EXECUTIVE SUMMARY
US TSYS: Hawkish Fed Vs The World Sees Treasuries Twist Steepen
The Treasury curve twist steepened Thursday, as the implications of the Fed's apparent hawkish shift continued to be digested.
- Short-end Treasuries were an early focus, following dovish decisions overnight by the BOJ and BOE. At one point 2Y yields were 8bp below Wednesday's post-FOMC highs (they had risen 15bp on the decision), and they would held on to most of the steady declines made through Thursday's session.
- Data had little significant impact on market pricing: continuing and initial jobless claims, final GDP growth and Q3 core PCE prices were all on the stronger side of expectations, offset somewhat by a weak Philly Fed manufacturing index.
- Political developments arguably helped the curve steepen, with president elect Trump and his proxies discussing a government shutdown (growth negative) as well as a removal of the statutory debt limit (arguably putting focus on longer-end liabilities).
- Unusually, nominal Treasuries weakened after a 5Y TIPS auction - but this was one of the worst such sales in years, tailing by 7bp and resulting in the belly of the nominal coupon curve briefly underperforming.
- A large TYH5 block at 1349ET, 14.25k at 108-19+ (unconfirmed buyer) helped Treasury futures come off the lows, but that nascent rebound faded into the close.
- Curves finished steeper, with various segments at multi-year highs.
- Friday's schedule includes the November PCE report and the final December UMichigan survey, while we also get the first post-FOMC meeting commentary with SF's Daly and NY's Williams appearing in the morning.
- Latest levels: Mar 10-Yr futures (TY) down 13.5/32 at 108-19 (L: 108-16.5 / H: 109-0.5). The 2-Yr yield is down 3.6bps at 4.3186%, 5-Yr is up 2.7bps at 4.4301%, 10-Yr is up 5.8bps at 4.5722%, and 30-Yr is up 6.7bps at 4.7426%.
NEWS
FED (MNI INTERVIEW): The Federal Reserve will keep cutting interest rates next year because the job market is weaker than it looks on the surface and policymakers have said they do not want to see it weaken any further, former Philadelphia Fed economic advisor Luke Tilley told MNI. “I expect they'll be totally normalized down to 2.75 to 3% by the end of 2025,” said Tilley, now chief economist at Wilmington Trust.
FED (MNI BRIEF): The Federal Reserve Bank of New York will expand the timing of the Standing Repo Facility around year-end to better understand how the facility's timing can impact the effectiveness of the tool during money market pressures. The Fed is conducting an additional overnight SRF operation on each business day beginning December 30 through January 3 from 8:15 to 8:30 a.m. ET because there's likely to be some money market pressures at that time and those pressure offer a better chance that it will be economically convenient for counterparties to use the facility. There is also a good chance officials will learn whether adding another earlier auction could help make the facility more effective.
BANXICO (MNI BRIEF): The Central Bank of Mexico unanimously reduced its overnight interbank interest rate by 25 basis points to 10.00% Thursday, marking the fourth consecutive cut, and signaled further reductions next year, potentially including larger ones. "Looking ahead, the Board expects that the inflationary environment will allow for further reference rate reductions. In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, while maintaining a restrictive stance," the bank said in a statement.
CANADA (MNI POLITICS): Speaking at a presser, Finance Minister Dominic LeBlanc says that PM Justin Trudeau 'has the full support of Cabinet to stay on.' LeBlanc also claims that the PM told him that he would be the finance minister until the next election. There had been notable media speculation that former BoC and BoE Governor Mark Carney could be brought into gov't in any cabinet shuffle, but LeBlanc sought to shut this down speaking to Brunswick News saying that “Carney is not an option,” and “that discussion has concluded,”
CANADA (MNI): Canada's Federation of Independent Business says sentiment declined after Donald Trump threatened a 25% tariff, in one of the first confidence readings since the U.S. president-elect's Nov 25 announcement. The small business group's three-month outlook index fell 4.7 points to 46.6, the lowest since the start of 2024, and the 12-month outlook declined 3.4 points to 56.4. Risk of a trade war comes on top of a domestic economy seen as weak by half of firms surveyed, a drag that's led the central bank to lead the G7 with 175 basis points of rate cuts this year. Governor Tiff Macklem says tariffs are a major new source of uncertainty for Canada.
