EXECUTIVE SUMMARY
US TSYS
US TSYS: Post-FOMC Steepening Pared Ahead of Holidays
- Treasuries have seen some downward pressure late in the session but hold onto gains for the day (albeit only just in the case of 2s).
- Core PCE inflation was slightly softer than expected but still solid trend rates for supercore inflation appear to have helped anchor Fed rate expectations with markets only willing to pare so much of Wednesday’s reaction to a hawkish Fed.
- Polymarket shows odds of a government shutdown as having tilted from 75% overnight to 45% currently.
- Cash yields are 0.8-5.6bps lower, with the belly leading declines after being dragged higher by a particularly weak 5Y TIPS auction yesterday with a 6.7bp tail.
- 2s10s of 21.2bps (-3.8bp) has seen a sizeable pullback away from yesterday’s fresh ytd high of 28bps, potentially in profit taking for a successful week for steepeners.
- 10Y yields have topped out this week at 4.5923% (currently 4.158%), easily through the mid-Nov high of 4.50% for highs since May.
- TYH5 trades at 109-01 having pulled back from an earlier high of 109-08+. It consolidates an increase away from support at 108-16+ (Dec 19 low) but hasn’t troubled resistance at 110-07+ (20-day EMA).
- Fed Funds implied rates show 2bp of cuts for Jan, a cumulative 26bp for June and 39bp for Dec.
- Next week sees Monday start with durable goods orders and new home sales, having been pulled forward from Tuesday.
NEWS
US POLITICS (BBG): House Republicans said they will vote Friday on funding to keep the government open through March 14, provide disaster relief and gives billions of dollars in economic aid to farmers. [...] Speaker Mike Johnson emerged from a two-hour meeting with fellow House Republicans to tell reporters there is a “unanimous agreement in the room that we need to move forward.” Johnson wouldn’t discuss the plan and said he still had “a couple things” to work out. The speaker plans to use an expedited process for the measure that requires a two-thirds majority, meaning it will need significant Democratic support.
FED (MNI BRIEF): Cleveland Fed President Beth Hammack said Friday she dissented against this week's FOMC rate cut in favor of keeping policy on hold because the risk has risen that inflation pressures will linger for longer. "The economy’s momentum and recent elevated inflation readings caused me to revise up my inflation forecast for next year. In addition, the balance of risks to the outlook appears to be skewed toward higher inflation outcomes," she said in a statement. "A stall in inflation above 2% for too long would risk de-anchoring inflation expectations, making it harder to return inflation to our objective."
FED (MNI BRIEF): The Federal Reserve has entered a new phase in the monetary easing cycle where it can be more deliberate about deciding whether and how quickly to continue lowering interest rates, particularly in the face of firmer inflation data, San Francisco Fed President Mary Daly said Friday. "The progress has slowed relative to what we had wanted, but that's a typical pattern," Daly told Bloomberg TV in an interview, adding this week's decision to cut rates by 25 basis points was a close call. "Now I feel that we've got that recalibration phase behind us. We can return to a more typical pattern of gradualism."
FED (MNI): NY Fed President Williams says in an interview post-November PCE data that "I think what we're seeing is encouraging news. It's been a bit of a bumpy kind of journey. I've seen the disinflation process, especially over the past 12 months, but we've seen really sizable movement down in inflation the last couple years. We're still not to our 2% goal. We're getting. We're going to make sure we get there, but definitely seeing good seeing further progress towards that goal." In other words, Williams as usual is on the dovish side of the FOMC spectrum, echoing Powell's overall message at the December press conference, and seeing policy as alternatively "somewhat restrictive" and "pretty restrictive".
CANADA (MNI): Canada's labor market will tighten again and face shortages as the government reduces foreign work visas even with employers currently skittish amid a threatened U.S. trade war, the head of an influential business survey told MNI. “The immigration policy is going to be so strict though for the next few years,” said Andreea Bourgeois, Director of Economics at the CFIB. “Businesses are going to feel a lack of people” and “the labor market may overheat again."
