EXECUTIVE SUMMARY
- MNI: Canada Finance Minister Quits Cabinet On Budget Day
- MNI Fed Preview - Dec 2024: Analyst Outlook
- MNI: Fed SEP Likely To Show Three Cuts For 2025 - Ex-Officials
- US DATA: Composite PMI Surprisingly Strong
- MNI BOE WATCH: On Hold In December, Gradualism Dominant
US TSYS: Short-End Remains Anchored To Start Fed Week
Treasuries softened slightly Monday, with the Fed's December rate decision and communications coming into view.
- After modest upticks overnight in a minor recovery from last week's sell-off, stronger-than-expected preliminary December Services PMIs applied downside pressure on Treasuries.
- Futures would hit their worst levels around midday ET after president-elect Trump noted there had been some progress in stopping the war in Ukraine.
- That saw futures briefly hit their weakest intraday point since Nov 22 (TYH5 109-24.5), though losses were pared modestly going into the cash close.
- The cash curve lightly bear steepened on the day. Short end yields were unchanged, with the FOMC rate path seen very slightly more dovish than on Friday (1bp added to 2025 cuts), but this week's rate decision considered to be a done deal (25bp cut remaining ~95+% implied).
- Attention turns to Tuesday's Retail Sales data, with the Fed decision coming up on Wednesday as mentioned.
- The MNI Markets Team's Fed analyst preview, as well as our Policy Team's Sources article out today, point to expectations that the FOMC will signal 3 25bp cuts in 2025 via its Dot Plot, compared with 4 25bp cuts envisaged in the last set of forecasts in September.
- Latest levels: The Mar 25 T-Note future is down 1/32 at 109-27, having traded in a range of 109-24.5 to 110-35. In cash, the 2-Yr yield is unchanged at 4.2448%, 5-Yr is up 0.4bps at 4.2535%, 10-Yr is up 0.4bps at 4.4007%, and 30-Yr is up 1.4bps at 4.615%.
NEWS
CANADA (MNI): Canadian Finance Minister Chrystia Freeland quit cabinet Monday hours before she was expected to deliver a budget statement with a deficit that broke her own fiscal guidelines and at nearly the same time the housing minister quit, putting pressure on Prime Minister Justin Trudeau to prove he retains the confidence of his Liberal Party needed to continue governing. "On Friday, you told me you no no longer want me to serve as your Finance Minister and offered me another position in the cabinet," Freeland said in a letter posted to the X social media website. "I have concluded that the only viable and honest path is for me to resign from the Cabinet."
FED (MNI Fed Preview): Analysts are unanimous in expecting a 25bp rate cut from the FOMC this week, but there are varying opinions on the path of rates ahead and the number of cuts that the Fed will signal in its Dot Plot for 2025. The median analyst sees the FOMC rate “dot” for 2025 to be upped by 25bp (ie one less cut) from the September edition, to 3.6%. There is a range of opinions though, including unchanged at 3.4% and upped by 50bp to 3.9%.
FED (MNI): The Federal Reserve is likely to shave at least a quarter point and perhaps 50 basis points off its earlier projected interest rate reductions for 2025 this week, but the uncertainty attached to December’s projections is higher than usual as the Republicans prepare to take control of Congress and the White House, former Fed officials and staffers told MNI.
BOE (MNI BOE WATCH): The Bank of England is set to leave Bank Rate on hold at 4.75% at its December meeting in what is likely to be an 8-1 vote, with Swati Dhingra the only Monetary Policy Committee member expected to favour a cut. The MPC made its second cut of the cycle in November but emphasised gradual easing compatible with its central scenario and aligned with cutting once a quarter in 2025. Recent comments by MPC members, most notably at the Dec 19 Treasury Select Committee hearing, have highlighted continuing differences of view, though with Governor Andrew Bailey crucially tilting away from faster easing towards the centrist, gradual approach.
NEW ZEALAND (MNI/RNZ): "The minimum wage for adults will increase by 1.5 percent to $23.50 an hour from April, the government has confirmed." (RNZ) Workplace Relations and Safety Minister Brooke van Velden said the increase met the coalition government's commitment to moderate increases to the minimum wage each year, and reflected the current economic climate and labour market conditions. "Delivering a modest increase in the minimum wage strikes the right balance between supporting workers and limiting further costs on business," she said.
NORGES BANK( MNI NORGES WATCH): Norges Bank is widely expected to leave its policy rate on hold at 4.5% at its December meeting, completing a full year at that level, with investors focussed on indications of the likely timing of cuts in updated forecasts and guidance. The previous full set of forecasts, from September, showed a Q1 cut was near inevitable but left analysts debating whether it would come in the January or March meeting, with March seen by many as most likely. Governor Ida Wolden Bache Wolden Bache could choose to tilt clearly in favour of one or other of these months this week.