BOE (MNI BOE WATCH): The Bank of England left its key policy rate on hold in December, as expected by economists, although there was a surprise for financial markets as three members of the rate-setting body voted to cut rates as early as this month. The Monetary Policy Committee voted by 6-3 to keep Bank Rate at 4.75%, but Deputy Governor Dave Ramsden, Swati Dhingra and Alan Taylor all voted to cut by 25BP. Explaining the decision in a written comment to reporters, Governor Andrew Bailey said following the two cuts so far this year, there was a "need to make sure we meet the 2% inflation target on a sustained basis."
GLOBAL (MNI POLITICAL RISK ANALYSIS): In our Political Risk calendar for 2025 we include details on the major political events scheduled to take place in developed and emerging markets over the course of the next 12 months. We only include those events that have a set date or period in which they will take place.
OVERNIGHT DATA
US DATA: Domestic Demand Continues To Underpin Solid Growth
Q3 GDP growth was unexpectedly revised up in the third and final reading, to 3.1% Q/Q annualized from 2.8% prior, and an acceleration from 3.0% prior - representing the best quarterly growth since Q4 2023.
- The upward revisions were "solid", driven by domestic demand: growth in real final sales to domestic purchasers came in at 3.7%, up 0.2pp from the 2nd reading and 2.8% in Q2.
- Real final sales to private domestic purchasers grew by 3.4%, up from 2.7% in Q2. According to Fed Chair Powell at December's press conference in reference to this metric, which "we think is the best indicator" of growth: "private demand is looking to come in around 3% this year. This is a really good number" (it grew 3.1% on a Y/Y basis in Q3).
- This was encapsulated an upgrade to personal consumption expenditures (up 3.7% vs 3.5% in the prior reading), contributing 2.5pp to overall growth.
- The only noticeable downside in the report is that real Gross Domestic Income was nudged down by 0.1pp to 2.1% - but even so, the average of real GDP and real GDI ticked up by 0.1pp to 2.6%. So while GDI will still be seen as a sign of softer growth than the impressive GDP numbers, they're clearly not recessionary.
- Early estimates for Q4 show similar results to Q3 so far, with the Atlanta Fed's nowcast at around 3%.
- The upgrade to Q3 growth suggests upside risks to the Fed's new SEP forecast for Q4 2024 (2.5%, Y/Y upgraded from 2.0% in the prior edition).
- A note on inflation: core PCE was revised up from 2.146% (just rounding to 2.1%) to 2.193% (2.2% rounded) in the final reading - casting a slightly hawkish tone to the report.
US DATA: Jobless Claims Settling In To Cool But Not Weak Range
Initial jobless claims came in on the low side in the week to Dec 14, at 220k, dropping more than the 12k expected (to 230k from 242k prior unrevised). Continuing claims also came in lower than expected for the Dec 7 week, at 1,874k (1,892k expected) from 1,879k (rev down 7k).
- That kept the 4-week average of initial claims at 226k, up just slightly from 224k in the prior week and 8k up from the mid-November low, but down from the high 230ks in October (which appeared hurricane-related).
- And continuing claims have likewise steadied out in the 1,870-1,900k range since mid- October.
- All of that is suggestive of a labor market that remains on the cool side, but without any signs of significant deterioration - conditions Fed Chair Powell alluded to in the December press conference, that afforded the FOMC more patience to see further progress on disinflation before easing to protect the labor market.
US DATA: Philly Fed Post-Election Optimism Fades
The Philadelphia Fed Business Outlook survey took an unexpected turn for the worse in December, with the index for current general activity dropping to -16.4 from -5.5 prior, versus the rise to +2.8 expected.
- That was the worst outturn since April 2023, and weakness was widespread throughout the survey: New Orders (-4.3, lowest since May) and Shipments (-1.9) both declined and turned negative, while Employment dipped 2 points to 6.6 and the average workweek index fell back into negative territory (-8.2) after a November jump.
- Optimism has faded too: the future general activity index dropped 26 points to 30.7 after two consecutive rises, with future new orders, future shipments, future employment, future capex, and future prices paid dropped - future prices received rose though. Note that optimism was a 42-month high in November, seemingly related to the election results, but that impact has more than fully reversed.
- And on inflation, prices paid rose 5 points to 31.2, though prices received dropped for a 3rd consecutive month to 7.3. A gap appears to be opening up between the two measures - this is the widest spread (-23.9) since April 2022, potentially suggestive of margin pressures building.
- Overall we would discount the month-to-month readings, but it's clear that the post-election optimism among regional manufacturers has faded, and the survey continues to point to sluggish manufacturing activity.
- Indeed, using appropriate weightings, this survey is equivalent to a roughly 49 ISM Manufacturing reading.
