EXECUTIVE SUMMARY
- MNI: Fed's Inflation Fears Back On Rise, Even Before Tariffs
- US: Congress Strikes Government Funding Deal, Likely To Anger GOP Conservatives
- MNI INTERVIEW: Trudeau Cabinet Disarray Fuels Trump Trade Risk
- US DATA: Autos Flatter Retail Sales, But Underlying Consumption Trends Robust
- CANADA: BoC Core CPI Beats But Headline And Traditional Core Softer
US TSYS: Nascent Recovery Gives Way Pre-FOMC
Treasuries were mostly flat Tuesday, with little apparent conviction ahead of the FOMC meeting.
- A sell-off in UK Gilts saw Treasuries weaken overnight, with cash yields rising ~3bp more or less in parallel across the curve.
- After futures dipped through support at 109-20 (Nov 20/21 low), reaching a low of 109-17, Treasuries saw a modest recovery after US retail sales data came in more or less in line, and industrial production was on the weak side (the Atlanta Fed's GDP nowcast was downgraded 0.2pp for Q4 to 3.1% following the data).
- There was a final pullback of a few ticks into the close on elevated volumes that saw end basically unchanged for the session, and with no apparent trigger this appeared more like anticipation of Wednesday's FOMC decision.
- There was little reaction to a 20Y auction that tailed 1.5bp, but was at least better than November's much poorer sale.
- The cash curve was almost entirely unchanged on the day, with 5s and 10s yields unchanged and 2s / 30s yields very slightly lower.
- Analysts are unanimous in expecting a 25bp rate cut from the FOMC Wednesday, 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. We go through what to watch for in detail in our MNI Fed Preview.
- Latest levels: The Mar 25 T-Note future is down 1.5/32 at 109-26, having traded in a range of 109-17 to 109-31.5. The 2-Yr yield is down 0.6bps at 4.2426%, 5-Yr is unchanged at 4.2571%, 10-Yr is unchanged at 4.3967%, and 30-Yr is down 1.1bps at 4.5876%.
NEWS
FED (MNI): Bumps along the road to disinflation are likely raising concern inside the Federal Reserve that the swift return to price stability which looked all but assured a few months ago is now drifting from view, former Fed officials and staffers told MNI.
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.
US (MNI POLITICS): Congressional leaders have struck a deal to extend government funding until March 14. The final text of the package is yet to be released but appears to include nearly all of the USD$100+ million in disaster relief requested by Biden and a one-year extension of the Farm Bill, which includes roughly USD$10 billion in economic assistance to farmers. The CR is also expected to include a package of China-related bills that crack down on US investment in some areas related to the Chinese tech sector.
CANADA (MNI INTERVIEW): Justin Trudeau's efforts to encourage Donald Trump to lift the threat of a 25% tariff have been set back by the resignation of his finance and housing ministers, Canadian Federation of Independent Business Vice President Corinne Pohlmann told MNI.
MNI Norges Bank Preview: Norges Bank has signalled since September that policy rates will likely be kept at 4.50% through the end of 2024. As such, anything other than another hold in rates would be a significant surprise to markets. The September MPR rate path assigned a near-certain implied probability of a 25bp cut in Q1 2025, so it won’t be a surprise for Norges Bank to signal such an intention in the December policy statement.
MNI RIKSBANK WATCH: The Riksbank looks near certain this week to deliver the 25-basis-point-cut to 2.5% that it signalled in November, and appears to be on track to take the policy rate to at least the mid-point of its new assessment of the neutral range.
OVERNIGHT DATA
US DATA: Autos Flatter Retail Sales, But Underlying Consumption Trends Robust
November's retail sales report showed a strong contribution to growth from the two single-largest retailing categories, with activity beyond those areas looking solid but less impressive.
- Motor vehicles/parts dealers (4-month best +2.6% M/M, just under 20% of total retail sales) and non-store retailers (i.e. online sellers, +1.8% M/M, 17% of retail sales) helped boost the overall retail sales reading to 0.7% M/M (0.5% prior, 0.1pp upward rev). Auto sales continue to rebound from a summer lull, with nominal readings boosted by stronger inflation in the category.
