• Core bonds took a breather after surging on a slightly slower-than-expected US CPI yesterday. US yields still drop a few bps at the front end of the curve but are trading flat further out. USTs outperformed Bunds. German yields gapped lower at the open but immediately headed north with news of the country planning to issue a record amount of bonds next year (see below) triggering an upleg in the process. News agency Reuters, citing sources, reported that tomorrow’s ECB new forecasts will put inflation “comfortably above 2.0% in 2024” and just above it in 2025. Rather than the actual numbers (which haven’t been exactly accurate lately anyway), it would have a strong signaling function. The news had no direct market/yield impact but helped sustain the ongoing move. Some momentum got lost in afternoon trading though, leading to yield changes currently between -3 bps (2y) to +4.5 bps (30y). The US dollar loses a few ticks as investors bide their time ahead of the Fed. EUR/USD holds north of 1.0611. UK CPI also eased a tad more than anticipated but unlike in the US, this (potentially) declining trend has only just started and has yet to prove itself. This results in sterling trading virtually unchanged and a mixed performance of the UK curve with the front outperforming going into the BoE meeting tomorrow.
• All eyes are now turned to the Fed policy decision. The US central bank is poised to slow the tightening pace from (4x) 75 bps to 50 bps. That will bring the policy rate to 4.25/4.50%. The real market information lies in the new economic projections. These will probably entail another upward revision to the inflation forecasts. PCE inflation was seen in September at 5.4% this year, 2.8% next year and 2.3% in 2024 before returning to the 2% target in 2025. Although economic indicators in most cases held up relatively well lately, we wouldn’t be surprised to see some downward adjustments to the growth forecasts. This is because we expect the Fed to have raised the terminal policy rate to 5% and perhaps even more, in line with recent guidance from chair Powell and others. Critically, both the median rate projections (dot plot) and Powell will emphasize that this higher policy rate is here to stay for longer. In a sense, markets have brought this upon themselves. Because of the recent sharp repositioning, financial conditions have eased materially, thus undoing part of the Fed’s efforts. We anticipate a strong pushback against the 50 bps rate cuts being priced in for the second half of next year – which in our view is unjustified and have never been consistent with Fed talk.
• According to the issuance plan released by the German Finanzagentur, the German government in 2023 intends to issue a record amount of federal securities for a total of around €539 billion. €274 billion of that amount will be raised on the capital market in auctions of conventional federal securities and further €242 billion will be issued on the money market. In addition, €15 to €17 billion will be raised via green federal securities and €6 to €8 billion via inflation-linked securities. The Finanzagentur sees € 325.1 bln of redemptions next year. The previous record issuance was set in 2020 at €483 bln due to funding of measures related to the corona crisis.
• Inflation in Sweden remained elevated in November. Headline rose 1.0% M/M pushing the Y/Y measure to a new cycle peak of 11.5% Y/Y (0.2% and 10.9% in October). CPIF inflation (with a fixed interest rate), the reference for the Riksbank’s monetary policy, reaccelerated to 0.7% M/M and 9.5% Y/Y (from 9.3%). Core CPIF inflation excluding energy rose 0.2% M/M to be up 8.0% Y/Y. Despite higher yearly readings for all measures, the outcome was marginally softer than expected. In its November monetary policy report, the Riksbank forecasted CPIF inflation to slow to an average of 5.7% next year from 7.6% this year, with inflation expected to return to 2.0% in 2024. In this scenario, the Riksbank guided that the policy rate (currently 2.5%) will probably have to be raised to ‘be just below 3.0%’. Today’s data only confirm that the RB’s intentions remain soft given persistent elevated inflation. Even so, the reaction on Swedish interest rate markets was very limited. EUR/SEK trades little changed near EUR/SEK 10.87.