Daily Points

ON DECK FOR THURSDAY, DECEMBER 19

KEY POINTS:

• FOMC impact continues to reverberate through global markets…
• …as some calm returns to the US
• Trump and Musk torpedo funding bill…
• …driving high risk of a government shutdown after tomorrow
• US GDP revised up: good for growth, pouring salt in the wound of rate cut hopes
• US jobless claims stabilized following temporary surge, volatile Philly tanks
• US home resales expected to rise
• Canadian lagging payrolls dip, but wages soared
• BoE holds, more dissenters wanted a cut now, guidance more dovish than markets
• Bank of Japan held and sounded like a hike may be a long way off
• Norges held, guides skip in January, cut in March
• Riksbank cuts 25bps and sounds like it’s almost done
• Banxico expected to cut 25bps
• BSP cuts, guides less cutting than previously

The aftermath of the FOMC’s more hawkish pivot continues to reverberate through global markets. US equity futures are a little more stable with small gains this morning and the US yield curve is slightly bull steepening in the wake of yesterday’s sell off across the curve. The rest of the world is catching up to the decision in their own trading hours. EGBs are broadly cheaper on the carry implications. Australia’s curve sold off by double digit basis points. European equities are down by 1%+ after broadly based softness across Asian exchanges. The USD is mostly softer against a variety of crosses except the yen post BoJ.

While the aftermath of the FOMC is dominant, twists on the narrative are derived from a slew of decisions by global central banks, Trump’s antics around government funding and the debt ceiling, and mostly positive US data.

A US Government Shutdown Seems Likely

Last evening, Trump rejected the bipartisan bill to fund the US government and avert a shutdown that would occur after Friday night. He wants concessions to the Democrats to be nullified and a deal to raise the debt ceiling with explicit guidance to pin it on the Dems before the new red swept Congress convenes in January. The unelected Musk was an instigator behind Trump’s move and threatened to undermine GOP members who agreed with the deal probably by using his funds to coordinate alternate candidates the next time around. Musk wants a government shutdown if the concessions to the Dems are not removed; that’s hundreds of billions talking relative to the lives that would be affected. Time is obviously very tight and so the risk of a government shutdown just before Christmas is high. Next steps are unclear ahead of the January 1^st reimposition of the debt ceiling, but don’t say I didn’t warn you about expecting four years of attention-seeking drama and its effects on markets and the economy! And at US$36 trillion and counting, whatever happened to the Trump who railed against raising the ceiling without severe spending cuts? Meant rhetorically of course…

BoE Held, Sounded More Dovish Than Markets

The Bank of England held Bank Rate unchanged at 4.75% as widely expected. As written in daily notes, my interpretation of UK data since last Friday has been on the more dovish side relative to how markets saw it and so I wasn’t surprised to hear a more dovish tone from Governor Bailey et al relative to what was priced for next year. There were three dissenters in favour of a cut at this meeting (Ramsden, Taylor, Dhingra) which is two more than previously (Dhingra). Markets reacted in somewhat muted fashion as sterling slipped a little following the communications, 2-year gilts were only maybe 2bps richer, and OIS pricing moved a little above two cuts for 2025 but remains Market pricing is shown in chart 1 while chart 2 is a reminder of the ongoing softness of core CPI.

BoJ’s Uncertainty Drives Weaker Yen

The Bank of Japan held its target call rate unchanged at 0.25% as widely expected, but it was the cautious bias that sank the yen as it moved from about 154.6 to the dollar before the decisions to 156.7 this morning (chart 3). The 8–1 vote to hold included one dissenter who preferred a hike at this meeting. It was Governor Ueda’s comments in the press conference that struck a tone marked by a potentially lengthy pause. Ueda said “Needless to say, on both Japan’s wage outlook and the impact of Trump’s policies, it will take a long time to grasp the entire picture.” He elaborated by noting that the BoJ will hike if the outlook is realized, but that he wants to see more evidence on the move toward Spring wage talks, wants more data, is uncertain about the global outlook, and wants to see what policies the incoming US administration implements and is uncertain about their impact on inflation. Ueda was noncommittal toward the next meeting on January 24^th, saying that he’s not sure they’ll have enough information by then. Some think that the government’s push toward applying stimulus and perhaps uncertainty over whether Japan would retaliate if US tariffs are applied were added constraints on Ueda’s flexibility now.

