US TSYS: Curve Steepens, Fed Cut Next Week Cemented On CPI Data
The Treasury curve bear steepened Wednesday, with the short-end outperforming after in-line CPI data pointed to a Fed cut next week.
- Core CPI inflation was a little stronger than expected in November at 0.31% M/M (cons 0.28), but housing inflation - whose stickiness has been a concern for Fed policymakers - pulled back more sharply than expected, helping shift implied probability of a 25bp cut next week to near 100% versus <90% Tuesday.
- Additionally, analysts saw the data implying that the Fed's preferred core PCE metric would decelerate.
- Yields rose from session highs as the afternoon went on, despite a solid 10Y Treasury auction, with equities and oil pushing all-time/session highs respectively.
- Also digested were concerns over the stickiness of ex-housing services inflation over the medium term, and the 50bp Bank of Canada rate cut coming with hawkish communications.
- Long-end Treasuries would fully reverse post-CPI gains. But the shape of the curve remained steeper: 2s10s +3.06, 10.98 (L: 4.464 / H: 11.551), moving further away from the near-inversion earlier this month.
- Attention turns to PPI (to round out PCE estimates) and jobless claims data Thursday morning, with attention also on the concurrent ECB decision (25bp rate cut fully priced, attention on guidance).
- Latest levels: Mar 25 T-Note future is down 8.5/32 at 110-23.5, having traded in a range of 110-20.5 to 111-07.
- In cash, the 2-Yr yield is up 0.8bps at 4.1511%, 5-Yr is up 3.2bps at 4.1282%, 10-Yr is up 3.9bps at 4.2652%, and 30-Yr is up 5.8bps at 4.4769%.
MNI ECB PREVIEW - DECEMBER 2024: Back-to-Back Cuts Continue
The ECB will cut by 25bp, marking the third back-to-back cut, and the fourth reduction this year. Given that the ECB has previously shown some flexibility in following its self-prescribed data dependent and meeting-by-meeting approach, future meetings carry some degree of uncertainty over policy outcomes. This time around, the prospect of a 50bp cut, although appearing unlikely, cannot be entirely discounted.
MNI SNB PREVIEW - DECEMBER 2024: Further Easing Coming
The SNB is expected to cut its policy rate again, with a regular 25bps cut to 0.75% appearing the most likely outcome but an outsized 50bps move also remains possible. Market pricing between the two remains finely split. There will therefore likely be a downward revision to September’s updated inflation projection, regardless of it being conditional on any new policy rate.
US DATA: Core Goods Pickup Notable Ahead Of Potential Tariffs
That's a 19-month high print for core goods inflation, with the category in positive territory in November for the 3rd consecutive month (after sequential deflation in 14 of the previous 15 months). And it comes even ahead of potential tariffs next year.
- Within those core goods categories, used car inflation softened only slightly less than expected (to 1.99% M/M vs 2.72% prior, and 1.05% expected).
- Apparel (+0.2% vs -1.5% prior) and new vehicles (0.6% vs 0.0% prior) both rebounded from unexpectedly soft Octobers, perhaps a little more than some had expected.
CANADA: Further Hawkish Adjustment In Rates Post BoC Decision
- 2Y GoC yields have extended the post-BoC climb to 9.5bps now vs 2.5bp for Tsys over the same period.
- It sees a ~7bp narrowing in the Can-US 2Y differential (both post-decision and on the day) to -119bps, away from multi-decade lows.
- BoC-dated OIS prices 18-19bp of cuts for the Jan 29 decision (assuming a similar 4bp spread over the overnight rate target). The actual implied rate has only increased ~4bps post-decision as it also allows for the catch-up from today’s 50bp cut only being 45bp priced.
- CORRA contracts see implied yields as much as 10bps higher for 2025/early 2026 contracts, with the Dec’25 pointing to ~63bp of cumulative cuts.
The press conference with Gov Macklem and Senior Dep Gov Rogers follows in less than 5mins. https://www.bankofcanada.ca/multimedia/press-conference-policy-rate-announcement-december-2024/
MACRO ANALYSIS: Foreign Holders Have Been Key To Absorbing OAT QT
The attached analysis piece sketches out key compositional changes in French debt from 2004 to Q2 2024, using data from the IMF (Arslanalp and Tsuda, 2014, updated) and the ECB.
- Foreign holders have been key to absorbing increased OAT free float since 2022 stemming from the ECB’s balance sheet run-off.
- As of Q2 2024, non-official foreign investors hold 33% of outstanding French general government debt. Meanwhile, 19% of French debt is held by “Foreign official” investors (which include non-domestic central bank FX reserves, bond holdings at non-domestic Eurosystem banks and foreign official loans).
- As ECB holdings have fallen from 28% to 24% of outstanding debt between 2022 and Q2 2024, foreign bank holdings have increased from 4% to 7%, and non-bank holdings have increased from 23% to 26%. Domestic bank/nonbank holdings have fallen 1pp each.
- Indeed, ECB Executive Board member Schnabel highlighted on November 7 that “foreign investors have been absorbing the largest share of the net issuance of bonds in the euro area since the Eurosystem ended its reinvestment of securities under the asset purchase programme (APP)”.
