ECB: Accounts: Shift In Balance Of Inflation Risks To Upside
A little more colour in the ECB Accounts on the balance of inflation risks, still two-sided (as Lagarde had described as two-sided in the press conference) but with a suggested shift in the balance of risks to the upside:
- “Risks to the inflation outlook were seen as two-sided: upside risks were posed by the outlook for energy and food prices, a stronger US dollar and the still sticky services inflation, while a downside risk related to the possibility of growth being lower than expected. There was considerable uncertainty about the effect of possible US tariffs, but the estimated impact on euro area inflation was small and its sign was ambiguous, whereas the implications for economic growth were clearly negative. Further uncertainty stemmed from the possible downside pressures emanating from falling Chinese export prices.”
- “There was some evidence suggesting a shift in the balance of risks to the upside since December, as reflected, for example, in market surveys showing that the risk of inflation overshooting the target outweighed the risk of an undershooting. Although some of the survey-based inflation expectations as well as market-derived inflation compensation had been revised up slightly, members took comfort from the fact that longer-term measures of inflation expectations remained well anchored at 2%.”
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US TSYS: Early SOFR/Treasury Option Roundup
Mixed SOFR & Treasury option trade reported overnight on much lighter volumes than the week opener. SOFR leaning towards upside call structures and puts in Treasury options. Underlying futures continue toi gradually unwind Monday's DeepSeek inspire risk-off support. In turn, projected rate cuts through mid-2025 have eased vs. late Monday (*) levels as follows: Jan'25 at -0.1bp (-0.7bp), Mar'25 at -7.8bp (-8.3bp), May'25 at -14.7bp (-15.9bp), Jun'25 at -26.7bp (-27.9bp), Jul'25 at -31.6bp (-33.7bp).
- SOFR Options:
- Block/screen, 3,500 SFRZ5 95.62/96.12 2x1 put spds, 10.0ref 96.10
- 2,000 SFRJ5 96.00/96.06/96.12 call flys ref 95.935
- 1,000 0QM5/0QZ5 96.25/96.50/96.75 call fly spd
- 3,900 SFRH5 95.87/96.00 call spds ref 95.78
- Treasury Options:
- 5,000 TYH5 106/107 put spds, 5 ref 108-29
- 3,000 wk1 TY 107.75/108 put spds (exp 2/7) ref 108-29 to -27.5
- 1,250 TYH5 103/104.5/107 broken put flys ref 108-31
SPAIN: Cabinet To Approve Pensions & Tax Decree After Gov't & Junts Reach Deal
The Council of Ministers is set to approve an omnibus decree later today after the gov't parties reached an agreement with the pro-Catalan independents Junts party. The decree is set to include a boost to state pensions in line with inflation and the restoration of public transport subsidies, among other measures. Last week Junts, which supports the gov't of PM Pedro Sanchez in a confidence-and-supply agreement, voted with the opposition conservative Popular Party (PP) to defeat the omnibus decree, citing a lack of trust in the Sanchez gov't.
- After the Council approves the decree, Sanchez is expected to deliver public remarks explaining the changes made to the decree that enabled Junts to offer its support.
- While the agreement limits stability risks in the short term, over the medium-to-long term Spain's policy-making environment remains vulnerable to the whims of regionalist and separatist parties given the lack of a majority for Sanchez's leftist coalition gov't.
CROSS ASSET: USD Demand In Early NY Trade As E-Minis Fade From Highs
E-mini weakness over the last 90 minutes seems to have factored into fresh USD demand, with little of note when it comes to macro headline flow.
- BBDXY back towards London morning highs, with the likes of EUR/USD and cable registering fresh session lows, albeit remaining comfortably within ranges seen over the past few sessions.
- Initial negative reaction to GM earnings pre-market, although the name is only indicated -0.5%.
- The move lower in equities also means that TY, Bund and gilt bears have not been able to force a retest of session lows.
