Markets
A huge block sale in the federal funds futures market yesterday offered some entertainment during an otherwise quiet trading session. The record-sized 200k single wager stands to benefit if the market prices out the remaining odds – currently around 17% – for a Fed rate cut at the January 28 policy meeting. It’s therefore not a coincidence the bet was made yesterday, ahead of key US economic data to be released as final input to that gathering. That starts today with JOLTS vacancies (November), the ADP job report (December) and the services ISM (December) and ends with the December payrolls on Friday. ADP job creation is seen at 50k, recovering from November’s unexpected 32k drop while the services ISM should hold fairly steady around 52.2. After three consecutive Fed rate cuts (Sep-Oct-Dec), markets in our view correctly so assume a break in the normalization cycle. We think it’ll take huge downside surprises in today’s data and ultimately in Friday’s payrolls for markets to flip their current thinking. Market’s timing for a resumption of rate cuts, right now June, could shift though, even in less outspoken data misses. In any case we don’t expect technical breaks to occur in US yields or the dollar today. The 2-yr tenor is supported by the October ’25 low of 3.37%. The 10-yr maturity is struggling near first resistance around 4.2%. EUR/USD is currently changing hands in the middle of the 1.14-1.19 trading range in place since last summer. DXY is holding a similar position in the 96-100 range.
Moves in other FI parts of the market showed some modest gains for Bunds. Yields grinded around 3 bps lower, with regional inflation numbers kickstarting the move and proximity of resistances zones (eg. 2.9% in the 10-yr) supporting some return action as well. They hinted at a downside surprise in the national inflation print, which eventually came in at 0.2% m/m and 2%, missing the 0.4% and 2.2% bar. Together with a slight French miss (0.1% m/m vs 0.2%, 0.7% y/y as expected), they pose some minor downside risks to today’s European-wide release. The bar is set at 0.2% m/m and 2% y/y. Even if that would occur, there’s no reason for the ECB to act. Future CPI releases will likely see inflation dropping below the 2% goal due to (energy) base effects. But policymakers the last couple of months repeatedly warned that the ECB is to look through small and temporary deviations from target. Supply today consists of Germany’s second tap this week (10-yr) along with Belgium launching a new 10-yr syndicated benchmark deal. Stock markets after a strong start of 2026 seem to be catching a breather today. Japanese stocks this morning underperform following China imposing export controls over a feud regarding Japanese PM Takaichi’s Taiwan comments (see below).
News & Views
Overall Australian price growth was unchanged in November (0% M/M) with the annual figure falling somewhat more than hoped, from 3.8% Y/Y to 3.4% Y/Y (vs 3.6% consensus). The largest contributor to annual inflation in November was housing, up 5.2%. This was followed by food and non-alcoholic beverages, up 3.3%, and transport, which rose 2.7%. Trimmed mean inflation, which ignores the most volatile price swings and is the central bank’s preferred measure for core inflation, showed prices rising by 0.3% M/M and 3.2% Y/Y (from 3.3%). Annual goods inflation slowed from 3.8% Y/Y to 3.3% Y/Y mainly because of electricity prices (19.7% Y/Y from +37.1% Y/Y). Services inflation slowed from 3.9% Y/Y to 3.6% Y/Y due to domestic holiday travel. Today’s lower inflation print doesn’t alter the market view that the RBA will be raising its policy rate by the May policy meeting. The Aussie dollar extends its (commodity-driven) good run against USD with AUD/USD moving above 0.6750 for the first time since October 2024.
The Japanese foreign ministry reacted to yesterday’s announcement of Chinese export controls for items destined for Japan that could have military uses. Broad estimates suggest that dual-use items (commercial & military) total over 40% of total Japanese goods imports from China. Japan’s Chief Cabinet Secretary Kihara said that the measures only target Japan and deviate significantly from international practice. Tensions between both countries rise high since end November when PM Takaichi suggested that Japan could use military action if China uses force to try and seize Taiwan.
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