STIR: 46.5bp Of BoE Cuts Priced Through December, REC Report Shows Soft Jobs
GBP STIRs a little more dovish to start the week after the latest signs of deterioration in the UK labour market.
- SONIA futures flat to +2.5, SFIZ6 registers a fresh cycle high (next resistance 10.5 away at the Aug ’24 top 96.840).
- BoE-dated OIS shows 1.54bp of easing for February, 10.5bp through March, 22.5bp through May, 29.5bp through June and 46.5bp through year-end. Contracts are little changed to 1bp more dovish on the day.
- The latest KPMG-REC Report on Jobs showed a further deterioration on the quantities side, while there were some mixed signs on wage pressures.
- We think that the wage signal in this survey is of lesser importance to the MPC than the Agents' Pay Survey or the DMP data. Meanwhile, the continuing softening on the quantities side is notable.
- Wider core global trade has centred on weakness in the long end of the Tsy curve amid the latest round of Fed independence worry (the U.S. DoJ served Fed Chair Powell with subpoenas threatening criminal indictment linked to the renovation of the central bank’s headquarters). This, coupled with the REC report, should promote fresh outperformance for gilts early today.
BoE Meeting | SONIA BoE-Dated OIS (%) | Difference vs. Current Effective SONIA (bp) |
Feb-26 | 3.711 | -1.4 |
Mar-26 | 3.620 | -10.5 |
Apr-26 | 3.501 | -22.4 |
Jun-26 | 3.429 | -29.6 |
Jul-26 | 3.348 | -37.7 |
Sep-26 | 3.310 | -41.5 |
Nov-26 | 3.273 | -45.2 |
Dec-26 | 3.262 | -46.3 |
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JGB TECHS: (H6) Just Off Cycle Lows
- RES 3: 140.08 - High Jun 13
- RES 2: 139.05 - High Aug 4
- RES 1: 137.30 - High Sep 8 and key short-term resistance
- PRICE: 133.44 @ 15:44 GMT Dec 12
- SUP 1: 133.25 - Low Dec 10
- SUP 2: 132.78 - 2.0% Lower Bollinger Band
- SUP 3: 132.17 - 1.0% 10-dma envelope
Prices traded to new pullback and cycle lows earlier this week, weighed by building expectations of a December BoJ rate hike and a breach of support in futures prices. This affirms the firm downtrend that’s dominated prices since mid-September, and prices will need to challenge resistance before signaling any broader reversal.
FED: Reserves Fell To "Ample" At Just Under $3T (2/2)
The FOMC's decision this week to immediately initiate reserve management purchases (RMPs) suggests some concern by policymakers over recent funding market issues and potential further volatility at year-end, while also having an eye on building reserve capacity ahead of the major tax date in April.
- The December FOMC statement noted "reserve balances have declined to ample levels" vs abundant previously, and RMPs will be conducted "to maintain an ample supply of reserves on an ongoing basis."
- As of the meeting, reserves stood at just under $3T ($2.97T), perhaps on the high side of most estimates of where the "ample" range had been. Gov Waller estimated in July that "ample" could be closer to $2.7T.
- The $40B / month pace of RMPs is front-loaded and will taper off, with the reserve rebuild set to average about $20-25B/month. (Powell said Wednesday: "We have to keep reserves, call it, constant as a -- as it relates to the banking system or to the whole economy. And that alone calls for us to increase about $20-25 billion per month...It's also happening in the context of a temporary few month front loading to get reserves high enough to get through the -- you know, the tax period in mid-April."
- The NY Fed's guidance: "The Desk anticipates that the pace of RMPs will remain elevated for a few months to offset expected large increases in non-reserve liabilities in April. After that, the pace of total purchases will likely be significantly reduced in line with expected seasonal patterns in Federal Reserve liabilities. Purchase amounts will be adjusted as appropriate based on the outlook for reserve supply and market conditions."
FED: Trump Tells WSJ: Leaning To Warsh Or Hassett As Fed Chair
President Trump has told the Wall Street Journal in an interview Friday that he was leaning toward either Kevin Warsh or Kevin Hassett as his pick for the next Fed Chair.
- Warsh's probability of becoming Fed chair is spiking (40%, up 25pp on Kalshi in the last few minutes) on prediction markets with the interview suggesting the ex-Fed governor is neck-and-neck with previously presumptive favorite Hassett (57%).
- "In an interview with The Wall Street Journal in the Oval Office on Friday, the president said Warsh was at the top of his list. "Yes, I think he is. I think you have Kevin and Kevin. They're both -- I think the two Kevins are great," he said. "I think there are a couple of other people that are great.""
- Additionally Trump tells the WSJ that the next Fed Chair should consult with him on where to set interest rates, and that he pressed Warsh this week on "whether he could trust him to support interest-rate cuts if he were chosen to lead the central bank, according to people familiar with the meeting. Trump, in the Journal interview, confirmed that reporting. "He thinks you have to lower interest rates," Trump said of Warsh. "And so does everybody else that I've talked to." "
- "Asked where he wants interest rates to be a year from now, Trump said, "1% and maybe lower than that." "
- This is not entirely new rhetoric from Trump on rates and the associated litmus test of a low rate preference for the next Fed Chair - as such there's not much market reaction to the news, but the reporting suggests that current Fed officials Waller and Bowman may be out of the running.
