MNI ASIA OPEN: Fed Sees Sharp Downshift In Rate Cut Pace

EXECUTIVE SUMMARY

• MNI: Fed Lowers Rates 25BPS, Sees Two '25 Cuts; One Dissent
• MNI: Fed Framework Review To Hone QE Objectives - Ex-Officials
• MNI BRIEF: EZ Recession Chances "Quite Far Away" -ECB Lane
• BOJ: MNI BoJ Preview - Dec 2024: Pushing Further Tightening Into 2025

• MNI BoE Preview - December 2024: 8-1 Vote for Hold

   

US TSYS: Multiple Supports Breached On Hawkish Fed, 10YY Briefly Clears 4.50%

• After initially some trepidation ahead of the 4.50% handle, 10Y yields managed to push to session highs of 4.5080% before dipping back below again (currently 4.496%).
• In doing so it cleared the Nov 15 high of 4.5007% for highs since May.
• The belly sees the largest sell-off on the day, with 5Y yields +13.2bps (real yield 12.4bps) having cleared 4.40% for the first time since June.
• TYH5 has touched a fresh low of 108-29 (currently 109-00) having started the FOMC press conference at ~109-13+ and been at 109-29 prior to the FOMC announce.
• It has cleared a bear trigger at 109-02+ (Nov 15 low) and also the round 109-00, for now stopping short of testing further support at 108-28 (1.236 proj of Oct 1-14-16 price swing).

NEWS

FED (MNI): The Federal Reserve reduced interest rates by a quarter point as expected Wednesday but revised lower the number of cuts needed next year to just two from four at the September meeting as inflation projections were bumped significantly higher.  Cleveland Fed President Beth Hammack dissented against the move, preferring to keep rates on hold, and three other Fed officials agreed, according to the dot plot. The FOMC statement did not alter its description of the economy, repeating that inflation remains "somewhat elevated." But the committee added it was mulling the "extent and timing" of additional adjustments in rates, a possible hint of a looming slowdown or pause in rate cuts.  

FED (MNI):  U.S. central bankers revised up their inflation view for 2025 fairly sharply, now seeing headline and core PCE ending the year at 2.5%, up from 2.1% and 2.2% respectively as of September. Meeting participants also bumped up their view of GDP growth for next year by a tenth to 2.1%. A further upward drift in official estimates of the nominal neutral rate of interest leaves the median estimate at 3.0%, compared with 2.5% a year ago. A higher neutral rate suggests the Fed doesn't need to cut rates quite as much as in past cycles.

FED (MNI): The Federal Reserve is likely to consider using its framework review next year to provide more clarity on its objectives for carrying out bond purchases via quantitative easing, which at times have been used to support market functioning and at times to provide stimulus, former Fed officials and staff told MNI.

ECB (MNI) The possibility of a mild recession in the euro area seems “quite far away” based on the internal dynamics of the bloc, European Central Bank executive board member Philip Lane told an MNI Webcast on Wednesday. “Of course, if we have new shocks we have to assess that,” he said, adding that monetary easing and the delayed consumption recovery indicates that the Eurozone is not moving into a world of recession. “It’s a good, very modest recovery”. Lane admitted that consumption growth has grown less than the ECB expected because hadn’t yet 'felt' a increase in disposable incomes but that “at a certain time, reality will come to perception”.

BOJ: MNI BoJ Preview: The broad consensus for the BoJ policy meeting outcome on Thursday is for no changes in policy settings. Towards late November, market pricing for the meeting outcome stood at over 60% in terms of a 25bps hike priced in. This has fallen back sharply though as we have gotten closer to the meeting date, last around 14% probability priced for a full rate hike.

BOE: MNI BoE Preview - MNI's macro team expects this week’s MPC meeting to see an 8-1 vote split for Bank Rate to be on hold (with Dhingra the sole dissenter looking for a 25bp cut) and with guidance largely unchanged.

RIKSBANK: MNI Riksbank Preview: The Riksbank is expected to bring its policy rate to 2.50% with a 25bp cut in December. Although inflation has tracked a little above the September MPR projections over the past three months, continued softness in domestic economic activity means there is little reason for the Executive Board to go against its November guidance.

ITALY (MNI): The Italian government is adjusting its targets and milestones for the NextGenerationEU programme, making them easier in order to secure swift approval for the remaining tranches of its EUR191 billion allocation, government and coalition sources told MNI.

NORGES BANK: MNI Norges Bank Preview: Norges Bank has signalled since September that policy rates will likely be kept at 4.50% through the end of 2024. As such, anything other than another hold in rates would be a significant surprise to markets.