MACRO ANALYSIS: Foreign Demand For OATs Will Be Closely Watched In 2025
The aftermath of last week’s no-confidence vote has kept political uncertainty heightened in France, but also increased the risk of further fiscal slippage with the 2025 budget now in flux.
- This will likely require higher 2025 OAT issuance than initially assumed in Autumn 2024 (even as sources suggest France is sticking to its plan to borrow E300bln in 2025 for now), and by extension maintain the need for resilient foreign demand into next year.
- Although French government bond auctions since the snap legislative election announcement have generally been well digested, there are indications of weakening foreign demand for OATs in some areas of the market.
- For example, Japan’s monthly balance of payments data shows that Japanese investors sold JPY2.9 trillion of French paper between June and October (however, this only corresponds to ~E17-18bln, and may also reflect improved yield pickup for JGBs given the Bank of Japan’s monetary policy stance).
US TSYS/OVERNIGHT REPO: SOFR Remains Stubbornly High
Secured rates have been sticky to the upside over the past few sessions. At 4.64% (up 1bp), the SOFR fix printed 6bp above Fed Funds on Tuesday, widening the SOFR-EFFR spread for a 3rd consecutive session (EFFR has remained steady at 4.58%), with SOFR-ON RRP at 9bp and SOFR-IORB at -1bp.
- The 75th minus 25th SOFR percentiles rose 2bp to 11bp (highest since Dec 2) with 99th minus 1st up 2bp to 20bp.
- These are figures not often seen over the past few years outside of some quarter-/year-end dates when funding markets typically come under pressure, and that's before next week's mid-month Treasury settlements and corporate tax payment date.
- These are not necessarily alarming developments, and SOFR is still expected to fade by later in the month - but they underscore some underlying tensions in funding markets that have been bubbling up in the past couple of months.
- Fed officials have expressed that they are unconcerned that reserves are becoming scarce, but an end to QT is likely to be a topic of discussion at meetings in early 2025.
REPO REFERENCE RATES (rate, change from prev. day, volume):
- Secured Overnight Financing Rate (SOFR): 4.64%, 0.01%, $2308B
- Broad General Collateral Rate (BGCR): 4.61%, 0.01%, $864B
- Tri-Party General Collateral Rate (TGCR): 4.61%, 0.01%, $832B
New York Fed EFFR for prior session (rate, chg from prev day):
- Daily Effective Fed Funds Rate: 4.58%, no change, volume: $102B
- Daily Overnight Bank Funding Rate: 4.58%, no change, volume: $230B
BONDS: EGBs-GILTS CASH CLOSE: Short-End Strength Sees Steeper Curves
Core European curves steepened Wednesday, ahead of Thursday's ECB decision.
- Core bonds benefited overnight by the disinflationary implications of China reportedly being set to allow currency depreciation.
- While yields would trade in both directions for most of the session, short ends of curves benefited from an in-line US CPI report that cemented prospects for a cut by the Federal Reserve next week.
- That helped push curves steeper: the German curve twist steepened on the day, with the UK's bull steepening.
- Periphery EGB spreads tightened, assisted by the slighly more dovish central bank outlook, though notably French OATs moved wider of Bunds, amid anticipation over a new Prime Minister appointee.
- MNI's preview of the ECB decision was published Tuesday (link): the ECB will cut by 25bp (fully priced by markets; 4 % implied of a 50bp cut), Even if language concerning the ‘restrictive’ policy stance is not removed from the policy statement this time around, it soon will be.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is down 1.2bps at 1.952%, 5-Yr is down 0.1bps at 1.955%, 10-Yr is up 0.5bps at 2.127%, and 30-Yr is up 2.3bps at 2.377%.
- UK: The 2-Yr yield is down 2.6bps at 4.251%, 5-Yr is down 2.6bps at 4.133%, 10-Yr is down 0.6bps at 4.317%, and 30-Yr is down 0.2bps at 4.876%.
- Italian BTP spread down 2.2bps at 106.4bps / French OAT up 2.1bps at 76.9bps
FOREX: CAD/JPY Uptrend Firms on Diverging BoC/BoJ Themes
- The US CPI print came in just ahead of expectations, however the faster-than-expected inflation print is unlikely to deter a further 25bps rate cut from the Fed at next week's FOMC decision. The USD Index slipped in response, however losses were muted as US yields respected the recent range, and were generally contained.
- JPY remained one of the poorest performers across European trade, with Bloomberg quoting sources in reporting that the BoJ see little cost in waiting for the next BoJ rate hike. As such, JPY remained offered, while the hawkish BoC rate cut kept the underlying CAD/JPY uptrend intact.
- A fourth consecutive session of lower lows and lower highs for EUR/GBP continues to pile pressure on support, with 0.8203 the level to watch - the Mar 7 ‘22 low and the lowest point of a multi-year range. A break through support here would work against the RSI and could tip the price into technically oversold territory for the first time since September. This week's break lower has cancelled a recent bullish signal - an engulfing candle on Nov 12 - as rate differentials and aggressive ECB pricing dictate play.