Norges Bank Held, Guides a Little Less Easing

Norges Bank held its deposit rate unchanged at 4.5% as widely expected because they basically said so in advance. Fresh guidance says “the policy rate will most likely be reduced in March 2025” which means skipping again on January 23^rd. The cumulative pace of easing in the freshened guidance was lowered from previously (chart 4). Norges noted that “Higher tariffs will likely dampen global growth, but the implications for price prospects in Norway are uncertain.” The krone was already appreciating to the dollar before the decision and was little changed afterward. The already low pricing for January’s meeting was trimmed a little further and the already priced cut in March was retained with little change.

Riksbank Cut, Sounds Like It’s Almost Done

Sweden’s Riksbank cut its policy rate by 25bps as widely expected but sounded like it’s almost done cutting. Forward guidance said that if the outlook is realized then “the policy rate may be cut once again during the first half of 2025.” Uncertainty around this was marked by the comment that they will “carefully evaluate the need for future interest rate adjustments” given cuts to date and changes in inflation risk and the broader outlook including “particular uncertainty regarding developments abroad” insofar as geopolitical tensions, trade policy and governmental crises are concerned. The Riksbank’s explicit forward rate guidance has one more cut and then holding through to the end of 2027 (chart 5).

BSP Cut, Trims Forward Guidance

The central bank of the Philippines cut 25bps as widely expected, making that 75bps of cuts since August. Further easing was guided to be ahead as Governor Remolona indicated “a measured approach to monetary easing” and that “Maybe 100 basis points over 2025 will be too much, but zero will be too little” in reference to prior guidance that was more aggressive on cutting. Rates moved up several basis points and the peso outperformed most other Asian crosses overnight.

CBCT Held, Nervous Toward Tariffs

The Central Bank of China Taiwan held its benchmark rate unchanged at 2% as widely expected. Inflation at 2.1% y/y is near the 2% target. They forecast inflation to be 1.9% in 2025 but noted this does not include assumptions on US tariffs or the impact on Taiwan’s growth.

Banxico to Cut—But Will It Upsize?

Banxico weighs in this afternoon and is expected to but by another 25bps but a substantial minority thinks -50bps (2pmET). Inflation has continued to decline, hitting 4.6% y/y in November with core CPI falling to 3.6% y/y. A continued easing bias was conveyed in the last decision on November 14^th—after the US election—when the statement said “Looking ahead, the Board expects that the inflationary environment will allow further reference rate adjustments.” A 50bps cut may be delivered if Banxico wishes to pre-judge US tensions including prospects for a disinflationary surge in Mexico’s labour supply as migrants return but may be avoided until greater clarity emerges on prospects for US tariffs and how Mexico may retaliate.

The Good News/Bad News Angle on US Growth Continues

US Q3 GDP got revised up three-tenths to 3.1% q/q SAAR. The drivers were higher contributions from consumption (3.7% q/q SAAR instead of 3.5%) as shown in chart 6, and slightly less of a drag from inventories and net exports as the positive contribution from gross exports was revised up. Investment figures were left intact. This is a good news-bad news story. Stronger than previously reported growth is great. But it means more capacity pressures and hence even less evidence that the US is even beginning to take a step along the path toward creating disinflationary slack that would embolden the Fed to cut. Chart 7 shows the strength of the domestic economy more clearly.

The Philly Fed measure tanked, -16.4 from -5.5, signallign weaker manufacturing in the Philly Fed district. It’s a highly volatile gauge.

Initial jobless claims stabilized at 220k, down from 242k. The spike is 'ovah', ha. Or not.

Existing home sales during November are expected to rise in light of what we know about pending home sales that typically close within 30-90 days after inking the contracts (10amET).

Canada’s Lagging Payrolls

Canada’s SEPH payrolls report included some mixed nuggets. The -21k lost payroll jobs isn’t great, but it’s a wonky and severely lagging series that over time tends to converge with LFS jobs but excludes self-employment which is huge in Canada.

On the flip side, average weekly earnings were up 0.5% m/m SA, or 6.5% m/m SAAR and 5.3% y/y. This measure of wage pressures intensified (chart 8).