US TSYS: Strong Data Weighs on Rate Cut Pricing, Curves Twist Flatter
Dec-23 20:28
- Treasuries look to finish mixed, curves twist flatter (2s10s -1.733 at 63.666) with 2s-10s weaker vs. modest gains in Bonds. Futures gapped lower after stronger than expected economic data while projected rate cut pricing in-turn consolidated with the June '26 now the first FOMC date to price in a 25bp cut.
- Real GDP growth was clearly stronger than most expected in the “initial” Q3 release, with the largest upside coming from personal consumption but also with a larger than expected boost from net exports that was only partly offset by a larger than expected drag from inventories. Real GDP increased a strong 4.3% whilst PDFP was also solid at 3.0%.
- ADP employment saw an average week-on-week increase of 11.5k in the four weeks to Dec 6, a moderation after the upward revised 17.5k (initial 16.25k) in the four weeks to Nov 29.
- Durable goods orders fell more than expected in October, but as is often the case the headline reading was distorted by aircraft orders. Not only did core readings beat expectations, but priors were revised up, making for an overall solid report. In this shutdown-delayed report, headline durables orders fell 2.2% M/M (1.5% fall expected, but prior rev up 0.2pp to 0.7%), but fared better ex-transportation (up 0.2% vs the 0.3% expected, with an upward 0.1pp revision to prior to 0.7%).
- Information Technology and Communication Services sector shares continued to lead advances in the second half, chip makers buoyed after the Trump administration announced a tariff delay on China until 2027.
- Markets close early (1315ET) Wednesday for Christmas eve, re-open for electronic trade Thursday evening for Friday's order of business. Tomorrow's shortened session sees MBA Mortgage Applications (0700ET) and Weekly Jobless Claims (0830ET). Followed by US Treasury supply: US Tsy 4W & 8W bill auctions (1000ET), $44B 7Y Note (91282CPQ8) & 17W bill auctions at 1130ET.
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RATINGS: Moody's Upgrades Italy To Baa2 From Baa3, Still A Notch Below Others
Nov-21 21:46
The Moody's upgrade to Italy's credit rating announced late Friday was the first from the agency since 2002 but shouldn't be considered a major surprise. Among the 3 major ratings agencies, Moody's had the lowest rating on Italy - by two notches (Fitch and S&P both BBB+).
- So this upgrade to Baa2 from Baa3 represents something of a closing of that gap rather than a major breakthrough for Italy.
- From the release:
- "The rating upgrade reflects a consistent track-record of political and policy stability which enhances the effectiveness of economic and fiscal reforms and investment implemented under the National Recovery and Resilience Plan (NRRP). It also points to prospects of further policy actions supporting growth and fiscal consolidation beyond the plan's deadline in August 2026. As a result, we expect that Italy's high government debt burden will gradually decline from 2027 onwards."
FED: Heading Into Its Final Weeks, QT Pace Remains At $20B/Month (2/2)
Nov-21 21:03
On the asset side of the Fed balance sheet, we saw a $25B drop in assets, of which just $2B could be attributed to QT in one of its final weeks (ends Dec 1).
- Instead it was a $6B drop in dealer repo operations vs a week earlier, and $17B in "other" areas that aren't related directly to monetary policy and typically don't have any significant impact on the size of the balance sheet (such changes are largely due to items such as bank premises, accrued interest, and other accounts receivable.)
- Discount window takeup edged up $0.3B to $6.1B but remains relatively low.
- QT has totaled just under $21B over the last month, around the expected pace, though as noted this will flatline in December with a pickup in net bills as MBS proceeds are rolled over into T-bills.
LOOK AHEAD: US Week Ahead: Retail Sales, PPI & Claims Headline Thanksgiving Week
Nov-21 21:01
A Thanksgiving-condensed week sees data highlights from delayed retail sales and PPI reports for September on Tuesday (Nov 25) before a Wednesday release for weekly jobless claims (Nov 26). Aside, the Fed’s Beige Book should also offer another important update on Wednesday for latest liaison reporting, with no Fedspeak currently scheduled around the holiday and the FOMC media blackout due to start on Saturday, Nov 29.
- As we regularly comment in this weekly publication, Redbook and Chicago Fed CARTS indicators point to solid nominal growth in retail sales, something broadly reflected in analyst consensus for the release.
- PPI inflation will offer a useful albeit not overly timely update on input cost pressures.
- Jobless claims will be watched particularly closely, both for latest initial claims for signs of layoffs and a notable update for continuing claims. The latter covers the payrolls reference period for November and will be an important reference point for FOMC members trying to get a sense of latest unemployment rate clues with the next payrolls reports coming after the Dec 9-10 FOMC decision (going into it with this week’s 0.12bp rise to 4.44% back in September).