RIKSBANK (MNI Riksbank Preview): The Riksbank is expected to bring its policy rate to 2.50% with a 25bp cut in December. Although inflation has tracked a little above the September MPR projections over the past three months, continued softness in domestic economic activity means there is little reason for the Executive Board to go against its November guidance. The December decision includes an updated monetary policy report and rate path projection. Since the September rate path only incorporated a small implied probability of a 50bp cut in November or December, we should see a mechanical shift lower at the front-end of the December path.
OVERNIGHT DATA
US DATA: Composite PMI Surprisingly Strong As Serv/Mfg Divergence Builds
- The S&P Global US PMI was notably stronger than expected in the flash December release, with the composite rising to 56.6 (cons 55.1) from 55.1.
- It’s the highest for thirty-three months whilst the press release notes that “firms’ expectations output in the coming year also lifter higher, hitting a two-and-a-half year high”.
- The latter is deemed to be "reflecting growing optimism about business conditions under the incoming Trump administration. Employment also edged higher, up for the first time in five months, as firms expanded workforce numbers amid the brighter outlook.”
- It was driven by services jumping to 58.5 (cons 55.8) from 56.1. This index had been hovering around 55 since May before increasing to 56.1 in November. It also sees a resumption of a wider gap with the ISM Services measure which surprised lower back in November as it fell from 56.0 to 52.1 for its lowest since Aug.
- It easily more than offset the surprise decline to 48.3 (cons 49.5) from 49.7 for the manufacturing index – the charts below show this increased divergence.
- Mixed price implications: “Raw material cost growth spiked sharply higher in the manufacturing sector, though a further cooling of cost growth in the service sector helped to lessen overall inflationary pressures in terms of both overall costs and selling prices.”
US DATA: New York State Manufacturer Optimism Moderates
- The Empire manufacturing survey started the December round of regional Fed surveys on a softer than expected note, printing 0.2 (cons 10.0) after a surprisingly strong 31.2 in November.
- It’s hard to call this a miss though, being a survey with a standard deviation of 25pts for the monthly change since 2022.
- Within this, new orders shifted from 28 to 6.1 but are still healthy compared to the heavily negative figures from earlier in 2024.
- The six-month ahead general outlook has been less volatile however, and here it offered a second month of moderation to 24.6. That’s the lowest since Aug via October’s cycle high of 38.7.
- It's close to the 2019 average and indeed the press release characterizes this outlook as “fairly optimistic”.
MARKETS SNAPSHOT
Below gives key levels of markets in afternoon NY trade:
- DJIA down 20.62 points (-0.05%) at 43804.55
- S&P E-Mini Future up 34.5 points (0.56%) at 6160.5
- Nasdaq up 237.7 points (1.2%) at 20189.75
- US 10-Yr yield is up 0.4 bps at 4.4007%
- US Mar 10-Yr futures (TY) are down 1/32 at 109-27
- EURUSD up 0.0006 (0.06%) at 1.051
- USDJPY up 0.52 (0.34%) at 154.11
- WTI Crude Oil (front-month) down $0.31 (-0.43%) at $70.54
- Gold is up $5.83 (0.22%) at $2652.28
Prior European bourses closing levels:
- EuroStoxx 50 down 20.92 points (-0.42%) at 4947.03
- FTSE 100 down 38.28 points (-0.46%) at 8262.05
- German DAX down 92.11 points (-0.45%) at 20313.81
- French CAC 40 down 52.49 points (-0.71%) at 7357.08
US TREASURY FUTURES CLOSE
Current futures levels:
Mar 2-Yr futures (TU) down 0.375/32 at 102-27.875 (L: 102-27.3 / H: 102-29.5)
Mar 5-Yr futures (FV) down 0.75/32 at 106-26.75 (L: 106-25.5 / H: 107-0)
Mar 10-Yr futures (TY) down 1/32 at 109-27 (L: 109-24.5 / H: 110-3.5)
Mar 30-Yr futures (US) down 5/32 at 116-3 (L: 115-29 / H: 116-21)
Mar Ultra futures (WN) steady at at 122-10 (L: 122-3 / H: 123-1)
US STIR
| Meeting | Current FF Implieds (%), LH | Cumulative Change From Current Rate (bp) | Incremental Chg (bp) | Prior Session (Dec 13) | Chg Since Then (bp) |
| Dec 18 2024 | 4.34 | -24.0 | -24.1 | 4.35 | -0.6 |
| Jan 29 2025 | 4.30 | -28.2 | -4.2 | 4.30 | 0.0 |
| Mar 19 2025 | 4.17 | -40.8 | -12.6 | 4.17 | 0.3 |
| May 07 2025 | 4.10 | -47.6 | -6.8 | 4.11 | -0.7 |
| Jun 18 2025 | 4.01 | -56.9 | -9.3 | 4.01 | -0.3 |
| Jul 30 2025 | 3.96 | -61.7 | -4.8 | 3.97 | -0.7 |
| Sep 17 2025 | 3.91 | -67.5 | -5.8 | 3.92 | -1.1 |
| Oct 29 2025 | 3.87 | -70.8 | -3.3 | 3.88 | -0.8 |
| Dec 10 2025 | 3.85 | -73.3 | -2.5 | 3.85 | -0.6 |
| Jan 28 2026 | 3.83 | -74.8 | -1.5 | 3.84 | -0.3 |
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
US TSYS/OVERNIGHT REPO: Secured Rates Expected To Dip In Line With Fed RRP Tweak
The pullback in secured rates from December's highs continued Friday, with SOFR down 2bp to 4.60%. That's back to Dec 6 levels, lower than the 4.64% peak on Dec 10 (which was more reminiscent of month-end levels).