CANADA (MNI): Prime Minister Justin Trudeau's own political future remains in question Friday as he shuffled cabinet following the finance minister's acrimonious departure Monday, uncertainty keeping Canada's dollar at four-year lows amid questions of who can deal with Donald Trump's 25% tariff threat.
EUROZONE (MNI INTERVIEW): Bargaining power has “slowly but surely” shifted from eurozone workers towards employers in recent quarters and will continue to do so in a labour market that is gradually weakening, though without signs of “falling off the cliff for now", an economist responsible for the Indeed Wage Tracker, closely followed by the ECB, told MNI.
GERMANY (BBG): VW agreed to keep the brand’s 10 German factories operational and reinstate job security agreements until 2030, the works council said Friday, confirming an earlier Bloomberg report. In exchange, workers agreed to forego some bonuses, cut capacity at five sites by several hundred thousand units and reduce the workforce by more than 35,000 over the next five years.
ITALY (BBG): Italy’s Deputy Premier Matteo Salvini was acquitted over his role in preventing a rescue ship carrying 147 migrants from docking in Sicily in 2019. Salvini, the leader of the anti-migration League party and a junior partner in Prime Minister Giorgia Meloni’s coalition, had been facing a jail term of as much as six years.
OVERNIGHT DATA
US DATA: Monthly Progress But Supercore Trend Still Hot
- Core PCE inflation for November was marginally softer than detailed unrounded estimates, at 0.115% M/M vs estimates that we had seen averaging 0.13-0.14% M/M (it looked a larger miss compared to the 0.2% median estimate in the Bloomberg survey).
- The minor upward revision seen in yesterday’s Q3 data came early in the quarter, back in Jul-Aug whilst small (0.01pp) downward revisions to Sep-Oct modestly added to today’s downward surprise.
- It's the softest since May having averaged 0.215% M/M through Jun-Oct.
- Sticking on a sequential basis, supercore PCE inflation printed 0.16% M/M in Nov and saw a similar revision profile (upward in Jul-Aug, downward in Sep-Oct). It’s the first month in line or softer than a 2% annualized pace since May, having averaged 0.27% through Jun-Oct.
- Taking more of a step back, the annual rate of 2.82% Y/Y was technically its highest since April, but it still leaves it more clearly on track to average 2.8% in Q4 per the median FOMC forecast after this week’s upward revision from 2.6% in the September SEP.
- Recent run rates are a little softer, with the three-month easing three tenths to 2.5% annualized and the six-month inching a tenth higher to 2.4% annualized.
- Supercore PCE inflation remains problematic though, with an annual rate of 3.51% Y/Y and 3- and 6-mth rates of 3.2% and 3.0% annualized respectively. Unlike housing services, supercore averaged close to 2% pre-pandemic and so the category remains a missing piece of the return to inflation target puzzle.
- Recall Powell on Wednesday: "We try to look at not just a couple or three months. We shouldn't - our position shouldn't change based on two or three months of good or bad data. We have a long string now of inflation coming down, gradually over time."
- "That [12-month core PCE at 2.8% in their forecasts] is way better than we were. We still have work to do though is how we're looking at it. And we need policy to remain restrictive to get that work done, we think." Despite the upward FOMC revisions to 4Q25 core PCE inflation in particular, Powell considered it would still be “significant progress" and "meaningful" if core inflation drops to 2.5% in 2025 from 2.8 or 2.9% this year.
- The latter gives an idea of how the FOMC is likely to view the recent run rates of circa 2.5% for core PCE inflation.
US DATA: Consumer Remains Strong, But Services Demand Shows Signs Of A Slowdown
Spending growth remained steady in November, and while Incomes were robust, they cooled from an unusually strong October. While this was a solid report for the consumer, it was on the soft side of expectations, and there are signs that spending on services - which makes up the lion's share of PCE - is moderating.
