Highlights:
- US on cusp of government shutdown, as odds of no deal surge
- USD/JPY fades off highs as soft equities hinder risk appetite
- PCE data provides one of the last macro hurdles of the year
US TSYS: Curves Close To YtD Steeps, Govt Shutdown Odds Surge
- Treasuries have steepened further overnight with the front end continuing to pare Wednesday’s Fed-induced sell-off but still not fully pricing two further 25bp cuts for Dec (see STIR bullet).
- Political developments are to the fore after yesterday’s collapse of the latest spending plan, with Polymarket showing a 70% implied probability of a government shutdown. See our political risk team’s write-up on the matter here.
- Cash yields are 0.5-4.6bp lower on the day, with the declines led by the belly after being dragged higher by a particularly weak 5Y TIPS auction yesterday with a 6.7bp tail.
- 2s10s of 26.6bps (+1.6bp) is close to yesterday’s fresh ytd high of 28bps.
- TYH5 is close to session highs of 108-29 (09+) on reasonable volumes of 305k. It continues a lift off yesterday’s low of 108-16+ (now an initial support level). The bear trend remains intact with further support at 108-12+ (1.382 proj of the Oct 1-14-16 price swing) whilst resistance is seen at 110-07+ (20-day EMA).
- Data: Monthly PCE report Nov (0830ET), U.Mich final Dec (1000ET), Kansas Cit Fed services Dec (1100ET)
- Fedspeak: Daly on BBG TV (0730ET), Williams on CNBC (0830ET)
STIR: Next Fed Cut Tilts Back To June, PCE and Fedspeak Resumption Ahead
- Fed Funds implied rates have continued yesterday’s paring of Wednesday’s hawkish Fed announcement, with the Jun’25 rate for example having now unwound about half of the shunt higher.
- Cumulative cuts from 4.33% effective: 3bp Jan, 14bp Mar, 19bp May, 27bp Jun and 42bp Dec.
- Today’s macro focus is on the PCE/incomes report for November.
- We also see a restart of Fedspeak, with media appearances from SF Fed’s Daly (was a ’24 voter with next voting role set for ’27) early on at 0730ET before NY Fed’s Williams (permanent voter) at 0830ET.
- Both had a voting role at this week’s meeting and so are very unlikely to have been one of the four dots who marked down a preference for no change in the dot plot (along of course with their prior views). We nevertheless watch for signs of broader hawkish rhetoric after the notable shifts in the dot plot and forecasts considering both members are on the dovish end of the FOMC.
US: House Returns To Dysfunction After Spending Plan B Collapses
Funding for US federal government agencies expires at 00:01 ET 05:01 GMT Saturday, with no clear route for passing a spending bill that will avert a government shutdown. Yesterday’s ad hoc negotiations to devise a Plan B spending bill were injected with fresh uncertainty after President-elect Donald Trump demanded that a suspension, or abolition, of the debt ceiling be included in a final funding package.
- With the collapse of the Plan B bill, the House of Representatives has returned to a state of dysfunction, puncturing a short-lived sense of optimism that Trump’s re-election and Republican control of both chambers of Congress in 2025 would compel an armistice between Republican factions, facilitating a smoother implementation of Trump’s agenda.
- Wednesday’s implosion of a 1,500-page-plus bipartisan funding bill - stuffed with last-minute policy add-ons - and a hastily cobbled together 116-page plan B package yesterday has dented House Speaker Mike Johnson (R-LA) and increased uncertainty surrounding the January 3 floor vote for speaker.
- The episode has also raised questions about Trump’s strategy and the level of influence his unelected advisor, Elon Musk, has over the direction of the incoming administration.
- Please find in the attached PDF article a summary of yesterday's events and a full round-up of the pathways to resolving the stand-off.
Full article: Spending Plan B Collapses
US TSY FUTURES: Short Setting In The Long End Dominated On Thursday
OI data points to a mix of net short cover (TU), net short setting (FV, US & WN) and long cover (TY & UXY) during Thursday’s twist steepening of the curve.
- The net short setting in US & WN futures dominated in DV01 equivalent terms.
| 19-Dec-24 | 18-Dec-24 | Daily OI Change | OI DV01 Equivalent Change ($) |
TU | 4,223,583 | 4,228,301 | -4,718 | -182,275 |
FV | 6,110,645 | 6,093,976 | +16,669 | +706,560 |
TY | 4,453,426 | 4,454,886 | -1,460 | -94,706 |
UXY | 2,153,940 | 2,159,407 | -5,467 | -482,374 |
US | 1,875,093 | 1,851,306 | +23,787 | +3,000,675 |
WN | 1,771,641 | 1,766,642 | +4,999 | +956,884 |
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| Total | +33,810 | +3,904,765 |
STIR: OI Suggests SFRZ4/Z5 Steepener Exposure Was Trimmed On Thursday
OI data points to net short cover dominating through SFRH6 on Thursday, with only limited pockets of net long setting seen through that contract.
- Beyond there, we saw a mix of net short setting and long cover, as the strip twist steepened.
