FED: Semi-Annual MonPol Report Sees "Somewhat Restrictive" Financial Conditions
The Federal Reserve's semi-annual monetary policy report (PDF link) has been released ahead of Chair Powell's congressional testimony next Tuesday and Wednesday. Unsurprisingly given the historical track record of these reports, there's nothing noteworthy for the policy rate or Fed balance sheet/QT outlooks, but still there are a few subheadings of note:
- On financial conditions: "Financial conditions continue to appear to be somewhat restrictive on balance"; "Consumer financing conditions remain somewhat restrictive"; "Business financing conditions remained somewhat restrictive, but credit remains generally available". At the January press conference, Powell characterized "overall financial conditions are probably still
somewhat accommodative, but it's a mixed bag", but this is perhaps a glass half full vs half empty difference in the characterization. - On inflation: "Inflation eased a little further last year", "Core goods prices have been declining slightly, close to pre-pandemic declines, while housing services price inflation moved lower last year but remains elevated and core nonhousing services price inflation has flattened out at a somewhat elevated level"
- On the labor market: "The labor market no longer appears especially tight"; "Labor productivity increased solidly in 2024"; "Wage growth has slowed but remains solid";
- On rules-based policy rate prescriptions: As usual the report includes a section on rules-based prescriptions for the Fed funds rate, concluding "The current prescriptions from these rules are within the current target range for the federal funds rate of 4¼ to 4½ percent except for the first-difference rule, which prescribes a somewhat higher policy rate."
- This is included purely for informational purposes and not a signal of FOMC policy preferences, but it is notable that the various rule estimates have been at/below the actual Fed funds rate since late 2023 after having been greatly above the funds rate in 2021-2022.
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US-EU: Blinken And Barrot Downplay Greenland Comments, Indicate Gaza Progress
US Secretary of State Antony Blinken and French Foreign Minister Jean-Noël Barrot have spoken on a range of issues to reporters at a press conference in Paris, following a bilateral meeting earlier today.
- At the top of the presser, both ministers note that the Lebanon-Israel ceasefire agreement is operating as planned, with a withdrawal of 30% of Israeli troops from Lebanon underway.
- On Gaza, Blinken says: “We’re very close to a ceasefire and hostage agreement… I hope we can get it over the line in the time we have left but if we don’t, then the plan will be handed over to the [Trump administration].”
- Blinken reiterated that a “transformative” agreement to normalise relations between Israel and Saudi Arabia is “ready to go” if there is a ceasefire in Gaza.
- On US President-elect Donald Trump’s proposed acquisition of Greenland, Blinken said: “The idea expressed about Greenland is obviously not a good one, but maybe more important: It’s obviously one that is not going to happen, so we probably shouldn’t waste a lot of time talking about it.”
- Barrot says that the Franco-US relationship has survived 59 US elections, and “will survive the 60th”.
- Barrot: “Do we think the US will take Greenland? The answer is no… That being said we are entering a period of time where force is present everywhere…”
- Barrot quotes a comment from French President Emmanuel Macron on Monday saying that Europe needs to “wake up” and “strengthen up”.
CANADA: Fin Min LeBlanc Says He Won't Run For LPC Leader
Finance Minister Dominic LeBlanc has confirmed that he will not enter the race to succeed Prime Minister Justin Trudeau as leader of the centre-left Liberal Party of Canada (LPC). In a statement, LeBlanc - who took over from long-standing Finance Minister Chrystia Freeland following her resignation in December 2024 - said that his focus and that of his gov't departments must be on the threatened imposition of tariffs from the US once President-elect Donald Trump comes to office.
- The two frontrunners to take over from Trudeau remain Freeland and former BoC and BoE governor Mark Carney. Betting markets are somewhat divided.
- Polymarket has Carney as the favourite to become the LPC leader with a 40% implied probability to Freeland's 35%.
- Data from Kalshi shows bettors giving Freeland a 43% implied probability of being the next PM compared to 38% for Carney (the two websites ask slightly different questions, but the next LPC leader - barring unforeseen circumstances - will become the PM and as such can be seen as essentially the same).
- Whether Carney, Freeland, or another potential candidate emerges as LPC leader and PM they are unlikely to have a significant amount of time before an election campaign.
- The leftist New Democratic Party and the regionalist Bloc Quebecois, both crucial to avoiding defeat for the minority LPC gov't in previous confidence votes, have said they support an election at the nearest opportunity. Opinion polling continues to show the main opposition centre-right Conservatives on course for a comfortable majority.
STIR: ECB Pricing Back To Little Changed On the Day As Bonds Recover
ECB-dated OIS back to little changed on the day, with the Dec ’25 contract showing ~102.5bp of cuts.
- Dec meeting pricing briefly moved to ~99bp of cuts at one stage today, during the broader sell off in wider core global FI markets.
- Bonds have since recovered from session lows, which has fed into the stabilisation in STIRs.
- Euribor futures last +1.0 to -5.0.
- November lows in ERZ5 & Z6 still some distance below.
- Hawkish media speculation surrounding Trump’s tariff preferences continue to shape discussions, with debate around the ECB’s reaction to growth and inflation risks seen.
- Markets have previously assumed that harsher tariffs from the U.S. would promote a dovish ECB reaction function, owing to economic growth worries.
- This may have also factored into the modest dovish move seen this afternoon.
ECB Meeting | €STR ECB-Dated OIS (%) | Difference Vs. Current Effective €STR Rate (bp) |
Jan-25 | 2.675 | -24.3 |
Mar-25 | 2.401 | -51.7 |
Apr-25 | 2.226 | -69.2 |
Jun-25 | 2.080 | -83.9 |
Jul-25 | 2.028 | -89.0 |
Sep-25 | 1.951 | -96.8 |
Oct-25 | 1.921 | -99.7 |
Dec-25 | 1.894 | -102.4 |