- The rise in income / disposable income (both 0.3% M/M, 0.7% prior) understated the pickup in employee compensation (an 8-month high 0.6%).
- Spending's rise of 0.4% M/M (0.3% prior) reflected an acceleration in goods purchases (+0.8% from -0.1%), but services spending saw the slowest growth (0.2%, 0.6% prior) in 15 months.
- Real spending came in at 0.3% M/M, an acceleration from 0.1% prior, versus real disposable income growth of 0.2%, down from 0.5% prior (which was a 9-month high, leaving November's figure as closer to recent trends). The household savings ratio dipped to 4.4% from 4.5%, but these figures are often substantially revised so we take little short-term signal from them.
- These figures (and the corresponding price metrics) were on the soft side of expectations, but they should be put into the context of longer-term trends:
- Income growth is up 4.7% on a 3M/3M annualized basis, fastest since May 2024; real spending growth is up 3.6% on that basis - remaining well above the longer-run trend - with Y/Y at 2.9%. To put into context, Q3 GDP PCE printed 3.7%, and this is calculated on this basis, so there is no evident slowdown in consumption in Q4.
- If there is any worrying sign for the consumer in this report, it's in the composition of spending in real terms: goods (one-third of PCE) growing by an accelerating amount (5.9% 3M/3M ar, a 20-month high, and 3.4% Y/Y), but the more important services category showing some slowing signs (3M/3M 2.6%, slowest in 12 months, and Y/Y 2.7%, slowest in 8 months).
US DATA: Consumer Inflation Expectations Tick Lower In December
U.Mich consumer sentiment was unrevised in the final December release, confirming a further improvement to its highest since April whilst inflation expectations components surprised a touch lower with the long-term more firmly within recent ranges.
- U.Mich consumer sentiment was unrevised at 74.0 (cons 74.2, prelim 74.0) in December after 71.8 in November.
- 1Y inflation expectations: 2.8% (cons, prelim 2.9) in December after 2.6% in November.
- 5-10Y inflation expectations: 3.0% (cons, prelim 3.1) in December after 3.2% in November. That 3.2% in Nov was a rare push above its typical 2.9-3.1% range, having last seen 3.2% or higher in Nov’23 and before that Mar 2011.
CANADA DATA: A Mixed Retail Sales Report Doesn’t Alter Strong Recent Trend
- Retail sales saw a mixed report today, with a surprise downward revision from 0.7% to 0.6% M/M for October values but with upward revisions to the three previous months including from 0.4% to 0.6% in September.
- The November advance underwhelmed though, indicated “relatively unchanged” on the month.
- Potential revisions aside, it currently leaves the 3M/3M run rate for nominal sales at 6.8% annualized in Nov, unchanged from the upward revised 6.8% in Oct vs the 6.0% previously thought.
- Total sale volumes meanwhile were flat in October but it followed an upward revised 1.1% M/M in Sept for what was a third strong month. The 3M/3M rate was particularly firm at 9.0% annualized for its strongest since late 2021.
- This recent strength comes prior to any impact from the GST/HST two-month holiday that started this month.
