Markets
Richmond Fed Barkin is the next governor to share his personal view on policy going forward. He doesn’t have a vote on the FOMC board this year. Barkin is watching both sides of the Fed’s mandate with policy now within the range of estimates for neutral. He’s looking forward to first “clean” data in coming weeks as effects from the lengthy government shutdown subside. Barkin’s balanced view align with the ones of Philly Fed Paulson over the weekend. Paulson sees modest further adjustments later this year. Her comments matter more as she rotates into a voting FOMC seat. That regional rotation is a hawkish one this year with Cleveland Fed Hammack (preference to be slightly more restrictive to help continue put pressure on inflation), Dallas Fed Logan (spoke out against December 25 bps rate cut; only willing to cut further if there is clear evidence that inflation will hall faster than expected or the labor market cools more rapidly) and Minneapolis Fed Kashkari (pretty close to neutral right now) filling the other seats. These more hawkish views balance the more dovish board of governors but in the end, the latter will still be able to outvote the former of course if necessary.
Eco data were confined to national European inflation numbers today. Both French and German price increases were weaker than feared in December. French CPI rose by 0.1% M/M (vs 0.2% consensus) and 0.7% Y/Y. Unchanged German prices compared with November pulled the annual figure down more than hoped (2% Y/Y from 2.6% vs 2.2% expected). Spanish inflation, already released at the end of last year, came in in line with forecasts at 0.3% M/M and 3% Y/Y. German Bunds outperformed US Treasuries today with the move starting after first softer regional German CPI prints. German yields fall by 2.5 bps across the curve compared with 1-2 bps increases in the US. The lower inflation print and likely benign inflation (base) effects at the start of the year might bring the more dovish ECB members in the picture with money markets currently being extremely neutral positioned. This makes the front end of the European curve and the euro, ceteris paribus, vulnerable to guarded corrections lower. We nevertheless stick to the view that the current 2% ECB deposit rate will serve as a bottom. EUR/USD today drifted back from 1.1740 to 1.17.
The Kingdom of Belgium today announced its intention to issue a new 10-yr benchmark (OLO 106 June2036) via syndication in the near future, likely tomorrow. It’s the first of three planned new benchmark deals with the debt agency (BDA) also suggesting a new 5-yr OLO and a longer dated one (depending on market conditions) later this year. These syndications should help cover this year’s record €59.55bn gross borrowing requirement (net requirement: €26.37bn). To finance these needs, the BDA mainly relies on long term funding. They look to issue €51.6bn of OLO’s. That’s a significant mark-up (+€5.9bn) compared to last year’s €45.7bn and breaks with four consecutive years of relative stable OLO issuance (€43.2-45.7bn). A quick look at the Belgian redemption profile learns that €50bn+ OLO issuance is here to stay given that we don’t expect a marked improvement in budget deficit dynamics. The next nine years, annual redemptions exceed this year’s €28bn with the exception of more or less matching numbers in 2030 and 2032. Especially 2028 will be a challenging year with a record €38bn outstanding. The BDA could already lift pre-financing next year to prepare for this funding cliff.
News & Views
The Czech Finance Ministry today reported on 2025 central state budget data. The CZK 290.7bn budget deficit was the outcome of CZK 2081.1bn in revenue and CKZ 2371.8bn in expenditure. The result compared to an initial budget deficit target of CZK 241bn and also marks a rise compared to the 2024 deficit at CZK 271.4bn. According to Finance Minister Alena Schillerova, the overshoot in the budget deficit was due to a an underestimation of expenditures on renewable energy sources in the budget of the previous government, an overestimate of revenues from the sale of emission allowances and higher expenditure on education. Aside from the 2025 budget data, the Czech Finance Ministry also published the framework of its 2026 funding and debt management strategy. The report shows refinancing needs for state debt redemptions amounting to CZK 423.6bn. After the approval of the draft State Budget Act of the Czech Republic for 2026, expected later this month, an update will be published. The Ministry of Finance will then quantify the total financing needs including interest expenditures of the state budget in 2026.
