CHILE: BCCh Economist Survey Likely to Confirm Expectations for Dec 16 Rate Cut

OI data points to net short setting dominating as the SOFR futures strip twist steepened on Friday.

• SFRU5 seemed to see the only instance of net long setting, while net short setting outweighed any instances of net long cover further out the strip (in net pack terms). 

SF Fed’s Daly has published an essay (link) on the likely negative demand shock hitting the economy and the need for a balanced approach to policy setting. Her remarks support her dovish leaning stance, having last week said she completely supported the October 25bp cut and wants to keep an open mind about cutting again in December (although she doesn’t have a voting role in either 2025 or 2026). 

• The bottom line of analyzing wage developments: “We are likely experiencing a negative demand shock. Demand for workers has fallen —it just happened to be met with a nearly coincident decline in the labor supply.”
• “[U]nlike what many projected, trade rebalancing has not led to more broad-based and persistent inflation dynamics.6 Indeed, so far, the effects of the tariffs have largely been confined to goods, with little spillover into services inflation or inflation expectations, which remain relatively well-anchored around our target.”
• Concerning a wide range of productivity growth “We don’t want to work so hard to not be the 1970s that we cut off the possibility of the 1990s, losing jobs and growth in the process. That would be trading one mistake for another.”
• “The FOMC had vigorous debates about whether to react strongly to low unemployment and signs of rising inflation or take signal from emerging hints of a secular shift in productivity growth and the labor market. In the end, they took a balanced approach to policy, and we ended up with the roaring 90s and contained inflation.”
• “Getting policy right will require an open mind and digging for evidence on both sides of the debate. Clarity is there. You just have to look for it, regardless of where it leads.”
• She repeats that monetary policy is “modestly” restrictive. 

• There is  continued focus on UK funding markets. STR takeup dropped back somewhat last week and we saw RONIA spike once again on Thursday as a result, a move that was continued and slightly extended on Friday. We expect RONIA may remain at elevated levels until STR usage picks up again this week (which is very likely in our view).
• Note that tomorrow sees the last ILTR operation before the spread is increased with the operation being priced at Bank Rate plus 3bp from next week when used with Level A collateral (rather than the Bank Rate flat as it has been priced at so far). The change in the spread will only apply to new drawings from next week and so will be the last opportunity to lock in a slightly cheaper rate for 6-months. The date the spread change would be applicable from was announced on Friday but it had been announced months ago that this would take place in November.
• We are unsure how much of the previous ILTR takeup was in response to ILTR repayments and how much was frontrunning ahead of the spread changing. ILTR usage stands at GBP55.4bln (as of last week’s operation) up from around GBP31bln two months ago (around GBP24bln more). In the same two month period TFSME usage fell from around GBP79bln to around GBP42bln (around GBP37bln less).
• We still think that the increase in RONIA is largely a temporary market dislocation but as we continue to edge closer to PMRR and to a more demand-led BOE balance sheet with ample rather than excess reserves volatility in RONIA is likely to be increased relatively to prior periods.

Chart source: Bloomberg Finance LLP