- Core measures were on the soft side of expectations: ex-autos/gas at 0.2% M/M (0.2% prior) and control group 0.4% (-0.1% prior).
- Multiple sectors saw M/M contraction, including notably food services/drinking places, the third-largest retail category (14% of total sales), a "discretionary" sector, and one of the only readthroughs into non-goods consumption: it shrank 0.4%, the first contraction in 8 months and the largest drop in 10.
- Breadth looks like an issue therefore, but the trend gains in consumption remain positive.
- Total retail sales are up 3.8% Y/Y, the highest reading since December 2023, with the 3M/3M annualized rate up 7.2% - a 20-month high.
- From a GDP perspective too, control group sales remain robust: up 4.3% Y/Y and 5.6% 3M/3M annualized, the latter of which is a rough proxy of real PCE goods growth.
- With retail sales growth more than keeping up with CPI, should help underpin real Q4 GDP growth projections, including the FOMC's estimates ahead of its SEP publication tomorrow.
US DATA: Surprisingly Weak IP Data A Reminder Of Bifurcated Economy
- Industrial production was notably weaker than expected in November, slipping -0.1% M/M (SA, cons 0.3) after a downward revised -0.4% (initial -0.3).
- Utilities were an outsized drag with -1.4% after +1.4% although manufacturing production was still weak, at 0.2% M/M (cons 0.5) after a downward revised -0.7% M/M (initial -0.5).
- After three consecutive M/M declines, the Y/Y has pushed more firmly negative to -0.9% Y/Y (lowest since Jan and before that early 2021) whilst 3M/3M rates for both IP and mfg production pushed lower still at -2.9% annualized.
- Combine with capacity utilization surprisingly falling to 76.8% (cons 77.3, lowest since Apr 2021) after a downward revised 77.0% (initial 77.1) and there are clear signs of the manufacturing sector continuing to struggle whilst service activity grows strongly.
Core durable goods orders do however point to some upside relative to these weak trend growth rates for IP, with the same for the lift off recent lows for the ISM manufacturing survey.
US DATA: Homebuilder Survey Points To Consolidating Housing Activity
December's National Association of Home Builders (NAHB) Housing Market Index printed 46 for a second consecutive month, continuing to point to a subdued outlook for single-family homebuilding activity versus post-pandemic highs.
- Current sales conditions were steady at 48, with prospective buyer traffic down 1 point to 31 - but 6-month sales expectations rose 3 points to a post-April 2022 high of 66.
- The NAHB noted "high home prices and mortgage rates offset renewed hope about a better regulatory business climate in 2025".
- The headline index is a good leading indicator of overall (single as well as multi-family) building permits over the following 1.5 years, which in turn leads actual housing construction - and recent readings suggest permit activity closer to 1.2M annualized than the 1.7M+ seen in 2021.
- As such while activity looks like it will indeed be softer over 2025-26 than at peak, it is consolidating as opposed to deteriorating rapidly (as witnessed in the housing-driven GFC).
US DATA: Atlanta Fed GDP Estimate Pares Recent Rise
The Atlanta Fed's GDPNow estimate for Q4 has ticked down to 3.1% from 3.3% prior, following the release of solid retail sales data offset by weak industrial production and a slight downwrad revision to business inventories.
- While solid control group retail sales saw the PCE estimate tick higher to 3.3% (up 0.1pp), and residential investment to 4.7% (up 0.7pp), multiple other categories saw declines including equipment and nonresidential structure investment, while inventories are once again seen dragging on growth.
- The FOMC's median forecast for real GDP in Q4 is still set to rise in this week's projections from the 2.0% (Y/Y) eyed in September. The penultimate GDPNow update of the year comes Thursday after the FOMC, following PCE, GDP, and existing home sales data.
CANADA: BoC Core CPI Beats But Headline And Traditional Core Softer
Headline CPI was softer than expected at 0.0% NSA M/M in November (cons 0.1) and 1.9% Y/Y (cons 2.0%). We think the beat for the Bank’s preferred core inflation was more notable, although CPIxFE surprised lower to muddy interpretation. The mixed messaging has damped the hawkish reaction to the data.
