ENERGY: US Tells Personnel in Saudi Arabia to Exercise Caution

• +50,000 TYH6 113.5 calls, 32 vs. 112-11.5/0.31% -- adds to appr +77k at 31 earlier

• Treasuries extended the top end of the range in the last 5 minutes, tracking move in German Bund - both currently paring move at the moment.
• Cross asset correlated rather than flow, headline or data related (NAHB Housing Market in-line with expectations).
• Mar'26 10Y tapped 112-16.5 high (+11) trades 112-14.5 last, 10Y yield -.0293 at 4.1548%.
• Note, 2s10s curve just off this morning's 66.683 high at 65.732 (-.247) after climbing to highest level since mid-Jan 2022 Friday.

A key focus at Thursday’s ECB decision will be the December macroeconomic projections. Analysts generally expect upward revisions to GDP growth and core inflation projections relative to September, while 2027 headline inflation may be pulled downward by the likely one-year delay to ETS2. 2028 projections will be presented for the first time.

GDP: President Lagarde noted last week that growth projections will likely be revised higher.

• The median analyst expects a 0.2pp upgrade to 2025 GDP to 1.4% (range 1.4-1.5%), owing to stronger-than-expected GDP and survey data outturns in recent months.
• 2026 GDP is also seen 0.2pp higher at 1.2% (range 1.1-1.3%), driven by better momentum heading into the year and the anticipated German fiscal boost.
• 2027 GDP is expected unrevised at 1.3% (range 1.2-1.4%). Meanwhile, 2028 is also seen at 1.3% (range 1.2-1.4%).

Core Inflation: Analysts expect one tenth upgrades to 2026 and 2027 core inflation projections, owing to slightly stronger-than-expected recent momentum and the anticipated economic recovery next year.  

• 2025 core is unanimously seen steady at 2.4%. The 2026 median is seen at 2.0%, but RBC are a notable outlier looking for 1.7%.
• 2027 core is expected at 1.9%, albeit with several analysts expecting a 1.8% outturn. 2028 core is seen back at 2.0%.

Headline Inflation: 2027 headline inflation is expected to be pulled lower by the ETS2 delay, while core upgrades provide some offset to lower-than-expected energy pressures.

• For 2027 headline inflation, there is a sizeable 1.6-2.0% range around the median of 1.8%.
• For 2028, headline is seen back at the 2.0% target, albeit with several analysts pencilling in a 2.1% reading (the ETS2 delay pulls inflation down in 2027, but this is compensated by an upgrade in 2028).