EU/GERMANY (MNI):  An extended EU medium-term fiscal-structural plan would help Germany address its current economic problems, Economy Commissioner Valdis Dombrovskis said Wednesday.  Under the new EU fiscal rules, states can choose whether to request a four- or a seven-year plan, but choosing the longer plan must be accompanied by a programme of reforms and investments "Should that request come from the new German government, we will be ready to engage in this discussion and certainly additional reforms and investments may help address Germany's competitiveness problems," the commissioner told reporters. 

OVERNIGHT DATA

US DATA: Single Family Housing Steady, But Offset By Apartment Weakness

Housing starts and permits data continue to show a slowdown in overall construction activity, with a bifurcation between strong single-family activity versus a deteriorating multi-unit (ie apartment) segment.

• Housing starts came in well below expectations at 1.289M on a seasonally adjusted annual rate in November (1.325M expected, 1.312M prior), just a 4-month low, but that month - July 2024 - had the fewest starts since the pandemic shutdown. Conversely, permits came in stronger than foreseen at a 9-month high 1.505M (1.43M expected, 1.419M prior).
• Multi-unit activity was a major drag on starts, falling 84k (outweighing single-family rising 61k), though multi-unit permits jumped 85k, accounting for the upside surprise in overall permits (single family fell 1k). It's hard to know what to make of this, though they are volatile figures, and multi-unit starts have consistently under-run permits (November's starts of 278k were one of the lowest prints of the last decade). As such we see no reason to think there is a nascent revival in apartment building.
• The clearest sign of a multi-unit drag comes from the actual number of units under construction, the total of which fell to the lowest level since August 2021 (1.434M). Total completions fell to a 6-month low of 1.601M, well off the June peak of 1.725M. Multi-unis under construction hit a 33-month low (797k, down 22k) vs a downtick in single-family under construction (637k, down 5k).
• For the past decade, multi-units have made up the majority of units under construction, peaking at an all-time high 60% last year - that's down to 55% with single-family regaining ground (prior to 2013 single homes were the vast majority of units under construction).
• The stabilization in single family permits/starts has translated into positive estimates for residential investment growth in the GDP accounts for Q4 (Atlanta Fed's GDP Now at 4.7%), following two quarters of contraction.
• We reiterate though that mortgage market dynamics are key: higher funding rates make large-scale residential investment more costly vs rental yields, whereas high mortgage rates and low-rate lock-ins by homeowners have reduced existing home sales to multi-decade lows and encouraged homebuilders to cater to single-family building.
• Without a meaningful pullback in long-end rates, it's hard to see a rebound in multi-family activity, suggesting a medium-term drag.

US DATA: Second Largest Current Account Deficit Since 2008

• The current account deficit was once again larger than expected in Q3 at $310.9bn (cons $287.1bn) after an upward revised $275bn (initial $266.8bn) in Q2.
• It leaves a deficit of 4.2% GDP in Q3, the largest since 1Q22 and before that 2008, after a sharp increase from the 3.8% in Q2, 3.4% in Q1 and 3.1% in 4Q23.
• It’s a marked level difference compared to the 2% GDP deficits averaged in the years leading up to the pandemic, and is also currently coinciding with fiscal deficits to the tune of 6-7% GDP.  
• The latest quarterly deterioration was broad-based: the goods deficit increased from 4.1% to 4.2% GDP, the investment income balance shifted from 0.0% to a deficit of 0.1% GDP and the secondary income deficit (i.e. transfers) shifted from 0.6% to 0.8% GDP.
• Compared to pre-pandemic levels though, the main difference has been the dwindling in the primary income balance, from surpluses of 1-1.5% GDP to a second consecutive quarterly deficit this time at 0.2% GDP. Prior to Q2/Q3 this year, the primary income balance was last in deficit fleetingly in 1998.
• Investment income is the key driving force here, likely as US assets outperform those overseas. 

CANADA DATA: Oct Employment Insurance +4.7% YOY

• Employment insurance recipients +0.1% MOM in Oct.
• StatsCan notes that's in line with little change in employment in the Oct. Labour Force Survey.
• Manufacturing and utilities led the decline in number of regular EI beneficiaries in Oct.
• EI recipients +4.7% YOY led by art, culture, recreation and sport.
• Weakness in the labor market has been evident with the unemployment rate 6.8% in Nov., highest since 2017 excluding the pandemic. BOC has said economic slack a big reason it can keep cutting interest rates. 

EUROPEAN INFLATION: Key ECB Underlying Inflation Metric Remained At 2% in Nov

The ECB’s Persistent and Common Component of Inflation (PCCI) metric, which is regarded by staff as having the highest predictive power of medium-term inflation pressures, remained at 2% in November. The importance of this measure in providing the ECB confidence that inflation is returning to target was highlighted by Chief Economist Lane in today’s webcast with the MNI Policy Team.

