Highlights:
- BoE likely unchanged, no presser could contain market fallout
- Global bond rout prompts Gilts to spill lower, sending 10y UK yields to highest since Oct'23
- Confluence of Fed, BoJ meetings sends USD/JPY to new multi-month high
US TSYS: Twist Steeper Post-FOMC, Less Than 40bp Of Cuts Seen For 2025
- Treasuries sit twist steeper, with the pace of steepening accelerating earlier in London trade before stalling. The front end has firmed in a modest paring of losses seen on yesterday’s hawkish Fed but the long-end sell-off has extended after yesterday’s clearance of 4.50% for 10Y yields.
- The Fed cut 25bp as expected but there was a surprise dissent and four dots arguing for no change plus a raft of hawkish implications from the dot pot and broader macroeconomic projections. There is only one additional 25bp cut fully priced for 2025. MNI Fed Review here.
- In politics, Republicans scrapped House Speaker Johnson's bipartisan plan to avert a government shutdown, as President-elect Trump and Elon Musk joined a broad swath of the House GOP on Wednesday to condemn a compromise bill full of Democratic policy priorities (WaPo).
- Cash yields sit between 3.6bp lower (2s) and 2.9bp higher (30s).
- 10Y yields have seen session highs of 4.5401% (currently 4.528%, +1.6bp) for fresh highs since May.
- 2s10s at 21bps (+5bp) starts to eye year-to-date highs of 24bp seen in late September.
- TYH5 earlier saw new recent lows of 108-24 (currently 108-27+, -05) whilst current cumulative volumes are elevated at 455k. Having cleared a key short-term support at 109-02+ (Nov 15 low), it opens 108-12+ (1.382 proj of Oct 1-14-16 price swing) after which lies 108-00 (both 1.00 proj and round number).
- Fed Funds futures have marginally pared their hawkish shift on yesterday’s FOMC but still only price 37bp of cuts to end-2025 vs an equivalent closer to 49bp pre-FOMC.
- Cumulative cuts: 3bp Jan, 13bp Mar, 25bp Jun and 37bp Dec.
- SOFR-implied terminal yields hover around 4% after late 2026/early 2027 contracts have overtaken early 2026 contracts for the largest sell-off post-FOMC.
- Today’s data focus is on the third release of Q3 GDP/PCE inflation and weekly jobless claims data covering a payrolls reference period for initial claims.
US DATA: GDP Revisions Seen Maintaining Strength, Core PCE Could Round Higher
- Today's third release of Q3 national accounts at 0830ET will see the second revision to the GDP breakdown along with the first revision to GDI.
- Real GDP growth is seen remaining at 2.8% annualized in further confirmation of a solid reading after the 3.0% in Q2.
- Last month’s first revisions broadly confirmed a strong contribution from domestic demand, with final sales to domestic purchasers adding 3.5pp after 2.8pp in Q2 and final private demand (which Powell flagged yesterday) adding 2.7pp after 2.3pp.
- Consumption is watched to see if it remained a key driving force behind this domestic demand strength. Consensus looks for 3.6% having been revised down to 3.5% from an initial 3.7% in Q3, either way still a marked acceleration from the 2.8% in Q2 for its fastest since 1Q23 (it added 2.4pp to GDP growth in Q3).
- GDI meanwhile provided the softest area of last month’s Q3 release, increasing 2.2% annualized (vs real GDP 2.8%) after a downward revised 2.0% in Q2 (initial 3.4% and vs real GDP 3.0%).
- Analysts likely give greater caution to the GDI numbers though, having printed far softer growth than GDP prior to comprehensive national account revisions back in September after which they converged notably towards prior GDP trends - something that multiple FOMC members subsequently noted.
- Looking through noisier quarterly rates, both metrics currently show solid economic growth, with GDP at 2.7% Y/Y (within which PDFP increased 3.1% Y/Y, "a really good number" in Powell's words) and GDI at 3.1% Y/Y in Q3. We watch to see how this changes.
- This strength was reflected in yesterday’s Fed forecasts in the updated SEP. Real GDP growth was revised up from 2.0% to 2.5% for 4Q24 (which if anything currently looks like it could undershoot further considering GDPNow is running above 3% annualized for Q4) along with a more modest upward revision from 2.0% to 2.1% for 4Q25.