US DATA: Kansas City Fed Manufacturing Still Stagnant, But Big Rise In Optimism
The Kansas City Fed's manufacturing composite index fell to -4 in December from -2 prior (and -1 expected), continuing to point to stagnant ongoing manufacturing activity in the region. The report notes that "most month-over-month indexes were negative".
- Regional Fed surveys have been increasingly difficult to read in the last couple of months - potentially due to respondents' reactions to the November 5 election results - and Kansas City's is no exception.
- For instance, the survey saw a 29-month high in the 6-month outlook (18, up from 11 in November and 7 in September) in what appears to be an increasing divergence with current conditions (see below). That optimism came, for example, as new orders fell from -9 to -17. So while expectations for everything from production to new orders to capex and employment are expected to rise in the coming months, the upbeat view is at unusually large odds from the current conditions.
- As we saw in the Philly Fed survey earlier, optimism faded in December after a large (post-election) leap in November, more closely corresponding with current conditions.
On the inflation front, "price increases accelerated from last month, and raw materials prices continue to increase at a faster pace than finished product prices."
US DATA: Existing Home Inventories Show Surprising Tightness, But Remain Weak
Existing home sales picked up sharply in November on a seasonally-adjusted basis, with the 4.8% M/M increase the largest since February, to the highest level since March at 4.15M annualized. That also represented a 6.1% Y/Y gain, the biggest rise since June 2021 (when sales were soaring versus the early pandemic period).
- Notably, inventory did not rise to match the rise in sales, and at 3.8 months it represented a fall from 4.2 in October and was the first sub-4 months reading since May. Median sales prices rose 4.7% Y/Y to $406.1k.
- Existing home sales remain subdued overall, however, both outright (peaking at 6.6M in 2021, with October's 4.15M very close to the pandemic lockdown lows) and relative to new home sales (which while at merely 600k are at least roughly around pre-pandemic levels). Again this is largely related to financing.
- While the NAR press release notes that the rise in existing sales is in part owing to "consumers get[ting] used to a new normal of mortgage rates between 6% and 7%", the broader data suggests housing sales activity remains mired in a deep recession with buyers and sellers at a standoff.
- This is only likely to be resolved by lower rates, allowing buyers greater affordability and sellers to ability to move without incurring a substantially higher mortgage rate, and/or higher unemployment which forces sales.
CANADA DATA: Canada Oct. Payroll Employment -21.1K Led by Manufacturing
- Payroll employment -21.1K (-0.1%) in Oct. after little change in Aug. and Sept., Statistics Canada says Thurs.
- That's different from the +14.5K published in the Oct. Labour Force Survey and Nov. +51K.
- Payroll drop in Oct. was led by education, manufacturing and professional, scientific and technical services.
- YOY employment +125.8K (+0.7%) .
- Average weekly earnings +5.3% YOY in Oct.
- Job vacancies -15K in Oct. after little change in Sept. and -16.7K in Aug.
- Report continues pattern of weak job growth and elevated wages. BOC has said the job market is soft and expects wage gains to moderate, though they've been elevated for a while.
MARKETS SNAPSHOT
Below gives key levels of markets in afternoon NY trade:
- DJIA up 140.85 points (0.33%) at 42464.85
- S&P E-Mini Future up 13.5 points (0.23%) at 5953
- Nasdaq up 45.2 points (0.2%) at 19440.04
- US 10-Yr yield is up 5.6 bps at 4.5702%
- US Mar 10-Yr futures (TY) are down 13.5/32 at 108-19
- EURUSD up 0.001 (0.1%) at 1.036
- USDJPY up 2.54 (1.64%) at 157.37
- WTI Crude Oil (front-month) down $0.67 (-0.95%) at $69.91
- Gold is up $12.54 (0.49%) at $2597.85
Prior European bourses closing levels:
- EuroStoxx 50 down 78.28 points (-1.58%) at 4879
- FTSE 100 down 93.79 points (-1.14%) at 8105.32
- German DAX down 272.71 points (-1.35%) at 19969.86
- French CAC 40 down 90.25 points (-1.22%) at 7294.37
US TREASURY FUTURES CLOSE
Mar 2-Yr futures (TU) up 1.75/32 at 102-22 (L: 102-19.5 / H: 102-24.2)
Mar 5-Yr futures (FV) down 5/32 at 106-3.5 (L: 106-2 / H: 106-9.5)
Mar 10-Yr futures (TY) down 14/32 at 108-18.5 (L: 108-16.5 / H: 109-0.5)
Mar 30-Yr futures (US) down 35/32 at 113-31 (L: 113-17 / H: 115-0)
Mar Ultra futures (WN) down 55/32 at 119-22 (L: 119-2 / H: 121-6)
US 10YR FUTURE TECHS: (H5) Bears Remains In The Driver’s Seat
- RES 4: 112-02 Low Oct 14
- RES 3: 111-24 38.2% retrace of the Sep 11 - Nov 15 bear leg
- RES 2: 111-01+/111-20+ 50-day EMA / High 6 and the bull trigger
- RES 1: 110-13 20-day EMA
- PRICE: 108-25+ @ 16:49 GMT Dec 19
- SUP 1: 108-21 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 Wednesday’s move lower 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 110-13, the 20-day EMA.
