MNI EXCLUSIVE: Former RBA Research Head On Inflation

Fresh downside in e-minis and a move off early highs in European equity benchmarks (which now trade lower on the day) provides some background support to core global FI markets.

• Early London highs remain intact in TY & Bund futures, while gilt futures edge away from fresh session highs in recent trade.

UK paper plays catch up to the rally in wider core global FI markets.

• Futures trade as high as 91.30, through initial resistance at 91.18. Next upside level of note 91.78.
• Conversely, initial support is located at 90.50.
• Yields 1-3bp lower, curve flatter.
• 10s back below 4.50%, oscillating around that level since early December.
• 2s10s 1bp lower at 75.9bp after the recent steepening move failed to breach 80bp, leaving the November high (80.31bp) intact.
• Gilt/Bunds stable around 164bp after the recent failed foray below 160bp.
• GBP STIRs trade around pre-gilt open levels identified earlier. Next 25bp BoE rate cut fully discounted through June, ~39bp of easing priced through November.
• Little in the way of meaningful UK news flow since markets closed for Christmas, with broader geopolitical matters at the fore.
• No tier one UK data releases are due until the new year.

Front-end EUR rates maintain a mild hiking bias through next year. However, there is little conviction in a deposit rate move away from 2% at this stage. ECB officials have stressed that policy remains in a “good place”, and Executive Board member Schnabel re-iterated that she does not see a rate move for foreseeable future last week - somewhat tempering the hawkish interpretation of comments made earlier this month.

• ECB-dated OIS price just under 5bps of hikes through December 2026, while the 1y ESTR swap rate is only marginally above the current overnight rate.
• The 1y1y ESTR forward rate embeds a much greater implied probability of a hike in the coming years, but whether this is realised depends crucially on the implementation of and realised growth impulses from Germany’s fiscal expansion.
• Today’s regional calendar is light, while tomorrow sees December flash inflation data from Spain. Analysts expect HICP inflation to fall back to 3.0% Y/Y (vs 3.2% prior).
• Eurozone-wide flash December inflation is not due until January 7.