EU: Mercosur Deal Looks Set To Be Signed Off With Italian Approval

• "I'm very concerned about the labour market... we are definitely seeing a loosening, as Dr Mann said, in the sort of private sector labour market... higher levels of vacancies, increasing unemployment. And that is, of course, a concern. It comes from a very, a period of a very, very tight labour market, historically tight, not that long ago... that is sort of downside risk that we we focus on as a lot of analysis."
• "For me personally, I'm actually more worried about the supply side of the labour market... I'm much more worried about economic inactivity. What is going on there? What are the structural changes that we have seen following the shocks that we have just had, whether that is sort of Covid or energy prices, but particularly covid, you know, we have seen some really big changes, structural changes, I think, in the labour market around who is working."
• "There's some... really quite striking data about what's going on with young people, for example, that I think we need to understand. So I wouldn't just characterise this as just are we seeing a fall off in the demand for labour? I think we need to think about the demand for labour very carefully. Understand it very carefully. But I think we also need to look at some of these supply things as well."

The EUR/USD basis has tightened in recent weeks, and Danske Bank believe that the outcome space is “asymmetric”, with “less room for further tightening and much greater risk of an abrupt widening”. As a result, they recommend that EUR denominated investors hedging their USD risk “use the recent tightening of basis to receive EURUSD XCCY basis in longer tenors, i.e. 3-5Y”.

Swap spread differentials – and their impact on cross-border issuance incentives have become an important driver of belly/long-end basis (see charts). In this light, Mizuho are “looking for the EURUSD XCCY curve to steepen in coming months due to our relative swap spread view”, and “like receiving the belly vs paying the long end.”

The short-end of the basis curve is more impacted by relative liquidity/funding conditions. Recent moves in 1-year EUR/USD (and more notably, GBP/USD) basis may reflect expectations for Fed vs BOE/ECB balance sheet divergence.

• Although there is uncertainty around whether the Fed will make operational/balance sheet announcements at tomorrow’s decision, it is well understood that a rebuild of the balance sheet is likely from early 2026 (via reserve management purchases in bills) to meet underlying growth in liability demand.
• Meanwhile, passive run-off of the ECB’s balance sheet looks set to continue well into next year (albeit with excess liquidity currently still considered abundant), and the BOE will reduce its stock of APF holdings by GBP70bln in 2026, implying GBP21bln of active sales (and thus pulling supply led-reserves into the PMRR). 

MNI interviews the author of a recent paper on the effects of political pressure on the Federal Reserve. -- On MNI Policy MainWire now, for more details please contact sales@marketnews.com.