- Heavy Treasury settlements are set to underpin secured rates again in today's print. But that too should dissipate. There is relatively more debate over the effect on broader rates from the FOMC's broadly expected 5bp downward adjustment to ON RRP rates on Wednesday (to 4.25% from 4.55%, so 30bp, assuming the Fed cuts the funds rate by 25bp as expected).
- Some analysts see the lower ON RRP passing through to at least some degree to EFFR (potentially lowering it by 2-3bp), but some don't see it affected at all.
- While both recognize that EFFR is more influenced by IORB (which is set to remain 15bp above the lower bound, so 4.40% from 4.65% currently) than ON RRP, Deutsche pencils in a 2bp EFFR adjustment, while Wrightson ICAP sees fed funds pricing "determined almost exclusively by the IORB rate", ie no change (they also now see the tweak happening in January and not this week).
- Secured rates are expected to fall more clearly in line, however, with triparty (TGCR) rates falling by 4-5bp in line with ON RRP, with a similar for SOFR either immediately or over the coming weeks.
REPO REFERENCE RATES (rate, change from prev. day, volume):
* Secured Overnight Financing Rate (SOFR): 4.60%, -0.02%, $2255B
* Broad General Collateral Rate (BGCR): 4.59%, -0.01%, $844B
* Tri-Party General Collateral Rate (TGCR): 4.59%, -0.01%, $815B
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: $249B
US TSYS/OVERNIGHT REPO: ON RRP Hits Fresh Post-Pandemic Low As FOMC Eyes Tweak
Takeup of the Fed's overnight reverse repo facility fell $25B to $110.8B today - the lowest level since April 2021, and now down around $70B in 3 sessions.
- Today's pullback is not a major surprise as it comes amid large Treasury auction settlements, but the overall trend seems clearly to the downside and comes as the FOMC is likely this week to debate reducing the offer rate on the facility by 5bp vs other administered rates.
SOFR Fix - Source: Market source
- 1mth 4.37521 -0.00661
- 3mth 4.35138 0.00266
- 6mth 4.27273 0.01232
- 12mth 4.17105 0.03526
BONDS: EGBs-GILTS CASH CLOSE: Gilts Underperform Ahead Of Heavy UK Calendar
Gilts underperformed Bunds Monday at the start of a busy week on the UK calendar.
- December flash PMIs were the session's focus, and both the Eurozone and UK readings proved mixed (manufacturing weaker, services rebounding), though there was only limited lasting hawkish reaction to evidence of inflation pressures.
- Global core FI weakened in the afternoon on strong US Services PMI data and a modest rebound in oil prices, with Gilts hardest-hit. Chancellor Scholz's government lost its vote of confidence as expected, setting up early German elections on 23 Feb.
- ECB's Schnabel echoed the broader Governing Council's view that further easing toward neutral is appropriate, though again she did not sound supportive of easing past neutral. Earlier, ECB's Wunsch had similar sentiments.
- The UK curve bear flattened on the day, with Germany's twist steepening.
- Periphery EGB spreads widened, and while French spreads did too the move was contained given the sovereign's downgrade late Friday.
- The week's Europe highlight is the Bank of England decision released Thursday - as our preview of this week's CPI and Labour Market data (PDF) noted, unless there are absolutely huge surprises in thew data, it looks very likely that Bank Rate will be left on hold. Tuesday sees the Labour Market data, as well as German IFO/ZEW.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is down 2.1bps at 2.05%, 5-Yr is down 1.7bps at 2.071%, 10-Yr is down 1bps at 2.247%, and 30-Yr is up 0.4bps at 2.483%.
- UK: The 2-Yr yield is up 4.9bps at 4.357%, 5-Yr is up 4.5bps at 4.28%, 10-Yr is up 3bps at 4.442%, and 30-Yr is up 2.1bps at 4.988%.