STIR: Post-FOMC Extremes Pared, But Still Just 1.5 Cuts Seen In 2025
Fed rate cut expectations recovered slightly Thursday in steady fashion, after being beaten back on Wednesday's hawkish FOMC Dot Plot and communications.
- Fed funds futures currently imply the next full 25bp rate cut only by June (4 meetings away), but that's compared with Jul/Sep implied at Wednesday's close.
- 2025 cumulative rate cuts now stand at just over 38bp, or roughly one-and-a-half 25bp cuts to that point. That's 6bp more than seen at Wednesday's close, but 10bp less than before the FOMC decision release.
- With little reaction to today's slightly stronger-than-expected data (jobless claims, GDP revisions), attention turns to Friday's PCE release, which is the last major data before the Christmas market holiday.
| Meeting | Current FF Implieds (%), LH | Cumulative Change From Current Rate (bp) | Incremental Chg (bp) | Prior Session (Dec 18) | Chg Since Then (bp) | Tuesday (Dec 17) |
| Jan 29 2025 | 4.30 | -2.8 | -2.8 | 4.31 | -0.6 | 4.30 |
| Mar 19 2025 | 4.20 | -13.4 | -10.6 | 4.22 | -2.8 | 4.17 |
| May 07 2025 | 4.15 | -18.3 | -4.9 | 4.18 | -3.5 | 4.11 |
| Jun 18 2025 | 4.07 | -25.7 | -7.4 | 4.12 | -4.5 | 4.02 |
| Jul 30 2025 | 4.04 | -28.7 | -3.0 | 4.10 | -5.7 | 3.98 |
| Sep 17 2025 | 4.00 | -33.2 | -4.5 | 4.06 | -6.1 | 3.92 |
| Oct 29 2025 | 3.97 | -35.7 | -2.5 | 4.04 | -6.4 | 3.89 |
| Dec 10 2025 | 3.95 | -38.4 | -2.7 | 4.01 | -6.1 | 3.86 |
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
US TSYS/OVERNIGHT REPO: SOFR Dips Below EFFR, Post-FOMC Adjustments Pending
Secured rates fell back significantly Wednesday, with SOFR down 5bp to 4.57%. That move comes alongside GSE inflows reverberating through funding markets, and marks the first time this month that SOFR has printed below effective Fed funds (4.58%).
- Rates will adjust lower in Thursday's prints after the Fed's 25bp funds rate cut and 30bp ON RRP cuts are implemented - SOFR should fall by 26-30bp, with limited impact seen from the ON RRP tweak to EFFR.
REPO REFERENCE RATES (rate, change from prev. day, volume):
* Secured Overnight Financing Rate (SOFR): 4.57%, -0.05%, $2291B
* Broad General Collateral Rate (BGCR): 4.56%, -0.03%, $847B
* Tri-Party General Collateral Rate (TGCR): 4.56%, -0.03%, $820B
New York Fed EFFR for prior session (rate, chg from prev day):
* Daily Effective Fed Funds Rate: 4.58%, no change, volume: $112B
* Daily Overnight Bank Funding Rate: 4.58%, no change, volume: $251B
SOFR FIX - Source BBG/CME
- 1M 4.35600 -0.01426
- 3M 4.33730 -0.01676
- 6M 4.28090 -0.00228
- 12M 4.21110 0.0186
BONDS: EGBs-GILTS CASH CLOSE: Gilts Outperform On BoE Vote Split
Long-end European bonds sold off sharply Thursday, with Gilts a notable outperformer after the BoE decision.
- Global yields rose in the aftermath of the Federal Reserve's hawkish rate outlook released late Wednesday.
- But short-end/medium-term Gilts bucked the trend in Thursday's trade, as the BoE MPC split 6-3 in favour of a rate hold versus a 25bp rate cut, which led to a dovish reaction given expectations for an 8-1 vote.
- Expectations for BoE rate cuts were duly pared, with around 17bp of cuts seen at the February meeting (was 13bp prior), with about 10bp added to implied easing through 2025 (around 60bp).