MARKETS SNAPSHOT
- DJIA up 525.13 points (1.24%) at 42930.54
- S&P E-Mini Future up 65.25 points (1.1%) at 6009.5
- Nasdaq up 209 points (1.1%) at 19619.52
- US 10-Yr yield is down 7.6 bps at 4.4862%
- US Mar 10-Yr futures (TY) are up 20/32 at 109-7.5
- EURUSD up 0.0079 (0.76%) at 1.0444
- USDJPY down 1.36 (-0.86%) at 156.07
- WTI Crude Oil (front-month) up $0.16 (0.23%) at $69.55
- Gold is up $31.47 (1.21%) at $2627.26
US 10YR FUTURE TECHS: (H5) Bear Trend Remains Intact
- RES 4: 112-02 Low Oct 14
- RES 3: 111-24 38.2% retrace of the Sep 11 - Nov 15 bear leg
- RES 2: 110-30+/111-20+ 50-day EMA / High 6 and the bull trigger
- RES 1: 110-07+ 20-day EMA
- PRICE: 108-27+ @ 11:18 GMT Dec 20
- SUP 1: 108-16+ Low Dec 19
- SUP 2: 108-12+ 1.382 proj of the Oct 1 - 14 - 16 price swing
- SUP 3: 108-00 1.500 proj of the Oct 1 - 14 - 16 price swing
- SUP 4: 107-19+ 1.618 proj of the Oct 1 - 14 - 16 price swing
A bearish short-term theme in Treasury futures remains intact and this week’s sell-off reinforces the current trend condition. The contract has traded through key short-term support and the bear trigger at 109-02+, the Nov 15 low. The breach confirms a resumption of the downtrend and opens 108+12+, a Fibonacci projection. On the upside, initial firm resistance is at 110-07+, the 20-day EMA.
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
US TSYS/OVERNIGHT REPO: SOFR Sees 2bp Of Passthrough From 5bp Fed Tweak
Thursday's rate run reflected the Federal Reserve's rate cut this week, with effective Fed funds falling 25bp to 4.33% as expected. Secured rates saw a bigger drop, reflecting the 30bp fall in the offer rate on ON RRP.
- SOFR rates fell by 2bp more than the 25bp funds range cut, with BGCR down 4bp more and TGCR 5bp more. While there may also be some idiosyncratic factors at play that don't make these rates a pure measure of passthrough, these are roughly the degrees of passthrough expected from the 5bp ON RRP adjustment n the short term. Over time, SOFR is seen down slightly further (3-5bp of adjustment).
- However, EFFR is not seen as being heavily impacted, if at all, by the ON RRP cut.
REPO REFERENCE RATES (rate, change from prev. day, volume):
* Secured Overnight Financing Rate (SOFR): 4.30%, -0.27%, $2390B
* Broad General Collateral Rate (BGCR): 4.27%, -0.29%, $864B
* Tri-Party General Collateral Rate (TGCR): 4.26%, -0.3%, $827B
New York Fed EFFR for prior session (rate, chg from prev day):
* Daily Effective Fed Funds Rate: 4.33%, -0.25%, volume: $104B
* Daily Overnight Bank Funding Rate: 4.33%, -0.25%, volume: $266B
SOFR FIX - Source BBG/CME
- 1M 4.33654 -0.01949
- 3M 4.32742 -0.00989
- 6M 4.27621 -0.00471
- 12M 4.22397 0.01285
BONDS: EGBs-GILTS CASH CLOSE: Relief Rally Concludes An Otherwise Poor Week
European yields fell Friday, led by Gilts which had underperformed badly throughout the week.
- Equity weakness helped underpin global core FI in early trade. A softer-than-expected US PCE report helped Treasuries rally in the early European afternoon, helping extend the Bund and Gilt rally. European data had little impact: Eurozone flash consumer confidence and UK retail sales were weaker than expected, with German PPI a bit stronger.
- The UK curve bull steepened, with Germany's curve shifting down largely in parallel.
- 10Y Gilt yields closed the week 10bp higher, versus 3bp for Bund; 2Y UK yields closed 4bp higher (reflecting a paring of expected BOE easing after UK CPI and labour market data and the impact of a hawkish Fed, and despite a more dovish BOE decision vote split than expected), whereas German Schatz yields fell 4bp.
- Periphery spreads widened early, but narrowed in afternoon trade alongside a broader risk asset relief rally. BTPs marginally outperformed.
- In issuance, Italy announced E330-350bln of bonds planned to be issued in 2025, down from E361bln in 2024. Meanwhile the BOE announced its APF sales schedule for Q1: all auctions will be bit smaller than in Q4-24 - but there was no gilt reaction.