- Average core inflation was 2.65% Y/Y (cons 2.5) after an upward revised 2.65% Y/Y (2.55%). The median measure led the surprise at 2.6% (cons 2.4) but trim also surprised higher with 2.7% (cons 2.6%).
- It leaves the BoC’s preferred core inflation averaging 2.65% Y/Y in Oct-Nov vs the 2.3% forecast for Q4 as a whole in the October MPR.
- The recent run rates are looking more concerning for the BoC, with a 3-mth rate accelerating further from 2.9% to 3.3% for the first time above the 1-3% target range since January. The 6-mth rate held at 2.8% annualized.
- However, CPIxFE cooled by more than expected, from 2.28% to 1.94% Y/Y (we saw five analyst estimates averaging 2.17% Y/Y). CPIX meanwhile eased back from 1.7% to 1.6% Y/Y, where it was in September.
- Recent run rates for more alternative core metrics are much more consistent with the target, at 1.9% and 2.1% respectively on a three-month annualized basis.
- 2Y GoC yields are 2bps higher vs -0.5bp for Tsys since CAD CPI/US retail sales, with the Can-US 2Y differential off latest lows -123bps.
- 2Y GoC yields are 2bps higher vs -0.5bp for Tsys since CAD CPI/US retail sales, with the Can-US 2Y differential off latest lows -123bps. USDCAD has only dipped 5 pips or so on the release, at 1.4277 still close to the rare 1.43 handle.
MARKETS SNAPSHOT
Below gives key levels of markets in afternoon NY trade:
- DJIA down 335.22 points (-0.77%) at 43382.06
- S&P E-Mini Future down 34.75 points (-0.56%) at 6119
- Nasdaq down 105.9 points (-0.5%) at 20068.03
- US 10-Yr yield is down 0.2 bps at 4.3948%
- US Mar 10-Yr futures (TY) are down 1/32 at 109-26.5
- EURUSD down 0.0023 (-0.22%) at 1.0489
- USDJPY down 0.71 (-0.46%) at 153.44
- WTI Crude Oil (front-month) down $0.48 (-0.68%) at $70.23
- Gold is down $6.31 (-0.24%) at $2646.53
Prior European bourses closing levels:
- EuroStoxx 50 down 4.45 points (-0.09%) at 4942.58
- FTSE 100 down 66.85 points (-0.81%) at 8195.2
- German DAX down 67.44 points (-0.33%) at 20246.37
- French CAC 40 up 8.62 points (0.12%) at 7365.7
US TREASURY FUTURES CLOSE
Current futures levels:
Mar 2-Yr futures (TU) down 0.125/32 at 102-27.625 (L: 102-25 / H: 102-28.3)
Mar 5-Yr futures (FV) down 1/32 at 106-25.75 (L: 106-20.3 / H: 106-29)
Mar 10-Yr futures (TY) down 1/32 at 109-26.5 (L: 109-17 / H: 109-31.5)
Mar 30-Yr futures (US) up 1/32 at 116-7 (L: 115-22 / H: 116-22)
Mar Ultra futures (WN) up 12/32 at 122-27 (L: 121-29 / H: 123-12)
US 10YR FUTURE TECHS: (H5) Bear Cycle Extends
- RES 4: 112-02 Low Oct 14
- RES 3: 111-24 38.2% retrace of the Sep 11 - Nov 15 bear leg
- RES 2: 111-06/111-20+ 50-day EMA / High 6 and the bull trigger
- RES 1: 110-19+ 20-day EMA
- PRICE: 109-29+ @ 16:41 GMT Dec 17
- SUP 1: 109-20 Low Nov 20/21
- SUP 2: 109-02+ Low Nov 15 and the bear trigger
- SUP 3: 109-00 Round number support
- SUP 4: 108-28 1.236 proj of the Oct 1 - 14 - 16 price swing
A bearish short-term theme in Treasury futures remains intact despite Tuesday’s bounce. It is still possible that the latest pullback is a correction. Initial resistance to watch is 110-19+, the 20-day EMA. A break would highlight an early bullish development. For bears, 109-22, 76.4% of the Nov 15 - Dec 6 upleg, has been pierced. A continuation lower would expose 109-02+, the Nov 15 low and key support.