- That helped Gilts outperform Bunds, after a lengthy period of underperformance seeing UK/German spreads rise to 34-year wides (to 227bp vs from 231bp at Wednesday's close).
- The UK curve twist steepened, with Germany's bear steepening.
- Periphery and semi-core spreads were little changed, with GGBs and BTPs widening around 1-2bp vs 10Y Bunds.
- Friday's calendar includes UK retail sales.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is up 2bps at 2.048%, 5-Yr is up 4.2bps at 2.112%, 10-Yr is up 6.1bps at 2.306%, and 30-Yr is up 5.9bps at 2.534%.
- UK: The 2-Yr yield is down 3.9bps at 4.424%, 5-Yr is down 2.7bps at 4.367%, 10-Yr is up 2.1bps at 4.579%, and 30-Yr is up 5.1bps at 5.114%.
- Italian BTP spread up 1.1bps at 117bps / Greek up 1.3bps at 85.7bps
FOREX: GBP's BoE Slide Only Outdone by JPY and BoJ Pressure
- GBP suffered into the close, slipping on the back of a dovish read from the BoE's December meeting. While rates were held unchanged - alongside expectations - markets were taken offguard by the 6-3 vote split among the committee, meaning the MPC doves were just two votes short of a majority, making for firmer pricing for the easing cycle across 2025. As a result, EUR/GBP bounced off a fresh cycle low as the relentless widening of the SFI - ER Z5 spread hit pause.
- USD/JPY extended the day's rally through the London close as the confluence of BoJ/Fed meetings gave the pair the best session of the year so far. The daily gains of near 300 pips are akin to the rally posted on April 26th, which was followed just the next day by official BoJ intervention to slow the decline of the JPY. That seems unlikely at this juncture given the move today has been triggered by fundamentals, rather than baseless speculation, with the Fed/BoJ confluence moving markets globally, and not just contained to Japan.
- A pullback in crude oil prices helped NOKSEK take another leg lower, building on the move seen after the Riksbank/Norges Bank rate decisions, making for a clearing of the November 1 low at 0.9672. Having traded over 1.0% lower Thursday, the cross is on track for the second largest one-day fall this year (topped only by the 1.4% fall on Aug 2). Trendline support drawn from the August 5 low is now firmly in view (0.9639 today), clearance of which exposes the Sep 26 low at 0.9572.
- Friday turns to the UK retail sales release for November, final UMich sentiment data for November as well as the core PCE release - among the last key datapoints of the year for the US. The first Fed speakers following the rate decision are due to appear, with Fed's Daly and Williams set to make appearances on Bloomberg TV and CNBC respectively.
| Date | GMT/Local | Impact | Country | Event |
| 19/12/2024 | 2100/1600 | ** |  US | TICS |
| 20/12/2024 | 2330/0830 | *** |  JP | CPI |
| 20/12/2024 | 0700/0700 | *** |  GB | Public Sector Finances |
| 20/12/2024 | 0700/0800 | ** |  DE | PPI |
| 20/12/2024 | 0700/0800 | ** |  SE | PPI |
| 20/12/2024 | 0700/0800 | ** | SE | Retail Sales |
| 20/12/2024 | 0700/0700 | *** | GB | Retail Sales |
| 20/12/2024 | 0745/0845 | ** |  FR | PPI |
| 20/12/2024 | 0800/0900 | ** | SE | Economic Tendency Indicator |
| 20/12/2024 | 0900/1000 | ** |  IT | ISTAT Business Confidence |
| 20/12/2024 | 0900/1000 | ** | IT | ISTAT Consumer Confidence |
| 20/12/2024 | 1100/1200 | ** | IT | PPI |
| 20/12/2024 | 1100/1100 | ** | GB | CBI Distributive Trades |
| 20/12/2024 | 1330/0830 | *** | US | Personal Income and Consumption |
| 20/12/2024 | 1330/0830 | ** |  CA | Retail Trade |
| 20/12/2024 | 1330/0830 | ** | CA | Retail Trade |
| 20/12/2024 | 1330/0830 | *** | US | Personal Income and Consumption |
| 20/12/2024 | 1400/1500 | ** |  BE | BNB Business Confidence |
| 20/12/2024 | 1500/1600 | ** |  EU | Consumer Confidence Indicator (p) |
| 20/12/2024 | 1500/1000 | ** | US | U. Mich. Survey of Consumers |
| 20/12/2024 | 1630/1630 | GB | BOE to announce Q1-25 APF sales schedule |