BoE’s 6-3 vote for a hold yesterday was a tighter call than it appeared

Markets

Front end US yields returned a few bps of the sharp Fed-induced gains yesterday but the long end extended its march higher. The 10-30-yr bucket added between 4.8 and 5.9 bps. Economic data, while second tier, again in most cases underscored the country’s economic resilience. European swap rates gapped higher in a first response to the Fed. They ended up with net daily changes between 3 (2-yr) and 7 (10-yr) bps. The dollar pulled back but the euro did not seize the opportunity. EUR/USD closed stable around 1.035. JPY underperformed after the Bank of Japan kept rates steady. USD/JPY shot up from 154.8 to 157.44. The pound dropped from EUR/GBP 0.822 to 0.829. The Bank of England’s 6-3 vote for a hold yesterday was a tighter call than it appeared. Conservative market pricing - only two cuts next year - made both sterling and short-term UK yields vulnerable for a kneejerk move lower. The Norwegian krone finishes the top three losers following the central bank readying to ease monetary policy in Q1 of next year.

The economic calendar features some interesting data for key areas though we doubt they’ll leave a significant mark on trading. Japan kicked off with inflation figures this morning (see News & Views). UK retail sales released just now were weaker than expected across all gauges, triggering some further GBP weakness. The EC’s consumer confidence is due later today and after the US release of PCE inflation figures. The latter are expected to rise by 0.2% m/m, lifting the yearly measures for headline and core to 2.5% and 2.9% respectively. After Wednesday’s Fed meeting, markets have drawn some hawkish conclusions that are unlikely to change with (outdated) PCE numbers though. If anything, the front end of the curve could be most vulnerable in case of a downside surprise given there’s nothing more than one cut and a half priced in for all of 2025. We expect the dollar to hold near the recent strong levels. We keep a closer eye at the developments in US Congress. A government shutdown suddenly and unexpectedly became a real possibility this weekend after president-elect Trump and key advisor Musk helped torpedo a bipartisan stopgap bill to fund spending through March 14. A GOP plan backed by Trump, which included a suspension of the debt ceiling through 2027, later also stranded in the Republican-led House.

News and views

Price pressure keeps building in Japan. National inflation accelerated to 0.6% M/M in November with the annual headline figure rising from 2.3% to 2.9%, the second fastest pace since October 2023. The Bank of Japan’s preferred core measure (ex. fresh food), increased by 0.5% M/M to 2.7% Y/Y from 2.3%. Goods prices gained 0.9% M/M on a strong rise in utility prices (+3% M/M) after the government rolled back energy subsidies. Services costs were up 0.2% M/M. Today’s inflation numbers should give the BoJ more confidence that inflation will settle around its 2% inflation target. Yesterday, the central bank kept its policy rate unchanged with BoJ governor Ueda remaining cautious on the timing of the next rate hike. That added JPY weakness to post-FOMC USD-strength, propelling USD/JPY to its highest level since mid-July (USD/JPY 158 from 155). It immediately prompted comments from Minister of Finance Kato: “The government is deeply concerned about recent currency moves, including those driven by speculators. We will take appropriate action if there are excessive moves in the currency market.”

US president-elect Trump gave another sneak preview on how he will use tariffs as leverage during his tenure. His first hit was at Mexico and Canada where tariffs could be installed if borders aren’t strengthened to stop migration flows into the US. Now he took aim at the EU: “I told the European Union that they must make up their tremendous deficit with the United States by the large scale purchase of our oil and gas. Otherwise, it is TARIFFS all the way!!!” Last year, the EU already bought more than half of US LNG deliveries. Up next: China? A stronger CNY or else TARIFFS all the way?!

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