Futures Tumble Ahead Of $4 Trillion Quad Witch, 2nd Biggest Ever OpEx

A miserable week for global stocks – which wrongfooted traders as risk first soared after a weaker than expected CPI only to tumble more than 7% just two days later – was set to end with even more selling on Friday after hawkish signals from the Fed and the ECB sparked worries about higher-for-longer interest rates leading to a possible recession: the latest economic data signaled a slowdown in US growth; data from France showed that it faces a greater recession risk, with its PMI falling to its lowest level in two years. Similarly UK companies are steeling themselves for an economic contraction, with both the manufacturing and service sectors experiencing a slump in the fourth quarter. Economists now see a 60% probability of recession in the US and an 80% chance in Europe. Equity analysts have cut 12-month earnings estimates for the regions to the lowest levels since March and July, respectively.

Not helping matters is today’s massive, $4 trillion quad-witching option expiration, which as we previewed yesterday threatens to become a liquidity-draining vortex just as CTAs are forced to dump stocks. potentially leading to outsized price moves. With the S&P 500 stuck for weeks within 100 points of peak gamma at the 4,000 strike, the sheer volume provides a positioning reset that could turbocharge market moves. Given the backdrop of hawkish central banks and slowing growth, worries are mounting the expiration will act as an air pocket.

Finally, bitcoin plunged back under $17K following news that accounting firm Mazars has paused work for all crypto clients globally, according to Binance, which was a customer of the auditing firm.

Between all that, it is perhaps surprising that S&P futures are down only 1% while contracts on the Nasdaq 100 dropped 0.62% by 6:56 a.m. in New York. The overnight selloff accelerated when Europe opened as European peripheral bonds blew out amid fears that the ECB’s aggressive tightening and QT will crash the European bond market. The dollar fluctuated and Treasuries dropped across the curve. Oil trimmed a weekly gain, sliding more than 2% amid renewed fears that the Fed is pushing the US into a crash-landing.

The S&P 500 index, already on track for its biggest annual slump since 2008, erased another $1.1 trillion in market capitalization in the past two days after both the Fed and the ECB took a more hawkish tone than expected about how much further rates will need to rise to tame inflation. The MSCI ACWI Index, the global equities gauge, headed for a 1.4% retreat this week.

“The worrying aspect for markets is the rate hike finishing lines are still unknown, and we have the two most dominant central banks in the world climbing the mountain into very restrictive territory,” Stephen Innes, managing partner at SPI Asset Management, wrote in a note. “Hiking interest rates into a dimming macro environment will undoubtedly trigger a recession. The question is just how profound.”

Ann-Katrin Petersen, senior investment strategist at BlackRock Investment Institute, said on Bloomberg Television that central banks were starting to acknowledge they will have to crush growth and will likely engineer recessions to tame inflation.

Among notable moves in US premarket trading, Adobe shares are up 3.7% in premarket trading, after the software company reported adjusted fourth-quarter earnings that beat expectations. Analysts said the report speaks to positive demand for creative design software despite economic uncertainties. Guardant Health shares sank after following disappointing results from a study of its blood test for detecting colorectal cancer in average-risk adults. Here are some other notable premarket movers:

• Amazon (AMZN US) falls 1.3% in premarket trading as JPMorgan cut its price target on the stock to $130 from $145 primarily due to AWS revenue deceleration and margin compression amid challenging macro conditions. .
• Meta Platforms (META US) rises 1.7% in premarket trading as JPMorgan raised the recommendation on the stock to overweight from neutral, citing increased cost discipline and a more favorable revenue outlook.
• Lanvin (LANV US) shares surge 56% in US premarket trading, following a volatile New York trading debut for the luxury group that saw its stock bounce between a gain of as much as 130% and declines of more than 50%.
• Stocks exposed to cryptocurencies drop in US premarket trading, as the price of Bitcoin fell below the $17,000 level after the Binance exchange said French auditor Mazars Group had paused work for all crypto clients globally. Hut 8 Mining (HUT CN) -4.6%, Block (SQ US) -2.1%.

“Recessionary fears raced back to the top of the agenda and any thoughts of a Santa rally have all but evaporated, with previous hopes of peak inflation and interest rates being soundly rejected,” said Richard Hunter, head of markets at Interactive Investor. “Comments from the ECB in particular that ‘we are not slowing down, we are in for the long game’ were in direct contrast to what markets had been pricing in over recent weeks.”

The slump this week also kept the S&P 500 from overcoming a technical downtrend in place since the start of the year, which has put an end to the past three bear-market rallies. The index didn’t convincingly break above its 200-day moving average, and is now close to testing its 50-day moving average, two other closely watched technical thresholds.