- Finally, note that it really doesn’t take much for core PCE inflation to round higher in Q3 at what could look like a surprise to the rounded 2.1% expected. It was revised down from 2.156 to 2.146% in last month’s Q3 update.
US: Trump And Musk Derail Bipartisan Spending Deal
There is now a real risk of a government shutdown on December 21 after US President-elect Donald Trump torpedoed House Speaker Mike Johnson’s (R-LA) bipartisan deal to extend government funding for three months. Trump’s decision to tank Johnson’s deal came after informal advisor Elon Musk waged a social media crusade against the deal, citing concerns over extraneous policy and the high cost of the package.
- Trump explicitly linked government funding to raising the debt ceiling for the first time, arguing that the debt limit should be lifted before he takes office on January 20, tying the short-term appropriations bill to one of the most challenging negotiations in Congress.
- It is unclear how Congress would approach raising the debt ceiling in the coming days. Lawmakers are scheduled to depart Washington D.C. on Friday evening. The broader GOP plan was to address the debt limit in a reconciliation bill in the summer, shortly before the government nudged against a default.
- The most obvious way forward for Johnson is to scrap assistance to farmers, disaster relief, and various Democrat add-ons in the funding deal. However, House Minority Leader Hakeem Jeffries (D-NY) indicated a clean CR will receive no Democrat support, meaning Johnson will have to take any compromise through the House Rules Committee and whip near-unanimous support from his conference.
- Beyond the immediate shutdown threat, the episode demonstrates clear political risks for 2025, we have a full rundown in the article below.
Full article: Trump and Musk Derail Funding Deal
US-RUSSIA: Putin-I Am Ready To Talk To Trump
Speaking as part of his marathon-length annual press conference/public phone-in, Russian President Vladimir Putin says, when asked what he is going to 'offer' US President-elect Donald Trump says "I don't know when we will meet". Putin claims that he has not spoken to Trump for more than four years, but that he is "ready to talk" with the incoming president. Asked if Russia is in a weak position before any possible meeting, Putin claims "We are getting stronger".
- On the war in Ukraine, Putin claims that "Practically all NATO countries are fighting against Russia". Asked if he is ready to compromise with Kyiv, Putin says "We have always said we are ready for talks and compromises [but] we need the other side to be ready [for the same]."
- Livestream with English translation can be seen here.
MNI UK Inflation and Labour Market Insight: Dec 2024 Release
- This week’s key pre-BOE meeting press releases have seen wage data come in significantly higher than expected, inflation data marginally lower than expected and the quantity side of the official labour market statistics have continued to moderate.
- The market has focused most heavily on the earnings numbers and seen a significant repricing of 2025 rate cut expectations, with less than two 25bp cuts fully priced in now (from more than three before the labour market data was published).
- Expectations for today’s MPC meeting have not really shifted, but we do think that it cements the expectation that there will be no change in guidance today and the chance of any other MPC member joining Dhingra in dissent is looking more remote than previously.
- We therefore continue to look for an 8-1 vote split today.
For the full document see: MNI UK Inflation Labour Insight - December 2024 Release.pdf
EGB FUNDING UPDATE: France 2025 Funding Plan
France has confirmed the provisional target set in October for E300bln of OAT issuance net of buybacks (and including linkers). The AFT notes that "The funding requirement may be adjusted, if necessary, depending on the 2025 Budget Bill."
- New issues via auction: One 3-year, one 5/6-year, two new 10-year OATs.
- "Prospect of" a new 15-20 year OAT via syndication.
- "Prospect, depending on demand and up to the limit of eligible green expenditures, of a syndicated tap" of the 3.00% Jun-49 Green OAT.
- "Prospect of" new 30-year OAT.
- "Consider, depending on market demand" a syndicated launch of a new OATei (no maturity given).
- "The gross nominal value of medium- and long-term debt issuance in 2024 stood at €339.8bn, consisting of €310.49.4bn in fixed-rate bonds and €29.4bn in inflation-linked bonds. In 2024, AFT bought back €25.0bn of debt maturing in 2025 and € 29.8bn in debt maturing in 2026."
- Auction schedules will remain as in 2024.
- Nothing unexpected here.
FOREX: USD/JPY Makes Light Work of Bull Trigger on Dovish BoJ
- Currency markets are in the midst of comfortably their busiest morning of the week, with G10 FX volumes surging well ahead of average for this time of day. Most notably, JPY futures are seeing volumes triple what you'd expect to see, thanks to the dovish outturn from the BoJ decision which allayed expectations for a rate hike in January, and saw the JPY spiral lower.
