Markets
Yesterday’s hawkish FOMC cut still resonated today. The front end of the curve outperformed slightly after US money markets even outhawked the Fed, looking to only 1 instead 2 rate cuts next year. The US 2-yr yield returns 4.5 bps of yesterday’s 15 bps gain. Long-end US bond yields remain upwardly oriented with the 10-yr and 30-yr yields respectively rising by 3.8 bps (10-yr) to 5.8 bps (30-yr). US president-elect Trump wants to kill a compromise reached between Democrats and Republicans for a three-month stopgap funding extension. Without a deal, the US faces a partial government shutdown by Saturday. He wants to slimdown the package and attach an increase to the debt ceiling (expires in June) to it. NBC even reported that he would support abolishing the debt ceiling altogether. In absence of European numbers, European bonds reacted to the move in US Treasuries yesterday. German yields rise by 4.5 bps (2-yr) to 7.2 bps (10-yr).
The Bank of England kept its policy rate unchanged at 4.75% in a 6-3 majority vote. Three members voted in favour of a 25 bps rate cut (Dhingra, Ramsden and Taylor). We add that one member of the current majority is close to flipping to a more activist approach. Minutes showed him/her arguing that the evolution and prospects for disaggregated measures of activity and inflation could warrant such behavior. Since the previous meeting, inflation rose slightly more than expected (2.6% Y/Y in November), owing in large part to stronger inflation in core goods and food, and is expected to continue to rise slightly in the near term. Bank staff expect GDP growth to have been weaker at the end of the year than projected in November while the labour market is broadly in balance. The outlook is surrounded by more and more domestic (eg impact Autumn budget) and international (geopolitics) uncertainty. A gradual approach to removing monetary policy restraint remains appropriate. Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further. The market reaction suggests that the split within the board was bigger than expected and that UK money markets took it too far in pricing out 2025 policy rate cuts. UK gilt yields gave away all of the post-FOMC gains with daily changes currently ranging between -2.3 bp (2-yr) and +6.1 bps (30-yr). EUR/GBP bounces off the YtD low at 0.8222 to currently change hands around 0.8260.
News & Views
The Swedish central bank lowered the policy rates by 25 bps to 2.5%. If the economic and inflation outlook holds, it expects to cut rates once again in the first half of 2025. Based on the Riksbank’s own rate forecasts, that would also be the last one of the current cycle: from 2025Q2 on through 2027 it has penciled in a 2.25% policy rate. This is exactly the mid-point of the 1.5-3% neutral rate estimate. After the rapid rate reduction and given the fact that monetary policy works with a lag, the central bank moved to “a more tentative approach when monetary policy is formulated going forward.” Also suggestive of the central bank nearing the end game is the first upward revision to December inflation forecasts since March of this year. The Riksbank expects CPIF to average 1.9%-2%-1.9% over 2024-2025-2026. This compares to 1.7%-1.6%-1.9% in September. The 2027 outcome is seen at 2%. Growth projections were more or less left unchanged at 0.6%-1.8%-2.6%-2.1% over 2025-2027. Swedish swap rates jumped by >10 bps. Gains for the Swedish krone (to EUR/SEK 11.45) could have been bigger if it not were for the risk aversion holding sway on broader financial markets.
The Norwegian central bank stuck to its long-term pledge to keep rates steady at 4.5% through the end of the year. The Norges Bank said that a restrictive monetary policy is still needed but that the time to begin monetary easing is soon approaching, with March 2025 aired as the most likely opportunity to do so. Inflation came in slightly lower than expected, offering some room for rate cuts. That said, it still averages above the 2% target over the policy horizon. GDP would expand at a faster pace next year than expected in September on the back of fiscal policy, consumer spending and higher petroleum investment than previously assumed. One of the key reasons for the Norges Bank to have deviated from major peers by keeping rates steady for so long, was the weak Norwegian currency. It still sees the NOK as a key risk that could derail any rate cutting plans if it were to depreciate further. The NOK loses some marginal ground after today’s decision. EUR/NOK moved to 11.81. Money market expectations were little changed with a first full rate cut priced in by March.
