GILTS: Futures Near Next Key Resistance

• -8,000 TYH6 113 calls, 45 vs. 112-14.5 - on the heels of appr +77k TYH5 113.5 calls at 31 a few minutes ago

Fed Gov Miran follows up his third consecutive dissent in favor of a 50bp cut (vs the 25bp decided) at the December meeting with a speech detailing his views on inflation (link). There are no surprises from the current-biggest dove on the FOMC on his rate outlook: he advocates "a quicker pace of easing policy". He argues that underlying inflation pressures are moderating, and a preferred measure of core inflation that cuts out various components that he considers distorted - market-based core ex-shelter PCE - is running close to the 2% target already. No word in the speech on whether he was the participant who submitted the lowest Fed funds rate dot for end-2026 (2.1%, 150bp of cuts from current levels) in the December projections but it is likely.

• The main thrust of his argument is that shelter inflation is both a badly-lagging indicator of price pressures from the pandemic period, and measures of it are due to come down substantially in the coming quarters. And since wages "are the primary driver of service inflation" recent labor market looseness have "tilt[ed] nominal wage growth risks toward the downside".
• He acknowledges "The lack of a clear downward forecast for core goods prices might suggest keeping interest rates elevated." But "the shelter outlook appears relatively clear—because market rents lead measured inflation—and powerful enough to overwhelm even the possibility of sustained higher goods inflation. Underlying inflation is near, and further approaching, our target...Shelter inflation is indicative of a supply–demand imbalance that occurred as much as two to four years ago, not today. Given monetary policy lags, we need to make policy for 2027, not 2022...Keeping policy unnecessarily tight because of an imbalance from 2022, or because of artifacts of the statistical measurement process, will lead to job losses".
• But he says "a better measure of underlying inflation would account for distortions from shelter and imputed prices. Removing imputed phantom inflation like portfolio management, market-based core inflation is running below 2.6 percent. If we further remove housing and look at market-based core ex shelter, underlying inflation is running below 2.3 percent, within noise of our target. Once shelter inflation has normalized from the anomalous post-pandemic experience, ordinary market-based core may be more appropriate."
• The above provides impetus to cut, in addition to potential labor market risks (and, he notes warily, "Recessions are an inevitable part of the business cycle, and at some point, we will suffer one. We should strive to ensure that point is as far in the future and as shallow as possible by appropriately calibrating monetary policy.")

{GB} GILTS: Gilts hold former on the day alongside core global FI peers, with pullbacks remaining shallow at this point.

• Futures last +29 at 91.29.
• Initial technical parameters in the contract remain unchanged
• Recent price action in futures highlights 90.53, the Nov 25/26 low, and 91.93, the Nov 27 high, as the important short-term directional triggers.
• Yields 0.5-3.5bp lower, early bull flattening theme intact with the recent steepening from post-Budget lows on the 2s10s and 5s30s curves losing momentum.
• Goldman Sachs maintain their cross-market longs in 10s vs. Bunds and remain long 10s vs. swaps.
• They argue that macro foundations continue to support UK paper, noting that “last week’s contraction in October GDP was the latest weak activity reading”, consolidating expectations for further weakening in this week’s labour market release.
• Still, Goldman are wary of instances of cross-market pressure, highlighting recent belly underperformance e.g. on the 2s5s10s fly. They suggest that such moves should be viewed in the context of global pressure on belly rates, as markets are moving away from an easing bias and begin pricing hike risks
• In the front end, 22bp of easing is priced for Thursday’s BoE decision, with 63bp of cumulative cuts priced through the end of ’26.
• December ’26 meeting pricing extends the dovish rebound after failing to break below 50bp of easing during recent rounds of hawkish repricing.
• SONIA futures flat to +2.5, SFIZ6 has edged through Friday’s high.
• CPI (Tuesday) & labour market (Wednesday) data are due ahead of the BoE decision.