STIR: December 25bp Cut Pricing Remains Well Anchored
Fed cut pricing through January is unchanged Tuesday, ahead of Wednesday's very likely (95+% futures-priced) 25bp cut to the Fed funds rate.
- This is not without some intraday volatility, with end-2025 cumulative pricing pulled back temporarily by 4bp (to 69bp) in European morning trading hours, largely in sympathy with a significant hawkish move in the UK STIR strip after strong UK wage data ahead of Thursday's Bank of England decision.
- However, the overnight move in Fed funds futures has reversed after solid US retail sales data, with 1bp added to the expected 2025 cut profile.
- The next full 25bp rate cut beyond December is priced for June 2025, with the 3.85% by end-2025 representing a 73bp cumulative drop from here, so just under 3x 25bp cuts including this week. That's on the hawkish side of this week's likely new Dot Plot (expectations are for the 2025 rate median to be pared to 75bp from 100bp in the previous edition).
- At the margins, a 5bp adjustment to ON RRP that is largely but not completely expected this week could be exaggerating the degree of envisaged cuts, but probably only by 1 to 3bp.
| Meeting | Current FF Implieds (%), LH | Cumulative Change From Current Rate (bp) | Incremental Chg (bp) | Prior Session (Dec 16) | Chg Since Then (bp) |
| Dec 18 2024 | 4.34 | -24.0 | -24.1 | 4.34 | 0.0 |
| Jan 29 2025 | 4.30 | -28.2 | -4.2 | 4.30 | 0.0 |
| Mar 19 2025 | 4.17 | -41.2 | -13.0 | 4.17 | -0.6 |
| May 07 2025 | 4.11 | -47.1 | -5.9 | 4.11 | 0.0 |
| Jun 18 2025 | 4.01 | -57.1 | -10.0 | 4.02 | -0.9 |
| Jul 30 2025 | 3.97 | -61.3 | -4.2 | 3.98 | -1.1 |
| Sep 17 2025 | 3.91 | -67.0 | -5.7 | 3.92 | -1.0 |
| Oct 29 2025 | 3.88 | -70.2 | -3.2 | 3.89 | -1.0 |
| Dec 10 2025 | 3.85 | -73.0 | -2.8 | 3.86 | -1.2 |
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
US TSYS/OVERNIGHT REPO: SOFR Jumps, ON RRP Adjustment Eyed
Secured funding rates rose Monday, led by a 5bp jump in SOFR to a fresh December high of 4.65%. This was not a wholly unexpected development, with a key quarterly tax deadline and Treasury settlements seen applying upward pressure.
- The 7bp SOFR-EFFR spread is unusually high (EFFR printed 4.58% as usual) outside a month-end date, last being this wide on Oct 31.
- As noted yesterday, SOFR and other rates are set to subside later in the week before like being pressured again at month/quarter/year-end, with an additional factor applying downside pressure including a possible/likely 5bp downward adjustment to ON RRP on Thursday post-FOMC.
- Of eight analysts who expressed an opinion, 6 saw the Fed adjusting ON RRP 5bp lower this week, versus two (Citi and Wrightson ICAP) seeing such a tweak as taking place at a future meeting.
REPO REFERENCE RATES (rate, change from prev. day, volume):
* Secured Overnight Financing Rate (SOFR): 4.65%, 0.05%, $2360B
* Broad General Collateral Rate (BGCR): 4.61%, 0.02%, $842B
* Tri-Party General Collateral Rate (TGCR): 4.61%, 0.02%, $818B
New York Fed EFFR for prior session (rate, chg from prev day):
* Daily Effective Fed Funds Rate: 4.58%, no change, volume: $99B
* Daily Overnight Bank Funding Rate: 4.58%, no change, volume: $224B
US TSYS/OVERNIGHT REPO: ON RRP Takeup Ticks Higher After 3+ Year Lows
Takeup of the Fed's overnight reverse repo facility ticked up $7.3B Tuesday to $118.1B after 3 consecutive drops that saw facility usage fall around $70B to the lowest level since April 2021.
