<Today's Opening Must-Knows_12/13 Bloomberg>
1) US November PPI Inflation Accelerates
The US Producer Price Index (PPI) rose faster than expected, but the surge was mainly due to a sharp increase in egg prices. Core service prices remained largely unchanged or fell, suggesting no significant issues with underlying inflation indicators that the Fed is monitoring. The final demand-based November PPI inflation rate was 0.4% month-on-month, exceeding market expectations of 0.2% and the October revised figure of 0.3%. Egg prices rose by a staggering 55% month-on-month. Bank of America economists said that while recent inflation progress has stalled, they are more confident about the possibility of a rate cut next week. However, they pointed out that there are upside risks to future inflation outlook.
2) Betting on Neutral Interest Rates Fuels Bond Market Volatility
With uncertainty surrounding the precise level of the "neutral interest rate," Wall Street's bond desks are acting as if everyone has an opinion on it. This implies that investors have widely divergent views on whether the Fed's easing cycle, aimed at lowering the benchmark interest rate to neutral, is just beginning or nearing its end after only three months. As a result, recent bond yield movements have become more volatile. This volatility intensifies when economic data points to either stronger-than-expected or weaker-than-expected recovery. For instance, on days when the monthly employment report is released, the yield on two-year US Treasury notes has reacted six times more strongly than before 2022. Greg Peters of PGIM Fixed Income described this as "a complete state of schizophrenia" and diagnosed the volatility as "too extreme."
3) ECB Cuts Rates Three Times in a Row
The European Central Bank (ECB) has implemented three consecutive interest rate cuts and signaled further reductions. Sources indicate that ECB policymakers are considering a possible 25bp cut in March, following a 25bp cut in January. A 50bp cut is being kept as a reserve option. The ECB removed the phrase "sufficiently restrictive" from its policy statement, which had previously committed to maintaining policies at a restrictive level for as long as necessary. Following the policy announcement, the euro-dollar exchange rate briefly fell by 0.3%. Investors focused on the removal of the "restrictive" language. Bloomberg Economics stated that "the ECB's move towards a neutral policy stance in the coming year suggests a slowdown in the pace of cuts after the first quarter." However, they added that "if inflation continues to slow and economic threats persist, there is a risk of two consecutive 2% cuts."
4) Switzerland Surprises with 50bp Rate Cut to Counter Currency Strength
The Swiss National Bank (SNB) implemented a larger-than-expected interest rate cut of 50bp. As a result, the Swiss franc fell by 0.6% against the euro, moving further away from its near decade-high reached last month. SNB President Martin Schlegel stated that "further monetary policy easing will require interest rate cuts as the primary tool" and added that "the SNB is willing to intervene in foreign exchange markets if necessary." This big cut marks Schlegel's first interest rate decision since taking office in October and the largest reduction in this cycle. It appears to be an attempt to curb speculative investment flows into the traditionally safe-haven Swiss franc amid geopolitical tensions. The policy rate now stands at 0.5%, and two further 25bp cuts would bring it to zero. When asked about the depth of policy measures, Schlegel replied that "there is still ammunition left" but also suggested that this decision reduces the likelihood of negative interest rates.
5) China Promises Fiscal Deficit Expansion and Rate Cuts Next Year
In response to the Trump administration's second term, China has prioritized "robust consumption growth" as its key policy objective for next year and plans to increase its fiscal deficit ratio by 2025. This signals further economic stimulus measures. According to reports, the Chinese leadership held a meeting of the Central Economic Work Conference chaired by President Xi Jinping and agreed to lower policy interest rates and reserve requirement ratios (RRR) at "an appropriate time." CCTV also reported that China will increase the issuance of ultra-long special government bonds and local government special bonds, which are crucial funding sources for infrastructure investment and other public spending. ANZ stated that "all policy measures align with our expectations" but added that "the key question now is the scale." Societe Generale noted that while specific details on the size of the stimulus package are lacking, "the direction of policy is correct" and "this demonstrates that policymakers are aware of the challenging economic situation."
(Source: Bloomberg News)
