Markets
The European morning session contained little more than the long-drawn waiting exercise that often precedes a Fed policy decision. EMU yields resumed their recent journey ‘north’ that accelerated on comments from ECB board member Schnabel on Monday. She ‘approved’ market pricing taking a rate hike as the ‘base case’ for the next ECB rate move. Market participants who still weren’t convinced as Schnabel is considered to be on the hawkish side of the ECB spectrum, got some more ‘neutral’ confirmation today. ECB Simkus, usually on the dovish side, also agrees that interest rates don’t have to be lowered any further as both inflation and growth recently printed stronger than expected and as risks on both have become fairly balanced. ECB Chair Lagarde in an interview at an FT event, agreed that the EMU economy had been more resilient than expected in the wake of the US tariff announcement in spring. The ECB already upgraded 2025 growth in September (from 0.9% to 1.2%) and might repeat that at next week’s staff projections. ECB’s Kazaks repeated that the bank is in a good place with inflation near 2% but warned that sticky core and services inflation ‘requires continued monitoring’. The ECB tomorrow enters its silent period ahead of the December 18 decision tomorrow. EMU (swap) yields currently trade off the intraday highs, but still add up to 2.5+ bps (2 & 5-y). The 2-y swap in this respect returned to the levels reached after German fiscal announcement early March. Longer maturities, affected by rising (fiscal) premia, even returned to the mid-2024 peak levels. As was often the case of late, the impact of moves in interest rate markets only had little impact on equities (Eurostoxx 50 -0.25%) or FX (EUR/USD little changed at 1.1635).
Awaiting this evening’s Fed decision, US yields understandably are changing less than 1 bp across the curve. The Fed is expected to proceed with another precautionary 25 bps rate cut (to 3.5%-3.75%) despite a highly divided MPC. Markets will keep a close eye at the new Summery of Economic Projections (dots) and any guidance from Fed Chair Powell. However, news from those sources will probably be highly conditional. Governors since the September forecast had little hard evidence on the labour market and even less on inflation to make substantial changes. One can expect the Fed chair to shift to an outright data-dependent narrative as the policy rate is coming closer to neutral. This puts the focus on data updates between now and Christmas (payrolls, CPI and Q3 GDP). With yields having rebounded/priced out more aggressive easing, there might again be room for some correction in case of softer data. Question is whether today’s FOMC meeting will already allow for such an interpretation/reaction.
News & Views
Norwegian inflation unexpectedly rose by 0.1% m/m in November, defying estimates for a slight 0.1% monthly drop. The annual print came in at 3% vs 2.7% expected but nevertheless a slight easing from October’s downwardly revised 3.1%. Norway’s central bank had 2.5% written down in the tables. The underlying measure on the other hand dropped a little more than analysts had penciled in, -0.3% m/m, lowering the yearly reading to 3% from 3.4%. Today’s numbers together with tomorrow’s regional business sentiment survey by the Norges Bank are the final input to next week’s monetary policy decision. With inflation still well above the 2% target, the central bank in all likelihood will keep rates steady at 4% and stick to the extremely gradual easing pace they’ve been communicating for some time now (one cut per year over the next three years). The Norwegian crown is slightly lower on the day with EUR/Nok moving towards 11.81.
The IMF in its annual review of China urged the country to make “the brave choice” in switching from an economy that’s nearing the growth limits via exports to a consumption-led model. The IMF called for additional fiscal stimulus and greater monetary easing while simultaneously take steps to rein in local debt and tackle a year’s long property crisis. It estimates the required spending for the latter to be around 5% of GDP. The IMF nevertheless upgraded its growth forecasts for China to 5% from 4.8% for this year and to 4.5% from 4.2% for 2026. Around a fifth of this year’s estimated 5% growth came on the account of net-exports, the IMF said, with a real depreciation of the Chinese currency having played a role. The IMF hasn’t formally called for China to pursue a stronger CNY, but did state that bolder stimulus could boost consumption and lift inflation (and the real CNY exchange rate) in the process.