- After dipping partly on account of Treasury settlements, ON RRP takeup is seen ticking higher through the coming sessions - with most attention in the space on whether the Fed as expected drops the ON RRP offer rate 5bp vs other administered rates.
SOFR FIX - Source BBG/CME
- 1M 4.36635 -0.00886
- 3M 4.35285 0.00147
- 6M 4.27749 0.00476
BONDS: EGBs-GILTS CASH CLOSE: Gilts Have Worst Session Since Oct On UK Wage Data
Gilts sold off Tuesday in a bear steepening move as stronger-than-expected UK wage data pared expected BoE rate cuts.
- Higher-than-expected UK wage data set a hawkish tone for the session, including private sector regular AWE which at 5.4% 3mY/Y (versus expected 5.0%).
- The unexpectedly strong wage data offered reason to expect MPC members to be more cautious at this week's meeting, reducing scope for additional dovish dissenters to the expected hold (almost 100% priced) announced Thursday. MNI sees an 8-1 vote to hold, with Dhingra dissenting in favour of a cut.
- Futures now see under 60bp of cuts through 2025, having pared 15bp from the path today alone. Whereas the first cut had been fully priced by March, it's now seen only by May.
- Conversely, Bunds were supported by weak IFO survey data, and a less onerous than expected 2025 German funding plan.
- The UK curve bear flattened on the day as yields rose the most since Oct 31, with Germany's curve twist flattening (with a modest uptick in short-end yields). 10Y Gilt/Bund spread closed at the widest (229bp) since 1990.
- Periphery / semi-core EGB spreads were little changed.
- The UK data spree continues Wednesday with CPI (preview here), and the BoE decision looms Thursday. We also get final Eurozone Nov inflation, and an MNI Webcast featuring ECB chief economist Lane.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is up 0.1bps at 2.051%, 5-Yr is down 0.4bps at 2.067%, 10-Yr is down 1.7bps at 2.23%, and 30-Yr is down 3.1bps at 2.452%.
- UK: The 2-Yr yield is up 9.6bps at 4.453%, 5-Yr is up 9.1bps at 4.371%, 10-Yr is up 8.2bps at 4.524%, and 30-Yr is up 5.9bps at 5.047%.
- Italian BTP spread up 0.1bps at 115.5bps / French OAT up 0.6bps at 80.5bps
FOREX: Japanese Yen Recovers Well Amid Turnaround for US Yields
- In the penultimate trading session before the Fed’s final decision of the year, US Treasuries have seen solid two-way price action. The US 10-year yield rose as high as 4.44% before retreating back to 4.38% and in sympathy, USDJPY has seen a roughly 100 pip pullback from intra-day highs to 153.35 as we approach the APAC crossover.
- GBP is in favour Tuesday, as wages data released pre-market came in ahead of expectations and showed early signs of a reversal in momentum for private wages - posing problems for any MPC members that may have looked to vote for a rate cut at this week's BoE decision. As a result, markets further trimmed rate cut bets across 2025.
- GBPUSD (+0.25%) has risen back above the 1.27 handle and key resistance to monitor is 1.2811, the Dec 6 high. EURGBP finds itself closer to cycle lows, trading around 0.8250 at typing, ahead of the major support at 0.8203, the Mar 7 ‘22 low and the lowest point of a multi-year range.
- Softer equities have weighed on the likes of AUD, NZD and CAD, all falling around half a percent. The Euro relatively outperforms and continues to oscillate around the 1.05 mark.
- In emerging markets, the Brazilian Real saw sharp volatility and the central bank had to intervene on two separate occasions to curb the declines. USDBRL rose to a record high of 6.2080, before the BCB used their most forceful intervention yet to stabilise the Real back to 6.10 per dollar.
- UK inflation data headlines the Wednesday data calendar before the focus turns to the December FOMC decision.
| Date | GMT/Local | Impact | Country | Event |
| 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 |