroads, while the Houthi takeover of Bab-al-Mandeb leaves markets facing uncertainty around two major transport routes. Talks with Gulf leaders provide a possible off-ramp, but until there is clearer evidence of progress, the risk of another move higher in oil should keep risk premium elevated and limit the upside for rates. The DXY has moved off the highs but remains confined to a narrow range, with lower oil capping support for now.

EGBs continue to benefit from the combination of lower oil and the global flattening impulse, but the front end remains constrained by a market still pricing close to three further ECB hikes by April. We think that looks too aggressive unless the energy shock persists and begins feeding more clearly into second-round inflation. For now, we would be inclined to tactically receive rates through the front end rather than chasing the long-end rally, where the BoE-driven move has already provided significant support. France remains big focus. Lecornu’s proposed €54bn consolidation and a 5% deficit target for 2027 are positive, but execution risk remains high with Le Pen now more open to vote in favour of a censure motion (if there is one and RN’s red lines are threatened). The market is unlikely to remove the fiscal premium. With 10Y OATs trading around post-2012 wides vs Germany, outright shorts are less attractive, but we would not fade the widening yet. EUR/USD has found a floor around 1.1480, with relative rate expectations still restrictive enough to limit the downside despite softer EUR yields.

Yesterday’s BoE meeting confirmed that the bar for hikes has fallen. The majority now acknowledges that inflation risks are tilted higher, with Breeden and Lombardelli the most likely switch candidates if the conflict persists or second-round effects emerge. However, the lack of a clearer steer towards November still felt modestly dovish given the amount of tightening already priced. The bigger rates signal came from QT. The BoE will pause active sales until April 2027, then sell £20bn a year to the DMO through 2034, while shorter and longer Gilts are held to maturity. This removes the Bank as a direct seller into the long end and places the timing and maturity of eventual issuance with the DMO. It is therefore supportive for long Gilts and the curve, although it does not eliminate supply because the DMO’s future financing remit will rise. This morning’s retail sales beat may nevertheless put some bearish pressure back into SONIA after yesterday’s rally. Sales rose 0.5-0.6% MoM versus -0.2% expected, but July was revised lower and the 3M trend decelerated slightly. The series is volatile and one strong print is unlikely to change the MPC’s view without evidence that summer resilience persists into autumn. GBP/USD is trading around 1.3373, while sterling GBP against EUR following the release.

Generally positive session in Asian equities, with markets focused on the dovish BoJ hike (2 dissenters) to 1.25%. JGBs bull-steepened while USD/JPY rose above 156.50. The statement acknowledged that the policy rate is now in neutral territory while…