- The ECB are expected to cut rates by 25bps Thursday, with much market focus on the projections out to 2025. We see Lagarde ruling out back-to-back cuts as a hawkish risk, and could prompt a swift reversal in dovish EUR pricing across recent weeks.
- Focus Thursday turns to the Australian jobs release for November, at which the unemployment rate is seen climbing to 4.2%. The release will provide the latest litmus test for whether the recent aggressive dovish re-pricing of RBA policy is justified, particularly as the AUD/USD rate hit a new pullback low at 0.6337 on Wednesday.
EQUITIES: Cyclicals/FAANG Lead Gains Amid CPI Relief
US equities had another strong session Wednesday, led by cyclical stocks. Upside was driven largely by an in-line CPI report which spurred the bulk of intraday gains, as the data appeared to remove most doubts about a Federal Reserve rate cut next week.
- Per our tech analyst, the S&P E-Mini contract (Z4 ) maintains a bullish tone, though for now futures (6,097.50, +0.85% as of 1520ET) remain just below the nearest resistance of 6,111.00 (Dec 6 all-time high).
- Communication Services was the leading sector (+2.7%), driven by a 4% rise in Alphabet which is now up 10% over two sessions on the back of a quantum chip breakthrough. Other strong performers included fellow FAANG stalwarts Netflix (+2.7%) and Meta (+1.9%).
- Consequently, NASDAQ futs (+1.9%) are outperforming their S&P counterparts, and at fresh all-time highs.
- Consumer Discretionary (+1.8%, with notables Tesla +4.6% and Amazon +2%) and Info Tech (+1.7%, Broadcom +6.8% and NVIDIA +3.5%) were close behind.
- Lagging were Utilities (-0.6%) and Health Care (-1.1%).
COMMODITIES: Crude Gains, Gold Tests Resistance At Nov 25 High
- Crude markets are on track for their highest close since Nov 22. Support comes from the possibility of tighter sanctions on Russian crude, with Bloomberg also noting that algorithmic buying activity has supported gains.
- WTI Jan 25 is up by 2.6% at $70.4/bbl.
- For WTI futures, initial firm resistance to watch is unchanged at $72.41, the Nov 7 high. Above here, key short-term resistance is at $77.04, the Oct 8 high.
- Meanwhile, Henry Hub front month is headed for its highest close since Nov 25, supported by the current above normal demand and despite milder weather forecasts for next week.
- US Natgas Jan 25 is up 7.5% at $3.4/mmbtu.
- Elsewhere, spot gold has risen for a fourth session in a row, with the yellow metal gaining by 0.8% to $2,716/oz, as US CPI inflation data reaffirmed expectations of a Fed rate cut next week.
- Gold briefly tested resistance at $2,721.4, the Nov 25 high, before paring gains.
- Clearance of this resistance level would highlight a bullish short-term development, opening $2,730.4, the 76.4% retracement of the Oct 31 - Nov 14 bear leg.
| Date | GMT/Local | Impact | Country | Event |
| 12/12/2024 | - |  EU | European Central Bank Meeting | |
| 12/12/2024 | - |  CH | Swiss National Bank Meeting | |
| 12/12/2024 | 0030/1130 | *** |  AU | Labor Force Survey |
| 12/12/2024 | 0700/0800 | *** |  SE | Inflation Report |
| 12/12/2024 | 0830/0930 | *** | CH | SNB PolicyRate |
| 12/12/2024 | 0830/0930 | *** | CH | SNB Interest Rate Decision |
| 12/12/2024 | - | *** |  CN | Money Supply |
| 12/12/2024 | - | *** | CN | New Loans |
| 12/12/2024 | - | *** | CN | Social Financing |
| 12/12/2024 | 1315/1415 | *** | EU | ECB Deposit Rate |
| 12/12/2024 | 1315/1415 | *** | EU | ECB Main Refi Rate |
| 12/12/2024 | 1315/1415 | *** | EU | ECB Marginal Lending Rate |
| 12/12/2024 | 1330/0830 | *** |  US | Jobless Claims |
| 12/12/2024 | 1330/0830 | *** | US | PPI |
| 12/12/2024 | 1330/0830 | * |  CA | Building Permits |
| 12/12/2024 | 1330/0830 | * | CA | Household debt-to-income |
| 12/12/2024 | 1330/0830 | ** | US | WASDE Weekly Import/Export |
| 12/12/2024 | 1345/1445 | EU | ECB Monetary Policy Press Conference | |
| 12/12/2024 | 1500/1000 | * | US | Services Revenues |
| 12/12/2024 | 1530/1030 | ** | US | Natural Gas Stocks |
| 12/12/2024 | 1630/1130 | ** | US | US Bill 04 Week Treasury Auction Result |
| 12/12/2024 | 1630/1130 | * | US | US Bill 08 Week Treasury Auction Result |
| 12/12/2024 | 1800/1300 | *** | US | US Treasury Auction Result for 30 Year Bond |
| 13/12/2024 | 2350/0850 | *** |  JP | Tankan |