- Italian BTP spread up 1.8bps at 115.4bps / French OAT up 1.5bps at 79.9bps
FOREX: USD Index a Touch Softer as FOMC Approaches, EURJPY Above 50-Day EMA
- Initial gains for the greenback on Monday were short-lived, with the USD index slipping into negative territory. The DXY is down 0.2% as we approach the APAC crossover and higher equity indices in the US may be weighing at the margin.
- Headlines surrounding the resignation of Canada’s finance minister Chrystia Freeland sparked some momentary CAD weakness, however, USDCAD has trade back to unchanged on the session around 1.4236 from a 1.4271 high.
- Once again, the Japanese Yen is weakening, with USDJPY rising back above 154 and briefly reaching a recovery high of 154.48. The moves come amid the backdrop of media snippets suggesting the BoJ sees little risks in waiting for 2025 for its next policy move. Indeed, MNI has also highlighted the domestic political backdrop as a constraint on sharp policy shifts, diminishing the likelihood of a rate move later this week.
- A firmer single currency has allowed EURJPY to rise a further 0.4%, piercing the 162 handle in the process. Gains today have seen the cross extend above the 50-day EMA, its first breach above the average since November 21.
- GBP is an outperformer, rising against all others in G10 on the back of a better-than-expected UK Services PMI print, which has resultingly seen GBP/USD trade to a daily high of 1.2699. The release showed some similar themes to the EZ PMIs across the morning, with average prices increasing at the fastest pace for nine months, particularly in services. Dynamics may limit the potential for more dovish dissents at the BOE meeting this week.
- UK labour market data highlights on Tuesday, before German IFO and ZEW sentiment data. Canadian CPI and US retail sales then highlight the North American data calendar.
| Date | GMT/Local | Impact | Country | Event |
| 17/12/2024 | - |  US | FOMC Meeting / S.E.P. | |
| 17/12/2024 | 0700/0700 | *** |  GB | Labour Market Survey |
| 17/12/2024 | 0900/1000 | *** |  DE | IFO Business Climate Index |
| 17/12/2024 | 1000/1100 | *** | DE | ZEW Current Conditions Index |
| 17/12/2024 | 1000/1100 | *** | DE | ZEW Current Expectations Index |
| 17/12/2024 | 1000/1100 | * |  EU | Trade Balance |
| 17/12/2024 | 1000/1000 | ** | GB | Gilt Outright Auction Result |
| 17/12/2024 | 1000/1100 | EU | ECB's Elderson at ECB Banking Supervision conference | |
| 17/12/2024 | 1330/0830 | * |  CA | International Canadian Transaction in Securities |
| 17/12/2024 | 1330/0830 | *** | CA | CPI |
| 17/12/2024 | 1330/0830 | *** | US | Retail Sales |
| 17/12/2024 | 1355/0855 | ** | US | Redbook Retail Sales Index |
| 17/12/2024 | 1415/0915 | *** | US | Industrial Production |
| 17/12/2024 | 1500/1000 | * | US | Business Inventories |
| 17/12/2024 | 1500/1000 | ** | US | NAHB Home Builder Index |
| 17/12/2024 | 1630/1130 | * | US | US Treasury Auction Result for Cash Management Bill |
| 17/12/2024 | 1800/1300 | ** | US | US Treasury Auction Result for 20 Year Bond |
| 18/12/2024 | - |  JP | Bank of Japan Meeting | |
| 18/12/2024 | - |  SE | Riksbank Meeting | |
| 18/12/2024 | 0700/0700 | *** | GB | Consumer inflation report |
| 18/12/2024 | 0700/0700 | *** | GB | Producer Prices |
| 18/12/2024 | 0700/1500 | ** |  CN | MNI China Money Market Index (MMI) |
| 18/12/2024 | 0900/1000 | EU | ECB's Lane in fireside chat at MNI Connect Event | |
| 18/12/2024 | 1000/1100 | *** | EU | HICP (f) |
| 18/12/2024 | 1000/1100 | ** | EU | Construction Production |
| 18/12/2024 | 1100/1100 | ** | GB | CBI Industrial Trends |
| 18/12/2024 | 1200/0700 | ** | US | MBA Weekly Applications Index |
| 18/12/2024 | 1330/0830 | * | US | Current Account Balance |
| 18/12/2024 | 1330/0830 | *** | US | Housing Starts |
| 18/12/2024 | 1530/1030 | ** | US | DOE Weekly Crude Oil Stocks |
| 18/12/2024 | 1900/1400 | *** | US | FOMC Statement |
| 19/12/2024 | 2145/1045 | *** |  NZ | GDP |
| 19/12/2024 | - |  NO | NorgesBank Meeting | |
| 19/12/2024 | 0001/0001 | * | GB | Brightmine pay deals for whole economy |
| 19/12/2024 | 0300/1200 | *** | JP | BOJ Policy Rate Announcement |