Bonds chop in risk off trade ahead of FOMC - Newsquawk US Market Wrap

• SNAPSHOT: Equities down, Treasuries flat, Crude down, Dollar flat/up.
• REAR VIEW: Soft US ex-autos retail sales print, but headline above expected & control in line; IP surprisingly declines; NAHB underwhelms; Below average US 20yr auction; Hot UK wage data; Mixed German data; China to reportedly maintain 5% growth target for 2025, raise budget deficit target; PFE issued 2024/25 guidance; TSLA PT raised at Mizuho
• COMING UP: Data: UK CPI, EZ CPI (Final), US Building Permits Events: Fed Policy Announcement Speakers: ECB’s Lane; Fed Chair Powell Supply: Australia Earnings: General Mills, Jabil, Micron, Lennar

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MARKET WRAP

It was a risk-off session on Tuesday with underperformance in the Russell and Dow vs S&P and Nasdaq. Sectors were predominantly lower, led by losses in Industrials, Energy and Financials while Consumer Discretionary, Consumer Staples and Healthcare were the relative outperformers. Meanwhile, Treasuries were ultimately flat with downside seen early on with T-Notes tracking Gilts lower after hotter-than-expected UK wages data. However, a soft US ex-autos print within US retail sales result (headline beat, control in line) saw T-Notes catch a bid, which extended after soft industrial production data. In FX, the dollar index continued to hover around 107 with eyes turning to the FOMC rate decision on Wednesday. Elsewhere, the Yen and Swissy were bid on the risk off trade while GBP was buoyed by the aforementioned wages data ahead of UK inflation on Wednesday and the BoE on Thursday. Antipodes and the Loonie lagged FX peers during the risk-off trade. Crude prices were also weighed on amid the poor sentiment.

Separately, other updates to be aware of include, Reuters reporting via sources that China is to maintain its growth target of "around 5%" for 2025, and it is targeting a budget deficit of 4% in 2025 (vs 3% initially), adding that more stimulus will be funded through issuing off-budget special bonds. The German Ifo business climate missed expectations, but ZEW economic sentiment beat, while the German Finance Agency announced it intends to issue around EUR 380bln via Federal debt sales in 2025, which is -13% Y/Y. The US 20yr bond auction was soft vs. averages but an improvement from the prior. Meanwhile, US Congressional Leaders struck a bipartisan deal to push the government funding deadline to March 14th, via Politico. Canadian inflation data saw the average of the BoC core measures slip marginally to 2.43% from the upwardly revised 2.5% in October. Elsewhere, Pfizer (PFE) was bid after issuing 2025 guidance, while ADRs of Nissan (NSANY) and Honda (HMC) were choppy on reports the two are to merge. Meanwhile, China is reportedly poised to investigate more US tech deals after the NVDA probe, according to The Information.

US

FOMC PREVIEW: The Federal Reserve will release its latest rate decision on Wednesday 18th December at 19:00GMT/14:00EST, alongside the updated Summary of Economic Projections (SEPs). Overall, the Fed is widely expected to lower the Federal Funds Rate target by 25bps to 4.25-4.50%, with the latest Reuters poll showing 93 out of 103 economists expecting this as the outcome. Following the recent commentary and economic data, it is now almost a certainty that the central bank will cut by 25bps, highlighted by money market pricing moving more dovish and pricing in a 96% probability of such an outcome. Regarding the statement and press conference, Goldman Sachs says the focus will be on the relative emphasis the Fed puts on language around either slowing the pace of rate cuts, or that decisions remain on a meeting-by-meeting and data-dependent basis. Nonetheless, GS expects to hear both messages, including an addition to the statement that nods toward a slower pace. Ahead, analysts and market pricing expect the central bank to pause on rates in January, amid some concerns about rising inflation risks, with inflationary pressures potentially set to rise due to President-elect Trump's proposed tariffs and tax cuts. Attention will then turn to Fed Chair Powell at 19:30GMT/14:30EST to explain the Fed's decisions with any clues for guidance ahead but he will not want to front-run any fiscal policy measures from US President-elect Trump. To download the full report, please click here.

