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STIR: 50bp Fed Cut Odds See SOFR Spreads Off Lows, EUR & GBP Peers Hold Lower

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Flattening/central bank policy error-type trades dominated on the USD, EUR & GBP STIR strips in the early part of this month, as shown in the Dec ‘24/Dec’25 (Z4/Z5) spreads.

  • Those differentials have narrowed on the back of dovish press reports covering this week’s FOMC and a subsequent increase in market-implied odds of a 50bp cut.
  • The SOFR strip still prices a slightly sharper round of ’25 cuts when compared to Euribor and SONIA peers.
  • While pricing of fairly equal levels of cuts seems to make sense at this stage, an upsized start to the Fed's cutting cycle may have some spill over into subsequent ECB & BoE decisions.
  • Meanwhile, a 50bp cut from the Fed may be seen to be setting a precedent for the early stages of the cutting cycle, if it is delivered (messaging and the dots in the SEP will be key here).
  • A reminder that several ECB GC members have explicitly pointed to a once-per-quarter cutting preference, while others have alluded to holding a similar preference.
  • Meanwhile, the BoE has chosen to not firmly commit to further easing.

Fig. 1: SOFR, Euribor & SONIA Dec ‘24/Dec ’25 Spreads (bp)

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Flattening/central bank policy error-type trades dominated on the USD, EUR & GBP STIR strips in the early part of this month, as shown in the Dec ‘24/Dec’25 (Z4/Z5) spreads.

  • Those differentials have narrowed on the back of dovish press reports covering this week’s FOMC and a subsequent increase in market-implied odds of a 50bp cut.
  • The SOFR strip still prices a slightly sharper round of ’25 cuts when compared to Euribor and SONIA peers.
  • While pricing of fairly equal levels of cuts seems to make sense at this stage, an upsized start to the Fed's cutting cycle may have some spill over into subsequent ECB & BoE decisions.
  • Meanwhile, a 50bp cut from the Fed may be seen to be setting a precedent for the early stages of the cutting cycle, if it is delivered (messaging and the dots in the SEP will be key here).
  • A reminder that several ECB GC members have explicitly pointed to a once-per-quarter cutting preference, while others have alluded to holding a similar preference.
  • Meanwhile, the BoE has chosen to not firmly commit to further easing.

Fig. 1: SOFR, Euribor & SONIA Dec ‘24/Dec ’25 Spreads (bp)

Keep reading...Show less