- As a result, USD/JPY has cleared the bull trigger and the post-election high from mid-November, printing a new multi-month high and getting a significant dose of upside momentum in the process. This opens a broader range for the currency headed into 2025, evident in the skew toward the short-end of the JPY vol curve.
- GBP trades well, gaining alongside a further widening in EUR-GBP rate differentials today (the SFR - ER Z5 spread is at new record levels), helping pressure EUR/GBP to a new pullback low, adding additional pressure to the single currency, that was already underperforming on the back of the hawkish interpretation of the Fed decision.
- Focus for the session ahead remains on central banks, with the Bank of England seen keeping their policy rate unchanged. An 8-1 vote for no change is consensus, and the lack of a post-decision press conference could limit any subsequent market volatility. Weekly claims data are the highlight in the US, with existing home sales for November also on the docket.
GBP: UK Importers in Focus as GBP/EUR Eyes Strong Weekly Close
GBP/USD heads into the BoE decision off the session's recovery highs to almost precisely sit on the 50% retracement of the FOMC reaction range.
- Consensus remains for an unchanged decision, and a 8-1, and the lack of a press conference today could contain any market fallout. We don't see guidance changing today, with the MPC looking for more certainty in the data outturns next year, before changing language. Full preview is here: https://media.marketnews.com/MNI_Bo_E_Preview_Dec24_dce60f0230.pdf
- That said, EUR/GBP is clearly of interest at current levels, with the widening SFI-ER Z5 spread adding further pressure to put prices at new pullback lows of 0.8223 (lowest since Mar'22) and exposing a further bear trigger at 0.8203.
- Of note, GBP/EUR - a key price for UK importers - looks set for a strong weekly close and appears to have consolidated the break of 1.2100 (1.2191 marks the next key resistance here) - which could come into further focus into year-end, with rallies providing further opportunity for importers to lock-in the multi-month rally before next year starts in earnest.
JPY: Vol-Buying Pays Off on Outsized Spot Reaction
- Today’s sharp rally in spot puts the price at the best levels since July and clear of the bull trigger marked at the mid-November high – and the straddle breakeven pricing of ~130 pips will mean those buying vol into the Fed/BoJ decisions would have been rewarded by today’s reaction.
- We noted yesterday that January BoJ pricing could be the market to watch for the spillover reaction in JPY, and today’s slide in January hike pricing (down to +12bps from +18bps at the beginning of the week) has accompanied the JPY sell-off, and opened a broader range for the pair into 2025.
- The front-end of the JPY implied vol curve is skewed further in favour of the front-end today, with 6m vols (capturing the next few BoJ meetings and the first months of the Trump Presidency) clearing 10.5 points to build well off the post-election lows. Demand for JPY downside clear to see in exchange-traded options, with the USD/JPY put/call ratio dropping to 0.8 today.
NORGES BANK: Judgement Factor Has Dovish Impact On December Rate Path
The Norges Bank “judgement factor” was actually negative through the forecast horizon. This means the policy rate path implied by the bank’s models was more hawkish than the baseline presented in the December MPR.
- As such, although the model-implied reaction function suggests policy rates may need to be held at 4.50% a little longer, Norges Bank sees the need to stick to its prior guidance and begin easing policy from Q1 next year.
- Looking at the contributions to the model-implied path relative to September: Domestic demand was the largest upside contributor, as expected. Money market premiums, petroleum prices and investments, and external factors also pushed the rate path higher.
- The prices and wages component was surprisingly a downward contributor. Most analysts had expected a broadly neutral impact here, following the Q4 Regional Network Survey, where 2025 wage expectations were revised up to 4.5% (vs 4.3% prior). In fact, Norges Bank downgraded its 2025 wage projection by 10bps to 4.2%.
- The exchange rate was a negligible contributor, as expected.
- The MPR notes that “At the end of 2026, the real interest rate is projected to be around 0.9%, which is in the upper range of the neutral real interest rate estimate”.
RIKSBANK: Cautious 25bp Cut In December, Little Change In Rate Path At Long-end
The Riksbank has cut rates by 25bps as unanimously expected, but the guidance and rate path is more cautious than consensus. Highlights from the policy statement:
- Unchanged from November: “ If the outlook for inflation and economic activity remains unchanged, the policy rate may be cut once again during the first half of 2025”.
