Upside Surprise in US CPI Will Strengthen January FOMC Pause

Markets

German Bunds outperformed US Treasuries and UK Gilts yesterday as we approach final policy meetings of respective central banks which are set to widen their diverging views. The ECB will on Thursday conduct a third consecutive (and 4th in total) 25 bps rate cut. A possibly slightly lower GDP and CPI outlook is covered by uncertainty (and downside risks). It will prompt a different tone in the policy statement, erasing the expressed need to keep policy restrictive for as long as necessary to bring inflation sustainably back to 2%. Returning to forward looking decision making instead of data dependence allows the ECB early next year to ignore any possible hick-ups in a still bumpy inflation path, instead arguing that price stability will be achieved in the longer run. We expect those dovish twists to hold end of 2025 money market rates below neutral levels (+- 2.25%) even if we don’t think that this will eventually materialize. As ECB Schnabel pointed out, a stimulative monetary policy can help overcome cyclical economic weakness but doesn’t fix the structural issues Europe is struggling with. Daily changes on the German yield curve ranged between -3.6 bps (2-yr) and +0.7 bps (30-yr). The (very) long end of the curve is that way extending its nascent bottoming out process. Loss of interest rate support pulled the single currency lower. EUR/USD failed this month to regain the 1.06-handle with gravity gently leading the pair back towards 1.04 (close: 1.0527). EUR/GBP’s closing level (0.8243) was the lowest since the brexit-induced sell-off lifted the pair from around 0.70 to 0.9250 in 2016. The intraday-low from early 2022 (0.8203) is ready to be tested and at risk of break. Such break would be of huge technical importance, ending almost 8 years of range trading between roughly 0.82 and 0.95. US and UK yields yesterday respectively added between 2 and 3.4 bps and 2.9 and 5.8 bps, both in a bearish steepening move.

Today’s eco calendar is compact, but interesting with November US CPI inflation numbers and a $39bn 10-yr Note auction. Consensus expects monthly price growth of 0.3% for both headline and core inflation. That would keep annual figures broadly unchanged at respectively 2.7% and 3.3%. We don’t expect today’s numbers to change the outcome of next week’s FOMC meeting (25 bps), but any upward surprise will strengthen the idea of a January pause in the rate cut cycle and could prompt more underperformance of US Treasuries. Against the background of Trump’s expansionary fiscal plans, tonight’s 10-yr Note and tomorrow’s 30-yr Bond auction deserve monitoring (possible weakness?). A weaker EUR/USD is this week’s default play.

News & Views

The European Commission released its funding plan for the first half of 2025. It intends to issue €90 billion of long-term bonds between January and June 2025. This compared to the €75bn issued in the first half of this year and the €65bn in the second half of 2024. The Commission will raise these funds over seven auctions and six syndicated transactions. Volumes via auctions are expected to increase during the semester in line with the increased funding target, keeping the auction share stable. This increase will be facilitated by the introduction of three-leg bond auctions during the semester, with an indicative start as of Q2 2025. The funds raised will be used to cover payments under the NextGenerationEU and additional needs that arise from other policy programmes, including support to Ukraine. Bonds will continue to be issued using benchmark maturities from 3 to 30 years. Maturities for the new lines will be chosen based on market conditions and the need to bring liquidity to the EU curve. There’s a tentative focus for new conventional benchmark bonds on the 3-y, 10-yr and 20-yr segment. The Commission will continue to issue NextGenerationEU Green Bonds as well with a preference to tap existing NGEU Green Bonds to improve liquidity before issuing new lines.

Germany’s IG Metall chair, Christiane Benner, urges Berlin to drop the cap on its borrowing limit. The head of Germany’s dominant metalworkers union (and the largest European industrial union) said policymakers should follow the US and Chinese example, which are strongly supporting their domestic industries. While all off the parties in pole position to be in the next government, including the poll-leading CDU/CSU, are open for changes to the constitutional debt brake, Benner said the cap had to “stop immediately, not after the elections”. Her call comes amid a wave of industrial job cuts that’s underscoring deep economic woes.