• President Lagarde also noted on Monday that recent progress in underlying inflation was a contributing factor in the decision to drop the ECB’s pledge to keep policy “sufficiently restrictive” in the December policy statement.
• The “core” PCCI metric (i.e. excluding energy and food) softened 10bps in November to 1.85%.
• The weighted median measure fully unwound the 30bp uptick seen in October, returning back to 2.4%. Meanwhile, the 10% trimmed mean measure rose 10bps to 2.3% and the 30% metric remained steady at 2.5%.
• Supercore - a model based measure which picks out the items that are estimated to co-move with the business cycle – has shown more limited progress in recent months, held at 2.8% for the fourth consecutive month.  

MARKETS SNAPSHOT 

US TREASURY FUTURES CLOSE

US 10YR FUTURE TECHS: (H5) Bear Threat Remains Present

• RES 4: 112-02   Low Oct 14
• RES 3: 111-24   38.2% retrace of the Sep 11 - Nov 15 bear leg
• RES 2: 111-04+/111-20+ 50-day EMA / High 6 and the bull trigger
• RES 1: 110-17+ 20-day EMA
• PRICE:‌‌ 109-25+ @ 16:52 GMT Dec 18
• SUP 1: 109-17   Low Dec 17      
• SUP 2: 109-02+ Low Nov 15 and the bear trigger
• SUP 3: 109-00   Round number support  
• SUP 4: 108-28   1.236 proj of the Oct 1 - 14 - 16 price swing

A bearish short-term theme in Treasury futures remains intact despite yesterday’s bounce. 109-22, 76.4% of the Nov 15 - Dec 6 upleg, has been pierced. A continuation lower would expose 109-02+, the Nov 15 low and key support. It is still possible that the latest pullback is a correction. Initial resistance to watch is 110-17+, the 20-day EMA. A break of this average would highlight an early bullish development.

STIR: Only One and A Half Fed Cuts Seen For The Cycle

• Fed Funds implied rates modestly extended their sharp hawkish reaction to hawkish SEP through Chair Powell’s press conference.
• The June implied rate sits 1.5bp higher than before Powell started speaking for +10bp since the announcement/SEP.
• Cumulative cuts from an assumed effective rate of 4.33%: 2bp Jan, 12bp Mar, 16bp May and 22bp Jun.
• SOFR futures implied yields see the largest post-FOMC increases in Z5/H6 contracts (currently +17bps) whilst the terminal yield has climbed 13bp (when looking far out to end-2027).
• The terminal yield of 3.96% is the lowest since May and implies just 1.5 x 25bp cuts to come this cycle.

SOFR FIXES AND PRIOR SESSION REFERENCE RATES

US TSYS/OVERNIGHT REPO: Secured Funding Rates Pull Back, FOMC Awaited

Secured rates came off monthly highs Tuesday as expected, with SOFR pulling back 3bp to 4.62% and BGCR and TGCR dipping 2bp as well. Large net bill redemptions ($26B) Tuesday helped rates come off higher levels earlier in the week that had been spurred by tax payments and Treasury settlements.

• There was no change in effective Fed funds, as usual. The expected 25bp cut to the Fed funds rate Wednesday will only be implemented on Thursday. There's also expected to be a 5bp downward adjustment to ON RRP (to 4.25%), which is likely to pull down SOFR but have a much more modest impact  on EFFR.

REPO REFERENCE RATES (rate, change from prev. day, volume):
* Secured Overnight Financing Rate (SOFR): 4.62%, -0.03%, $2341B
* Broad General Collateral Rate (BGCR): 4.59%, -0.02%, $856B
* Tri-Party General Collateral Rate (TGCR): 4.59%, -0.02%, $830B

New York Fed EFFR for prior session (rate, chg from prev day):
* Daily Effective Fed Funds Rate: 4.58%, no change, volume:  $103B
* Daily Overnight Bank Funding Rate: 4.58%, no change, volume:  $225B
 

US TSYS/OVERNIGHT REPO: ON RRP Takeup Rebounds For 2nd Session

Takeup of the Fed's overnight reverse repo facility rose for a 2nd consecutive day Wednesday, up $13.6B to $131.7B. That retraces most of the ~$70B fall in takeup between Dec 11 and Dec 16 when it hit a post-pandemic low just above $110B. The drop was seen as largely reflecting a large Treasury settlement, with ON RRP takeup seen retracing to pre-December levels ($140-200B) through the rest of this week and into next.

BONDS: EGBs-GILTS CASH CLOSE: Gilt Yields Widen Vs Bunds Again Pre-BoE

The Gilt sell-off continued Wednesday as BoE rate cut pricing diminished yet again.