Europe’s equity benchmark fell for a third day, to a five-week low. European real-estate stocks were the biggest declinerss in Friday trading, with the subindex for the rate-sensitive sector the biggest laggard on the Stoxx 600, after the ECB on Thursday hit a more hawkish tone than expected alongside its latest rate decision. Stoxx 600 Real Estate sector declines 2.2% with the wider Stoxx 600 -1%. Telecoms and retailers also underperformed as all sectors fell barring autos, which are supported by recent data that showed auto sales in Europe rose for a fourth straight month. Here are some of the biggest European movers:

• Games Workshop shares jump as much as 15%, the most since September 2020, after the maker of the Warhammer series of games said it has reached an agreement in principle for Amazon to develop the company’s intellectual property into film and television productions.
• TeamViewer shares jump as much as 11% to touch their highest level in six months, after the remote- software provider said that it would eventually end its sponsorship partnership with Manchester United
• Hollywood Bowl rises as much as 6.8% to its highest level since June 8 after the bowling chain reported a strong set of FY22 results
• Suedzucker rises as much as 5.9%, adding to yesterday’s 3.3% gains, as Warburg says the German sugar producer’s latest financial update is a “blow-out guidance” for the coming fiscal year.
• OVS shares rise as much as 5.3% in Milan after 9-month results, with Banca Akros upgrading to buy from neutral, noting that the 4Q sales performance is “much higher of our expectation.”
• Rank falls as much as 9.1%, most in two months, after a trading update from the gambling firm.
• Wood shares fall as much as 8% as Barclays cuts the energy services firm to equal-weight
• National Express falls as much as 6.5% after being cut to hold from buy at Liberum, with the broker highlighting that growing headwinds point to a “deleveraging challenge,” according to note.
• Aalberts shares drop as much as 5.1% after the Dutch piping firm announced Wim Pelsma has notified its supervisory board that he wishes to step down as chief executive officer in the second half of 2023
• Tele2 shares drop as much as 4.7% after Redburn analyst Steve Malcolm cut the recommendation to sell from neutral, citing a potential 2023 guidance cut.

Asian equities fell Friday, extending the week’s decline, as hawkish views from global central banks offset the boost from easing delisting risk for Chinese stocks in the US. The MSCI Asia Pacific Index dropped as much as 0.9%, led by technology stocks. Shares in Japan and Taiwan were among the worst performers in the region; it posted the first weekly decline since October.  Chinese shares eked out small gains after US officials said they got sufficient access to audit documents on companies in China and Hong Kong, removing the acute threat of delisting faced by those firms. Still, caution remained as the US government added dozens of Chinese tech companies to its blacklist. A risk-off mood extended into Friday’s trading after the Fed’s hawkish tone from its latest rate decision was echoed by the European Central Bank, squashing hopes for a pivot in monetary policies next year.

“As premature pivot bets collide with overly-exuberant China re-opening bets,” expectations will need to be “tempered for a bumpy path out of Zero-Covid amid winter/Lunar New Year travel and lingering confidence deficit,” said Vishnu Varathan, head of economics & strategy at Mizuho Bank. The Asian stock benchmark has fallen 1.8% this week, set to snap a six-week gaining streak as traders took profit following a recent rally, and as China’s surging Covid cases and the Fed’s tightening weighed on sentiment.

Japanese stocks declined for a second day, leading losses in the region, as investors assess the possibility of further tightening by global central banks and weak US retail sales data.  The Topix Index fell 1.2% to close at 1,950.21, while the Nikkei declined 1.9% to 27,527.12. The MSCI Asia Pacific Index dropped 0.7%. Toyota Motor Corp. contributed the most to the Topix Index decline, decreasing 1.9%. Out of 2,163 stocks in the index, 343 rose and 1,737 fell, while 83 were unchanged. “Both the U.S. and Europe were down significantly yesterday, and Japanese stocks are also dragged by this,” said Ryuta Otsuka, a strategist at Toyo Securities Co

In FX, the greenback traded mixed versus its Group-of-10 peers; the yen was the best performer.

• The euro swung between modest gains and losses against the US dollar. The euro’s volatility skew steepened with the currency failing to tackle spot offers around $1.0750 after the hawkish ECB decision and as profit-taking took over.
• The pound climbed and UK bonds fell, in line with bunds.
• Australian dollar reversed an intraday gain after iron ore fell on news that China would be centralizing purchases of the commodity.
• Kiwi rose as data showed non-resident bond holdings hit a four-year high.
• In rates, Treasury yields added up to 4bps led by the long end.