- Upon closer inspection, it looks like cover of existing SFRZ4/Z5 steepener positions factored into OI swings in the individual contracts on the day. With the spread back from ’24 highs that came in the wake of Wednesday’s FOMC decision, experiencing the highest daily volume of the month (~48K).
| 19-Dec-24 | 18-Dec-24 | Daily OI Change |
| Daily OI Change In Packs |
SFRZ4 | 1,254,215 | 1,306,211 | -51,996 | Whites | -57,511 |
SFRH5 | 1,095,174 | 1,104,290 | -9,116 | Reds | -61,285 |
SFRM5 | 1,019,503 | 1,024,162 | -4,659 | Greens | -1,485 |
SFRU5 | 838,501 | 830,241 | +8,260 | Blues | +7,809 |
SFRZ5 | 909,828 | 960,175 | -50,347 |
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SFRH6 | 562,746 | 561,335 | +1,411 |
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SFRM6 | 624,065 | 625,202 | -1,137 |
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SFRU6 | 614,740 | 625,952 | -11,212 |
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SFRZ6 | 694,941 | 720,557 | -25,616 |
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SFRH7 | 448,242 | 431,987 | +16,255 |
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SFRM7 | 359,097 | 354,089 | +5,008 |
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SFRU7 | 289,816 | 286,948 | +2,868 |
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SFRZ7 | 290,598 | 294,588 | -3,990 |
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SFRH8 | 226,761 | 216,402 | +10,359 |
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SFRM8 | 157,894 | 156,906 | +988 |
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SFRU8 | 118,747 | 118,295 | +452 |
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EUROPE ISSUANCE UPDATE:
Finland 2025 Funding Plan
- Net borrowing requirement E12.445bln (initial E12.88bln in 2024, realised E12.579bln)
- Gross borrowing requirement E41.900bln (initial E43.04bln in 2024, realised E42.832bln)
- "Approximately 55% of the next year’s gross funding will be funded with long-term maturities, the rest with Treasury bills."
- New benchmarks in 2025 to be launched via syndication: 10-year, 20-year and either 7-year or 15-year. First expected in Q1 (we expect the other two in Q2 and Q3).
- 2 RFGB auctions (plus one syndication) to be held in Q1 (18 Feb, 18 Mar) for E1.0-1.5bln each.
- 6 ORI operations to be held across 2025.
- 3 RFTB auctions to be held in Q1 (7 Jan, 11 Feb, 11 Mar).
FOREX: JPY Recoups Lost Ground, Softer Equities Drain Risk Appetite
- JPY is on the front foot early Friday, with the currency undergoing a small corrective recovery after Thursday's acute sell-off. As a result, USD/JPY has faded back below Y157.00 to mark a 100 pip gap with the cycle high posted yesterday. We wrote yesterday that while the Thursday price action strongly resembled the USD/JPY rally prior to the April intervention, official intervention to stem losses is unlikely at this stage - given the the rally was underpinned by the confluence of the Fed and BoJ.
- CHF is similarly firm, improving alongside the JPY, while equity sentiment remains poor. Core European indices are lower by 1% or more, with Germany's DAX a particular source of weakness; off 1.3%. US equity futures are similarly weak, with the e-mini S&P showing below the overnight low as well as the post-Fed low ahead of the NY crossover.
- The greenback is flat-to-lower, with markets look ahead to the first post-Fed decision commentary from Daly and Williams - who both appear on television later today.
- Focus for the session ahead turns to personal income and spending stats for November as well as the core PCE price index numbers - making for the final major US release before the holiday break. The final Michigan sentiment stats are also set to cross. October retail sales from Canada are also due, seen improving on the headline, but deteriorating on the ex-Autos figure.
OPTIONS: Expiries for Dec20 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.0350(E2.9bln), $1.0390(E927mln), $1.0400(E3.8bln), $1.0425(E2.6bln), $1.0430(E965mln), $1.0440(E2.2bln), $1.0450(E5.0bln)
- USD/JPY: Y150.00($1.7bln), Y150.65($1.3bln), Y155.00($1.6bln), Y156.00($1.3bln), Y157.00-05($3.6bln), Y158.00($596mln)
- GBP/USD: $1.2490-00(Gbp1.3bln), $1.2600(Gbp524mln), $1.2650(Gbp658mln), $1.2805(Gbp864mln)
- EUR/GBP: Gbp0.8290-00(E2.7bln), Gbp0.8345(E2.0bln)
- EUR/JPY: Y163.40(E580mln)
- AUD/USD: $0.6285(A$500mln), $0.6330-50(A$2.2bln), $0.6494-00(A$2.0bln)
- NZD/USD: $0.5850-60(N$1.0bln)
- USD/CAD: C$1.4200($2.6bln), C$1.4250($863mln), C$1.4300($768mln), C$1.4400($531mln)
- USD/CNY: Cny7.2500($1.4bln), Cny7.3000($3.2bln)
EQUITIES: Bull Cycle in Eurostoxx 50 Futures Intact Despite Recent Pullback
- A bull cycle in the Eurostoxx 50 futures contract remains intact, however, the latest pullback highlights a corrective cycle and the contract is again trading lower, today. Price has traded through the 50-day EMA, at 4897.73. 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 on Wednesday 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 6008.80, the 50-day EMA.
COMMODITIES: Recent Move Lower in Gold Undermines a Bullish Theme
- 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 Wednesday. The move down undermines a recent bullish theme. A resumption of 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 $2645.0, the 20-day EMA. A breach of it would be positive for bulls.
| Date | GMT/Local | Impact | Country | Event |
| 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 |