• While UK CPI data was largely in line, follow through from Tuesday's strong wage data saw implied BoE rate cuts diminish below 50bp for 2025. A hold is still the overwhelming base case for Thursday's decision.
• The effects continued to be felt through the curve, and the 10Y Gilt/Bund spread extended to another post-1990 wide (231bp). 10Y Gilt yields closed 0.5bp below the 2024 high close.
• The UK curve bear steepened though the 10Y segment, with Germany's twist steepening.
• Periphery / semi-core EGB spreads were mixed.
• Attention after the cash close is on the Federal Reserve meeting, while Thursday's focus will be the Bank of England decision - MNI's preview is here.

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is down 2.3bps at 2.028%, 5-Yr is up 0.3bps at 2.07%, 10-Yr is up 1.5bps at 2.245%, and 30-Yr is up 2.3bps at 2.475%.
• UK: The 2-Yr yield is up 1bps at 4.463%, 5-Yr is up 2.3bps at 4.394%, 10-Yr is up 3.4bps at 4.558%, and 30-Yr is up 1.6bps at 5.063%.
• Italian BTP spread up 0.4bps at 115.9bps / French OAT down 0.3bps at 80.2bps  

FOREX: Greenback Soars on Outright Hawkish Fed, USD Index at Two-Year Highs

• A hawkish dissent, matched with an outright hawkish set of projections from the FOMC has prompted substantial dollar gains late Wednesday, with the USD index soaring to the highest level in two years.
• Chair Powell added little throughout his press conference and as such, we have seen consistent demand for the greenback, bolstered by the weakness for major equity benchmarks and front-end yields rising over 10 basis points.
• Sentiment has weighed heavily on higher beta currencies, with the likes of AUD and NZD underperforming against the dollar in G10.
• AUDUSD is now down 1.66%, with momentum building on a break of 0.6270, with the pair trading at a fresh two-year low. The trend needle in AUDUSD continues to point south and this week’s fresh cycle lows reinforce current conditions. Sentiment may have also been aided by the most recent RBA dovish pivot.
• The move down maintains the price sequence of lower lows and lower highs. Note that moving average studies are in a bear-mode position too, highlighting a dominant downtrend. Below here, attention will be on 0.6210, the Oct 21 ’22 low.
• EURUSD (-1.25%) slides back below 1.0400 in sympathy with the broader bid in the dollar and risk off tone, with recent gains appearing to have been a correction. Price action has seen spot substantially narrow the gap to key support at 1.0335, the Nov 22 low and bear trigger. Below here, 1.0311 and 1.0258 are notable targets, both Fibonacci projections.
• For USDJPY, the weakness for stocks and the close proximity to the Bank of Japan decision overnight has limited gains to just 0.75%. We have printed fresh recovery highs, but remain just shy of 154.84, a Fibonacci retracement level. 156.75, the Nov 15 high and the bull trigger remains the key topside mark.
• After the BOJ on Thursday, central bank decisions in Sweden, Norway and the UK are all scheduled.

Date	GMT/Local	Impact	Country	Event
19/12/2024	2145/1045	***	NZ	GDP
19/12/2024	-		NO	NorgesBank Meeting
19/12/2024	0300/1200	***	JP	BOJ Policy Rate Announcement
19/12/2024	0700/0800	*	DE	GFK Consumer Climate
19/12/2024	0745/0845	**	FR	Manufacturing Sentiment
19/12/2024	0830/0930	***	SE	Riksbank Interest Rate Decison
19/12/2024	0900/1000	***	NO	Norges Bank Rate Decision
19/12/2024	0900/1000	**	EU	EZ Current Account
19/12/2024	1200/1200	***	GB	Bank Of England Interest Rate
19/12/2024	1200/1200		GB	BOE MPS and Minutes
19/12/2024	1200/1200		GB	BOE Agents' summary of business conditions
19/12/2024	1200/1200	***	GB	Bank Of England Interest Rate
19/12/2024	1330/0830	***	US	Jobless Claims
19/12/2024	1330/0830	***	US	GDP
19/12/2024	1330/0830	*	CA	Payroll employment
19/12/2024	1330/0830	**	US	Philadelphia Fed Manufacturing Index
19/12/2024	1330/0830	**	US	WASDE Weekly Import/Export
19/12/2024	1500/1000	***	US	NAR existing home sales
19/12/2024	1530/1030	**	US	Natural Gas Stocks
19/12/2024	1600/1100	**	US	Kansas City Fed Manufacturing Index
19/12/2024	1630/1130	*	US	US Bill 08 Week Treasury Auction Result
19/12/2024	1630/1130	**	US	US Bill 04 Week Treasury Auction Result
19/12/2024	1800/1300	**	US	US Treasury Auction Result for TIPS 5 Year Note
19/12/2024	1900/1400	***	MX	Mexico Interest Rate
19/12/2024	2100/1600	**	US	TICS
20/12/2024	2330/0830	***	JP	CPI