MNI US MARKETS ANALYSIS - ECB Seen Raising Rates, With Scant Conviction Over Inflation Trends

US TSYS: Twist Flattening With BoE, ECB and Retail Sales Incoming

• Cash Tsys sit with a twist flattening as the front end broadly maintains the cheaper post-FOMC open whilst the longer end sees an intra-session bid, all within yesterday’s ranges.
• The Norges Bank and SNB hiked 50bps as expected with the day’s main focus on the imminent BoE decision (no press conference in non-MPR month) and then ECB (press conf) also with 50bp hikes expected.
• 2YY +2.1bps at 4.230%, 5YY +1.9bps at 3.632%, 10YY +0.5bps at 3.483%, 30YY -1.0bps at 3.523%
• TYH3 trades 3 ticks higher at 114-26 on average volumes. The trend needle points higher with resistance at 115-11+ (Dec 13 high) whilst support is seen at 113-22+ (Dec 12 low).
• Data: Retail sales (0830ET) in focus but also get Empire & Philly manufacturing surveys (0830ET), weekly jobless claims (0830ET), industrial production (0915ET), business inventories (1000ET) and TIC flows (1600ET).
• Bill issuance: US Tsy $45B each 4W, 8W bill auctions

STIR FUTURES: Fed Rate Path Claws Back Some Of FOMC Presser Reversal

• Beyond the next meeting in February, Fed Funds implied hikes have nudged higher overnight but don’t fully reverse the press conference retracement of the initially hawkish reaction to the statement/SEP.
• Compared with just prior to the statement, the 32bp for Feb is unchanged before a cumulative 48bps to 4.82% in Mar (+4bp), terminal 4.89% May (+8.5bp) and 4.37% end’23 (+7bp).
• Powell saying the focus isn't on rate cuts and won't be considering such until the committee sees inflation returning to target doesn't stop ~50bp of cuts being priced from the terminal to year-end.

NORGES BANK: Bank Raises Rates by 25bps, As Expected

• Norges Bank raises rates by 25bps to 2.75%, alongside expectations
• Full Statement here: https://www.norges-bank.no/en/topics/Monetary-poli...
• An as-expected decision from the Norges Bank - rates hiked 25bps and more tightening likely before peak rate is reached in H1 next year.
• Path projections are revised lower beyond the peak path estimate of 3.11%, which is unchanged in Q3 next year. Terminal rate downgraded to by 18bps, so effectively pricing an extra 25bps cut as part of the easing cycle from end-2023 onwards.
• Decision does open the possibility for an unchanged decision at the next meeting in January - bank could shift back to only quarterly rate hikes.
• No meaningful response in NOK markets on the decision.

SNB: Markdown for Inflation Forecast Could Weigh on Peak Rate Expectations

The SNB raises rates by 50bps to 1.00%, alongside expectations.

Policy Statement here: https://www.snb.ch/en/mmr/reference/pre_20221215/s...

Highlights:

• FX language unchanged: "also willing to be active in the foreign exchange market as necessary."
• Near-term inflation forecasts revised lower to accommodate softer oil price: lower by 0.4 ppts into H2'23
• From mid-2023 onwards, the new forecast is higher and stands at 2.1% at the end of the forecast horizon.

A broadly as-expected decision from the SNB, but the 0.4ppts mark lower for near-term inflation forecasts could put downward pressure on peak rate expectations - currently at 1.25% - 2.00% to be reached in H1 next year.

MNI ECB, BoE Previews

ECB (MNI): MNI ECB Preview: December 2022 - Too Close to Call

While we initially expected the ECB to deliver another 75bp hike in December – and had euro area inflation surprised higher again this would have remained our assumption - our conviction has since ebbed. Uncertainty over whether inflation has peaked, how far the ECB will go when it unveils the ‘key principles’ for APP reduction, and shifting sentiment among both doves and hawks within the GC, make the decision between hiking 50bp and 75bp much more finely balanced.

BOE (MNI): MNI BoE Preview: December 2022 - 4-way Split with 50bp Hike

The MNI Markets team (along with 20/22 analyst previews we have read) expects a 50bp hike at this week’s MPC meeting. Assuming the 50bp hike is delivered, the breakdown of the vote and the forward guidance will arguably be the biggest drivers of markets moves.

FX SUMMARY: Dollar Dominant as Markets Work Through Central Bank Deluge

• Yesterday's Fed decision continues to work its way through market prices, with the greenback on top and rising against all others in G10. The hawkish interpretation of yesterday's decision is similarly hitting equities from the open, adding an anchor to high beta currencies including AUD, NZD and NOK ahead of the NY crossover.
• Central bank decisions from Switzerland and Norway left little mark on markets this morning, with decisions largely going alongside expectations.
• The SNB raised rates by 50bps and downgraded the front-end of their inflation forecast - putting downward pressure on peak rate expectations for H1 2023.
• In Norway, a 25bps rate rise was accompanied by a lower terminal rate, and suggested the bank are nearing the peak of their tightening cycle.
• Focus turns to decisions from the BoE and ECB, both of which are expected to tighten policy today. Data due later today includes weekly jobless claims numbers as well as the November US retail sales release.

FX OPTIONS: Expiries for Dec15 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0450(E3.5bln), $1.0500(E542mln), $1.0550(E526mln), $1.0600(E551mln), $1.0700(E1.7bln)
• USD/JPY: Y138.80-00($1.1bln)
• GBP/USD: $1.2350(Gbp1.5bln), $1.2450(Gbp693mln), $1.2495-00(Gbp574mln)
• USD/CAD: C$1.3500($659mln)
• USD/CNY: Cny6.9900-00($1.8bln), Cny7.1500($1.1bln)

BOND SUMMARY: Gilts Outperform Ahead of Central Bank Decisions

• EGBs and Bund drifted lower on the Bund cash open, following car sales in Europe rising 17% in November.
• Markets have since reversed course, and have bounced off their session lows.
• Not really seen a clear driver for the push back higher in Bund, given that the Euribor strip remains in the red.
• Looks like Gilt is helping underpin Europe.
• Seems that some desk are positioning for a Dovish BoE, given that Gilt is up 83 ticks and the SONIA strip is in the green.
• Peripheral spreads are mixed against the German 10yr, Italy is 3.9bps wider, while Greece is 3.4bps tighter.
• The SNB hiked its rate by 50bps to 1% as expected, and Norges Bank by 25bps to 2.75%, also as expected.
• US Treasuries are trading within their overnight ranges, and in the green across the longer end.
• The pull back in Bund, as reversed some of the Tnote/Bund tightening, with the US/German spread sitting 1.5bp wider at the time of typing.
• Looking ahead, the only notable data left for the session is the US Retail Sales, but before the release, the main focus will be on the BoE and ECB rate decisions, when 50bps hike is expected by both CBs.
• ECB Lagarde will hold her press conference, while for the UK, there is no press conference in a non-MPR month.