STIR: Midmorning SOFR Options, Two-WayPuts

• Worth noting the single currency has been under some pressure as we approach the month/year end WMR fixing window. EURUSD has extended session decline to 0.40%, to a fresh weekly low of 1.0361, while EURGBP is also down 0.3% on the session at 0.8268.
  • As noted, 1.0335 remains key for EURUSD, the Nov 22 low and a bear trigger.
  • For EURGBP, 0.8223 is the next support, the Dec 19 low, before major support at 0.8203.

House prices rose a little more strongly than expected in October, though overall gains remained fairly steady from a longer-term perspective.

• The S&P CoreLogic/Shiller 20-city home price index rose by 0.3% M/M (0.2% expected/prior), putting the Y/y measure at 4.22% (4.1% expected, 4.6% prior). The broader FHFA house price index rose by 0.4% M/M as expected, vs 0.7% prior.
• By most measures, housing valuations remain stretched (vs affordability/rates, rental yields), though this has not translated into softer prices. Recent momentum is mixed: on a 3M/3M annualized basis, FHFA prices were up 5.1% in October (highest since April), though S&P 20-city softened to a 17-month low 3.8%. Those are fairly typical figures for pre-pandemic house price trends.
• Prices have remained supported amid historically low turnover in the housing market, exacerbated by high mortgage rates.
• At some point the standoff between buyers and sellers will end, potentially when unemployment increases and/or mortgage rates drop. As it stands, expectations are for housing market activity to pick up in 2025 (existing home sales are seen at a 3-year high with new home sales at a 4-year high), with building permits/starts at the highest in 2 years. That's alongside a very modest softening in the labor market (4.3% unemployment), with long-end rates falling (10Y Treasury yields 4.1%).
• Economic solidity and solid household balance sheets (in part due to elevated house prices) should prevent too severe a deterioration in the housing market next year, though optimism over residential construction activity and home sales looks misplaced given higher rates.

Services Momentum To End Year On A Soft Note?

• The holiday season stretches the December Eurozone inflation round over two weeks this year. It also has limited the number of analyst expectations for the data to only a handful, which centre on a higher headline number underpinned by energy base effects, for a current MNI median Eurozone estimate of 2.4-2.5%.
• That would represent a pickup from 2.2% prior, though core inflation is seen steady at 2.7%. MNI will provide updates on any changes to consensus as we emerge from the holidays.
• There are expectations that service inflation could moderate slightly in December vs November, but that would still leave services HICP in the 3.8-3.9% Y/Y area (3.9% Nov).
• Methodological issues are a key theme, both in terms of assessing the apparent softening of seasonally-adjusted sequential services inflation in recent months, and looking ahead, to January's annual category repricings / reweightings.
• While markets fully expect a 25bp cut at the next ECB meeting in January, they currently price only a 10% implied chance of an outsized 50bp cut  – well off dovish extremes of around a one in three chance expected towards the end of November.

PDF Analysis Here:

December2024EZCPIPreview.pdf