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STIR: UK Terminal Rate Set To Close At Highs For The Cycle Despite Late Rally

STIR
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  • Sonia futures have lifted notably off earlier lows (e.g. Dec’25 now more than 10 ticks higher) but are still set to close at would be the highest implied terminal rate for the cutting cycle at ~3.90% in the Dec’27, with the majority of cuts in place with the ~4.05% in the Dec'25..
  • It of course follows continued spillover from yesterday’s Budget detailing more inflationary aspects than expected, leaving implied yields for 2H25 contracts 27bps higher over the past two days.
  • Euribor futures have been caught in the crossfires somewhat owing to closer linkages but have also seen their own ammunition from stronger-than-expected Q3 GDP, October flash inflation data (particularly in Germany) and the Eurozone unemployment rate surprisingly pressing to fresh series lows.
  • That in turn has seen implied yields climb more than 15bp over two days through 2H25-1H26 contracts, although an implied terminal rate of 2.1% is still roughly in keeping with neutral rate estimates as opposed to in the UK's case.
  • SOFR futures meanwhile have seen the smallest net increase, currently limited to 8bps for early 2026 contracts, despite a raft of mostly stronger than expected releases that has seen early days of Q4 GDP tracking some 50bps above the FOMC’s median forecast on a Y/Y basis.
  • That is however with the nonfarm payrolls report tomorrow. We note that considering the downward and unknown nature of potential distortions this month, we see greater risk to market reaction from a stronger print barring a particularly weak report with no signs of storm disruption. See the MNI Payrolls Preview here. 
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  • Sonia futures have lifted notably off earlier lows (e.g. Dec’25 now more than 10 ticks higher) but are still set to close at would be the highest implied terminal rate for the cutting cycle at ~3.90% in the Dec’27, with the majority of cuts in place with the ~4.05% in the Dec'25..
  • It of course follows continued spillover from yesterday’s Budget detailing more inflationary aspects than expected, leaving implied yields for 2H25 contracts 27bps higher over the past two days.
  • Euribor futures have been caught in the crossfires somewhat owing to closer linkages but have also seen their own ammunition from stronger-than-expected Q3 GDP, October flash inflation data (particularly in Germany) and the Eurozone unemployment rate surprisingly pressing to fresh series lows.
  • That in turn has seen implied yields climb more than 15bp over two days through 2H25-1H26 contracts, although an implied terminal rate of 2.1% is still roughly in keeping with neutral rate estimates as opposed to in the UK's case.
  • SOFR futures meanwhile have seen the smallest net increase, currently limited to 8bps for early 2026 contracts, despite a raft of mostly stronger than expected releases that has seen early days of Q4 GDP tracking some 50bps above the FOMC’s median forecast on a Y/Y basis.
  • That is however with the nonfarm payrolls report tomorrow. We note that considering the downward and unknown nature of potential distortions this month, we see greater risk to market reaction from a stronger print barring a particularly weak report with no signs of storm disruption. See the MNI Payrolls Preview here.