RETAIL SALES: US retail sales for November rose 0.7%, above the expected 0.5%, and lifting from the prior, revised higher, 0.5%. Retail sales ex-autos came in beneath forecasts at 0.2% (exp. 0.4%, prev. 0.2%), and ex-gas/autos was 0.2% (prev. 0.2%). Retail control printed 0.4%, as expected, lifting from October’s -0.1%. The solid headline was led by vehicle sales (+2.6% M/M) but still showed signs of broad-based strength, with control group sales increasing at a healthy pace too. As such, Capital Economics thinks this suggests Q4 consumption growth will be close to 3% annualised. In addition, the 0.4% M/M rise in building materials sales may reflect some rebuilding following the hurricanes, although department store sales fell 0.6% M/M despite Black Friday, with CapEco suggesting it signalling the structural shift among consumers towards online retail, which lifted by 1.8%. For the record, the data will have little to no bearing on the Federal Reserve’s rate decision on Wednesday whereby they are widely expected to cut rates by 25bps. Lastly, the updated Atlanta FedGDP Now estimate was released following the data, and also IP, whereby it revised down its Q4 estimate to 3.1% from 3.3%.

INDUSTRIAL PRODUCTION/MANUFACTURING OUTPUT: Industrial Production for November declined by 0.1%, slowing from the prior revised decline of -0.4% (initially -0.3%), but beneath expectations for a 0.3% rise. Manufacturing output rose 0.2%, rising from the prior -0.7% (initially -0.5%), but beneath the 0.5% forecast and it was boosted by a 3.5% increase in the index for motor vehicles and parts. Capacity utilization fell to 76.8% from 77.0% (initially 77.1%), and beneath the 77.3% forecast and also to a rate that is 2.9ppts below its long-run (1972–2023) average. Looking into the report, the output of consumer goods was unchanged, the index for durable consumer goods rose, while output in every category of nondurable consumer goods declined. The index for business equipment gained 1.2%, Construction supplies and business supplies posted declines of 0.2% and 0.7%, respectively. The index for materials decreased 0.3%, as a 1% decline in the output of energy materials more than offset a 0.2% gain in the output of non-energy materials. Oxford Economics summarise that "The latest numbers will lead to a downward revision to the near-term forecast for industrial production". The desk still expects a rebound next year thanks to reduced policy uncertainty and interest-rate relief, while noting that secular growth in certain pockets of manufacturing will continue.

NAHB: The NAHB housing market index for December remained unchanged at 46.0, although expectations were for a slight tick higher to 47.0. Further within the report, current sales conditions held steady at 48, sales expectations in the next six months increased three points to 66, the highest level since April 2022, as builders anticipate regulatory relief under a Republican-controlled government. Traffic of prospective buyers printed 31 (prev. 32). The latest HMI survey also revealed that 31% of builders cut home prices in December, unchanged from November. Meanwhile, the average price reduction was 5% and the use of sales incentives was 60%, both unchanged from November. Overall, Oxford Economics are less upbeat about housing than builders for 2025, and given their outlook for only slightly lower mortgage rates next year, Oxford expects just a modest improvement in new home sales and housing starts.

FIXED INCOME

T-NOTE FUTURES (H5) SETTLED 1+ TICKS HIGHER AT 109-29

T-Notes pare earlier downside on US data ahead of the FOMC. At settlement, 2s -0.6bps at 4.243%, 3s -0.4bps at 4.220%, 5s +0.1bps at 4.254%, 7s -0.6bps at 4.320%, 10s -0.8bps at 4.391%, 20s -1.3bps at 4.670%, 30s -2.6bps at 4.584%.

INFLATION BREAKEVENS: 5yr BEI -1.9bps at 2.379%, 10yr BEI -1.5bps at 2.310%, 30yr BEI -1.9bps at 2.275%.

THE DAY: T-Notes were ultimately little changed as morning weakness pared post-US data. Treasuries had been selling off overnight and into the European morning in wake of hot UK wages data, whereby T-Notes bottomed out at 109-17 just ahead of the US retail sales metrics. The figures were ultimately mixed with the headline beating expectations but largely supported by vehicle sales as the ex-autos print was beneath consensus. The retail control metric, which helps gauge consumer spending of GDP, was in line with expectations as it rose from the prior -0.1%. The miss in the ex-autos metric sparked a bid in T-Notes which later extended after disappointing IP and Manufacturing output numbers, which missed expectations and saw revisions lower. T-Notes then went on to break above the earlier peaks, hitting 109-31+, finding resistance around the 110-00 area. Attention turned to the 20yr bond auction, which ultimately was weaker than averages but not as weak as the prior (more below). Attention now turns to the FOMC rate decision and updated summary of economic projections on Wednesday.

