Rise and shine everyone.

Happy Friday!

Yesterday, U.S. November PPI data presented a mixed picture. While there was notable softness in components feeding into the PCE price indexes, offsetting the upside seen in the prior day’s CPI report, food prices rose sharply by 3.1%, driving the headline number higher. This suggests that the Fed’s preferred inflation gauge, the PCE price index, is likely to show substantially lower levels than CPI. Additionally, weekly initial jobless claims climbed to a 10-week high, hinting at some labor market softening.

Despite these mixed signals, U.S. Treasury yields continued their upward drift with a steepening bias. The afternoon’s 30-year bond reopening was met with lackluster demand, keeping pressure on the back end of the yield curve. Market expectations for a 25bps rate cut at next week’s Fed meeting remained intact.

In Europe, the ECB announced a 25bps rate cut, dialing back from earlier discussions of a 50bps move. ECB staff projections pointed to a continued disinflationary trend, but growth forecasts were trimmed, emphasizing a cautious outlook. President Lagarde reiterated the ECB’s stance of not pre-committing to future policy paths. Sovereign yields across Europe rose, led by peripheral nations, while the euro weakened further, remaining below 1.05.

U.S. equities saw mixed performance with subdued trading volumes, and decliners outpaced advancers.

China’s Central Economic Work Conference (CEWC) concluded with vague promises of more stimulus, including plans to raise the fiscal deficit and cut the reserve requirement ratio (RRR). However, there were no specific timelines or quantitative targets, underwhelming market expectations. China’s record bond rally continued unabated, with 10-year yields plunging another 11bps to 1.775%, while 30-year yields hit a record low of 1.999%. Reports surfaced that the PBOC is considering a yuan depreciation to 7.50 against the U.S. dollar to counter potential trade shocks, drawing criticism from U.S. President-elect Trump’s trade advisor, Peter Navarro, over alleged currency manipulation. Equities reflected disappointment, with Hong Kong’s Hang Seng Index seeing its largest drop in three weeks and Shanghai markets also under pressure.

In Japan, the Nikkei failed to rally despite positive sentiment from the BOJ Tankan survey, which showed improvements in business confidence among large manufacturers and non-manufacturers. Meanwhile, USD/JPY breached the 153 level for the first time since late November, as Japanese 10-year yields dipped 2bps below 1.04%. Analysts are increasingly speculating that the Bank of Japan may pause rate hikes at next week’s policy meeting, adding to a weaker outlook for the yen.

South Korea’s political turmoil escalated as President Yoon faces growing calls for impeachment. The opposition party continues to gain defections from ruling-party members, inching closer to the 200 votes required for impeachment proceedings.

Australian 10-year yields jumped 17bps after stronger-than-expected labor market data yesterday, reinforcing expectations of a delayed rate cut by the Reserve Bank of Australia.

Political developments in Europe are intensifying. In France, President Macron missed the deadline to appoint a new prime minister, with an announcement now expected within hours. In Germany, Chancellor Scholz faces a confidence vote on December 16th ahead of snap elections in February 2025. Meanwhile, the UK economy contracted for a second consecutive month, weighing on sterling as rate cut expectations were pared for next week’s Bank of England meeting. Consensus remains for no change to the Bank Rate.

European markets traded modestly higher, driven by seasonal trends in the lead-up to Christmas. ECB officials reiterated expectations for further rate cuts in January and possibly March, citing weak economic growth and a persistent premium above the neutral rate.

Further U.S. developments saw reports that President-elect Trump’s advisors are considering significant cuts to bank regulatory agencies, potentially targeting the FDIC for elimination, according to the Wall Street Journal.

Chart of the Day

Traders are pricing in over 1% of cuts by the ECB for next year, given the growth trajectory. We expect 4 cuts or exactly 1%.

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)