- This rhetoric has been used extensively by Exec board members: “Despite some signs that economic activity is on its way to recovery, it remains weak. A stronger economy is important in its own right, but it is also a necessary condition for inflation to stabilise close to the target”.
- Cautious signals ahead; “This argues for a more tentative approach when monetary policy is formulated going forward.”
- “The Riksbank will therefore carefully evaluate the need for future interest rate adjustments, in light of the effect of earlier cuts and shifts in the risk profile regarding the outlook for inflation and economic activity”.
- “There is particular uncertainty regarding developments abroad”
Cautious rate path in line with the guidance. Mechanical shift lower at the front-end at expected, but the end-point remains at 2.25% (the mid-point of the updated neutral range of 1.5 to 3.0%).
- Most analysts had looked for a downward revision at the end of the rate path to 2.05-2.15% or so.
EQUITIES: Sharp Sell-Off in E-Mini S&P Results in Breach of 20-, 50-Day EMAs
- A bull cycle in the Eurostoxx 50 futures contract remains intact, however, the latest pullback highlights the potential start of a corrective cycle. Price has traded through the 50-day EMA, at 4898.37. A continuation lower would open 4819.33, a Fibonacci retracement. On the upside, key short-term resistance has been defined at 5014.00, the Dec 9 high. A break of this hurdle would confirm a resumption of the recent uptrend.
- A sharp sell-off in the S&P E-Minis contract yesterday highlights a possible short-term top. The move down has resulted in a breach of both the 20- and 50-day EMAs. A continuation lower would open 5811.65, a Fibonacci retracement level. Note that support at 5921.00, the Nov 19 low, has been pierced. A clear break of this level would strengthen a bearish threat. Initial resistance is at 6011.85, the 50-day EMA.
COMMODITIES: Gold Recovers from Post-Fed Lows
- A bearish threat in WTI futures remains present and recent gains are - for now - considered corrective. A resumption of the bear cycle would open $65.57, the Oct 1 low, and $63.73, the Sep 10 low and key support. For bulls, a stronger reversal to the upside would instead refocus attention on the key short-term resistance at $76.41, the Oct 8 high. Initial firm resistance to watch is unchanged at $71.97, the Nov 7 high.
- Gold traded lower yesterday. The move down undermines a recent bullish theme. A resumption weakness would signal scope for an extension towards the key support at $2536.9, the Nov 14 low. Moving average studies are in a bull mode position highlighting a medium-term uptrend and this suggests that the latest sell-off is likely a correction. Initial pivot resistance is $2650.4, the 20-day EMA. A breach of it would be positive for bulls.
| Date | GMT/Local | Impact | Country | Event |
| 19/12/2024 | 1200/1200 | *** |  GB | Bank Of England Interest Rate |
| 19/12/2024 | 1200/1200 | GB | BOE MPS and Minutes | |
| 19/12/2024 | 1200/1200 | GB | BOE Agents' summary of business conditions | |
| 19/12/2024 | 1200/1200 | *** | GB | Bank Of England Interest Rate |
| 19/12/2024 | 1330/0830 | *** |  US | Jobless Claims |
| 19/12/2024 | 1330/0830 | *** | US | GDP |
| 19/12/2024 | 1330/0830 | * |  CA | Payroll employment |
| 19/12/2024 | 1330/0830 | ** | US | Philadelphia Fed Manufacturing Index |
| 19/12/2024 | 1330/0830 | ** | US | WASDE Weekly Import/Export |
| 19/12/2024 | 1500/1000 | *** | US | NAR existing home sales |
| 19/12/2024 | 1530/1030 | ** | US | Natural Gas Stocks |
| 19/12/2024 | 1600/1100 | ** | US | Kansas City Fed Manufacturing Index |
| 19/12/2024 | 1630/1130 | * | US | US Bill 08 Week Treasury Auction Result |
| 19/12/2024 | 1630/1130 | ** | US | US Bill 04 Week Treasury Auction Result |
| 19/12/2024 | 1800/1300 | ** | US | US Treasury Auction Result for TIPS 5 Year Note |
| 19/12/2024 | 1900/1400 | *** |  MX | Mexico Interest Rate |
| 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 |
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