20YR: The US Treasury sold USD 13bln of 20yr bonds at a high yield of 4.686%, tailing the when issued by 1.5bps, a smaller tail than the 3.0bps seen in the November offering but larger than the 0.6bps six auction average. Similarly, the B/C ratio of 2.50x was above the prior, but beneath the six auction averages - showing the auction had a better reception this time round, but still not as good as recent averages. The breakdown saw improvement in direct demand at 20.1% (prev. 7.9%, average 15.3%), but indirect demand fell to 62% (prev. 69.5%, average 71.4%), leaving dealers with an above average 17.9%, but beneath the prior 22.6%.

THIS WEEK SUPPLY: US to sell USD 22bln of reopened 5yr TIPS on Dec. 19th; all to settle on December 31st.

STIRS:

• Market Implied Fed Rate Cut Pricing: December 24bps (prev. 24bps), January 28bps (prev. 28bps), March 41bps (prev. 42bps).
• NY Fed RRP op demand at USD 118bln (prev. 111bln) across 42 counterparties (prev. 47).
• SOFR at 4.65% (prev. 4.60%), volumes at USD 2.360tln (prev. 2.255tln).
• EFFR at 4.58% (prev. 4.58%), volumes at USD 99bln (prev. 102bln).
• US sold USD 65bln of 42-day CMBs at 4.270%, covered 2.59x.
• US to sell USD 80bln 4-week bills and USD 75bln of 8-wk bills on December 19th and to sell USD 64bln 17-wk bills on December 18th; all to settle on December 24th.

CRUDE

WTI (G5) SETTLES USD 0.64 LOWER AT 69.65/BBL; BRENT (G5) SETTLES USD 0.72 LOWER AT 73.19/BBL

The crude complex was lower on Tuesday and was seemingly weighed on by the initial broader risk-off sentiment. Overnight benchmarks were largely sideways before WTI and Brent saw selling pressure through the European morning to hit lows of USD 68.81/bbl and 72.48/bbl, respectively, albeit on a lack of fresh fundamental drivers but perhaps on the aforementioned risk-off tone. Thereafter, as Europe left for the day WTI and Brent climbed off lows, although seeing little reaction on US data, but could not make their way back into positive territory. In terms of newsflow, Russian lieutenant general Kirillov and his associate were killed in an explosion in Moscow, which Ukraine's security service later took responsibility for, according to BBC. Separately, Reuters sources reported that a Gaza ceasefire deal is expected to be signed in the coming days and Israeli PM Netanyahu is on his way to Cairo, but this was later refuted by Axios’ Ravid citing the PM office who said he is not on his way to Cairo, but on the way to Syria. Looking ahead, private inventory data is due after-hours whereby current expectations are (bbls): Crude -1.6mln, Distillate +0.7mln, Gasoline +2.1mln.

EQUITIES

• CLOSES: SPX -0.39% at 6,051, NDX -0.43% at 22,001, DJI -0.61% at 43,450, RUT -1.18% at 2,334.
• SECTORS: Consumer Discretionary +0.28%, Health -0.05%, Consumer Staples -0.12%, Utilities -0.38%, Technology -0.40%, Materials -0.48%, Real Estate -0.53%, Communication Services -0.60%, Financials -0.69%, Energy -0.76%, Industrials -0.90%.
• EUROPEAN CLOSES: FTSE 100 -0.81% at 8,195, CAC 40 +0.12% at 7,366, IBEX 35 -1.62% at 11,588, PSI -0.80% at 6,312, FTSE MIB -1.22% at 34,315, DAX -0.30% at 20,254, Euro Stoxx 50 -0.13% at 4,940, SMI +0.28% at 11,735.