- Next week is unsurprisingly much thinner on the data/events front given the holidays, with some final Q3 GDP readings among the limited highlights, and no scheduled ECB / BoE speakers.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is down 2.1bps at 2.027%, 5-Yr is down 2.3bps at 2.089%, 10-Yr is down 2.1bps at 2.285%, and 30-Yr is down 1.6bps at 2.518%.
- UK: The 2-Yr yield is down 7.7bps at 4.347%, 5-Yr is down 7.7bps at 4.29%, 10-Yr is down 6.9bps at 4.51%, and 30-Yr is down 6.4bps at 5.05%.
- Italian BTP spread down 1bps at 116bps / Spanish down 0.8bps at 69.2bps
FOREX: Greenback Reversing Post-FOMC Advance as Equities Surge
- Amid the modest dovish Fed repricing in the wake of the softer-than-expected US PCE data, the greenback extended session losses, gradually eroding some of the gains seen in the aftermath of the hawkish Fed meeting on Wednesday.
- The downward trajectory for the US dollar was bolstered by an impressive recovery for major equity benchmarks, with e-mini S&P 500 futures rising around 2.7% above session lows, seen shortly before the data.
- Price action has seen strong rallies for the likes of EURUSD and GBPUSD, with the latter recovering well from the post BOE weakness that saw the pair dip below the 1.25 handle. We are currently nearer to 1.26 as we approach the weekend close.
- The Japanese yen is the best performer in the G10, with lower US yields boosting the JPY. USDJPY (-0.9%) declines today should be taken in relation to the impressive 2.75% advance over the Fed and BOJ meetings late Wednesday/early Thursday. Additionally, we had FinMin Kato come across the wires stating he was deeply concerned about FX moves, which was followed up by Chief FX Diplomat Mimura who also expressed deep concern around FX moves. Both officials stated action would be taken if FX moves were excessive.
- Lower than expected retail sales data in Canada prompted CAD to relatively underperform, with USDCAD remaining around 1% higher on the week at 1.4360. Canadian GDP data headlines the Monday economic calendar. US consumer confidence will also cross.
| Date | GMT/Local | Impact | Country | Event |
| 23/12/2024 | 0700/0700 | *** |  GB | GDP Second Estimate |
| 23/12/2024 | 0700/0700 | * | GB | Quarterly current account balance |
| 23/12/2024 | 0800/0900 | *** |  ES | GDP (f) |
| 23/12/2024 | 1330/0830 | * |  CA | Industrial Product and Raw Material Price Index |
| 23/12/2024 | 1330/0830 | *** | CA | Gross Domestic Product by Industry |
| 23/12/2024 | 1330/0830 | ** |  US | Durable Goods New Orders |
| 23/12/2024 | 1500/1000 | * | US | US Treasury Auction Result for 26 Week Bill |
| 23/12/2024 | 1500/1000 | * | US | US Treasury Auction Result for 13 Week Bill |
| 23/12/2024 | 1500/1000 | *** | US | New Home Sales |
| 23/12/2024 | 1630/1130 | ** | US | US Treasury Auction Result for 52 Week Bill |
| 23/12/2024 | 1630/1130 | * | US | US Treasury Auction Result for Cash Management Bill |
| 23/12/2024 | 1800/1300 | * | US | US Treasury Auction Result for 2 Year Note |
| 23/12/2024 | 1830/1330 | CA | Bank of Canada meeting minutes | |
| 24/12/2024 | 0030/1130 |  AU | RBA Minutes | |
| 24/12/2024 | 1330/0830 | ** | US | Philadelphia Fed Nonmanufacturing Index |
| 24/12/2024 | 1355/0855 | ** | US | Redbook Retail Sales Index |
| 24/12/2024 | 1500/1000 | ** | US | Richmond Fed Survey |
| 24/12/2024 | 1630/1130 | * | US | US Treasury Auction Result for 5 Year Note |
| 24/12/2024 | 1630/1130 | ** | US | US Treasury Auction Result for 2 Year Floating Rate Note |