STOCK SPECIFICS:

• eBay (EBAY) board authorised an additional USD 3bln for its stock repurchase programme on December 12th; the programme has no expiration date and adds to the previously authorised amounts.
• Pfizer (PFE) reaffirmed FY24 guidance and provided FY25 guidance. FY25 adj. EPS view 2.80-3.00 (exp. 2.88), revenue 61-64bln (exp. 63.2bln). Expects an additional 500mln in savings in 2025 from ongoing cost realignment programme.
• China reportedly poised to investigate more US tech deals after the Nvidia (NVDA) probe, via The Information.
• Arm Holdings (ARM) and Qualcomm (QCOM) are embroiled in a legal dispute before a Delaware jury, centred on Qualcomm’s 2021 acquisition of Nuvia and a licensing agreement for Arm’s technology.
• Teva (TEVA) and Sanofi (SNY) announced its Phase 2b RELIEVE study met primary endpoints in patients with ulcerative colitis and Crohn's Disease.
• Waste Management (WM) raised quarterly dividend 10% to USD 0.825/shr.
• Pentair (PNR) lifted quarterly dividend 9% to USD 0.25/shr.
• Pulte Family Office is calling upon Virtu Financial (VIRT) to sell itself to either a third-party PE firm or to another public Co.
• Tesla (TSLA) was upgraded at Mizuho to ‘Outperform’ from ‘Neutral’; said it expects Tesla to be a beneficiary of President-elect Trump’s anticipated regulatory changes, such as those about autonomous driving.
• CrowdStrike (CRWD) moves to dismiss Delta Air Lines (DAL) suit, citing contract terms, according to CNBC.
• Verizon (VZ) collaborates with Nvidia (NVDA) to power AI workloads on 5G private networks with mobile edge compute.

US FX WRAP

The Dollar saw marginal gains on Tuesday, although barely flinched to US retail sales data as participants await the FOMC rate decision, updated SEP’s and Chair Powell's presser on Wednesday (Newsquawk preview available here). Recapping US data, retail sales surpassed expectations, although the ex-autos metric disappointed, and control came in as expected. Industrial production metrics underwhelmed, while NAHB was unchanged M/M at 46.0 but light of the 47.0 consensus. On government funding, Politico reported that Congressional leaders have struck a bipartisan deal to push the Government funding deadline to March 14th and deliver more than USD 100bln in emergency disaster aid. Nonetheless, it was a pretty lacklustre day as anticipation builds for the Fed on Wednesday.

Safe-haven FX, JPY and CHF, were two of the best performers against the Greenback as they benefited from the broader risk-off sentiment, as opposed to anything currency-related. Meanwhile, GBP was the only other G10 to see gains and caught a bid on the back of a hot set of UK wage data. Overall, it was a hawkish set of data which cemented the view that the BoE will not be easing on Thursday and saw money markets price in 60bps of cuts by end-2025, vs. 69bps pre-data. The risk events come think and fast for Sterling watchers, highlighted by CPI on Wednesday ahead of BoE on Thursday. Cable saw a high of 1.2728 against an earlier low of 1.2667.

Activity currencies, AUD, CAD, and NZD, all saw losses and were hit by the downbeat risk tone. Newsflow was sparse for the Antipodeans, while Canadian CPI was slightly cooler Y/Y, but Median and Trim came in hot M/M; the average of the BoC eyed measures ticked down to 2.43% from a revised up 2.50%. Elsewhere in North America focus continues to reside around the future of PM Trudeau’s tenure, given the resignation of the finance minister on Tuesday. AUD/USD and NZD/USD traded between 0.6333-77 and 0.5751-93, respectively.

EUR was weaker, albeit not to the extent of the above currencies after mixed German data. Ifo figures were mixed, with the Business Climate and Expectations components printing below expectations whilst the Current conditions improved a touch. Overall, the figures only further confirmed the dire situation in the region. German ZEW was a little more optimistic. As is the norm, a couple of ECB speakers hit the wires, namely Rehn and Kazimir, although little new was offered.

EMFX was mixed. BRL managed to pare some of its recent notable weakness as it announced further spot Dollar auctions. Out of the House, Estadao reported that Lower House Speaker Lira said tax reform and part of the fiscal package will be voted on today, the other two proposals from the spending cut package will be voted on tomorrow. In CEE, NBH held rates steady, as anticipated, but it was not a unanimous decision as one proposed a 25bps cut. Post-rate decision Virag stated that inflation is to return to target only in 2026 and disinflation to recommence in Q1-2025. In China, Reuters sources reported that China is to maintain growth target of "around 5%" for 2025 and is to target budget deficit of 4% in 2025 (vs 3% initially). Lastly, Mexican retail sales surprisingly declined in October M/M, but the Y/Y figure did not see as great a decline as the St. forecasted.