In rates, treasury futures drifted lower over Asia and early European session, following wider losses seen across core European rates after several ECB policy members reinforced the bank’s hawkish stance. US session light, with focus including manufacturing data and Fed’s Daly talking on inflation. US yields were cheaper by up to 5bp across long-end of the curve, with 2s10s and 5s30s spread steeper by 3bp and 1bp on the day; 10-year yields near cheapest levels of the session at around 3.49% with bunds, gilts lagging by additional 6bp and 7bp in the sector. The German curve added 10-12 bps while Italian yields rose by 15-23bps after money markets bet the ECB will lift the deposit rate as high as 3.36% after a barrage of hawkish comments from ECB policy makers.

In commodities, crude benchmarks posted losses in excess of 2.0%; though, WTI still has around USD 4.0/bbl of downside required to bring it back to the WTD low of USD 70.25/bbl which printed on Monday. French President Macron said EU energy policy is likely to be finalized during the meeting on Monday, while it was separately reported that the Czech PM said EU leaders agreed the gas price cap deal must be done by Monday at the energy ministers’ meeting, according to Reuters. Spot gold and silver are experiencing some marked divergence with the yellow metal essentially unchanged, while silver has slipped by around 2% to the mid-USD 22/oz region.

Looking to the day ahead now, and data releases include the global flash PMIs for December. Central bank speakers include the Fed’s Daly, and the ECB’s Rehn, Holzmann and Centeno. Finally, earnings releases include Accenture.

Market Snapshot

• S&P 500 futures down 1.1% to 3,854.25
• STOXX Europe 600 down 0.8% to 426.66
• MXAP down 0.7% to 156.22
• MXAPJ down 0.6% to 508.56
• Nikkei down 1.9% to 27,527.12
• Topix down 1.2% to 1,950.21
• Hang Seng Index up 0.4% to 19,450.67
• Shanghai Composite little changed at 3,167.86
• Sensex down 0.8% to 61,333.94
• Australia S&P/ASX 200 down 0.8% to 7,148.68
• Kospi little changed at 2,360.02
• German 10Y yield little changed at 2.20%
• Euro little changed at $1.0625
• Brent Futures down 1.9% to $79.66/bbl
• Brent Futures down 1.8% to $79.72/bbl
• Gold spot down 0.0% to $1,776.18
• U.S. Dollar Index little changed at 104.59

Top Overnight News from Bloomberg

• An estimated $4 trillion of options is expected to expire Friday in a monthly event that tends to add turbulence to the trading day. This time, with the S&P 500 stuck for weeks within 100 points of 4,000, the sheer volume provides a positioning reset that could turbocharge market moves
• The Fed’s quarterly projections showed officials now expect so-called core inflation — which excludes food and energy — to end this year around 4.8%, up from the 4.5% figure they forecast in September. Yet that number looks much too high to Wall Street economists
• The ECB is likely to raise interest rates by 50 basis points at its meetings in both February and March, Governing Council member Olli Rehn said
• The ECB will likely accelerate the pace at which it offloads government debt accumulated during past crises from July next year as part of its fight against soaring inflation, Governing Council member Francois Villeroy de Galhau said
• Markets have understood the hawkish message sent by ECB rate setters, Governing Council member Robert Holzmann tells reporters in Vienna
• ECB Governing Council member Madis Muller said interest rates will likely rise above levels anticipated by markets as the economic slowdown isn’t enough to curb inflation as needed
• Euro-zone composite PMI rose to 48.8 in December, from 47.8 in the prior month and versus an estimate 47.9
• Three senior Italian politicians criticized the ECB’s increase in borrowing costs, pointing to rising tensions between Giorgia Meloni’s government and Frankfurt officials
• UK Composite PMI was little changed at 49 in December, compared to last month’s reading of 48.2 and expectations for a drop to 48
• Britain is enduring the highest number of strikes since Margaret Thatcher was prime minister, according to estimates by a group of economists
• UK retail sales unexpectedly fell in November. The volume of goods sold in shops and online fell 0.4%, the Office for National Statistics said Friday. Sales excluding auto fuel fell 0.3%. Economists expected a 0.3% gain on both measures
• China’s abrupt ending of its Covid Zero restrictions have forced economists to make sharp revisions to their growth projections for this year and next. UBS Group AG and Australia & New Zealand Banking Group Ltd. were the latest to adjust forecasts on Friday, cutting estimates for this year to 2.7% as Covid infections spread rapidly. Predictions for next year were raised sharply to close to 5% or higher, on the expectation that consumer and business activity will recover as Covid infections subside

A more detailed look at global markets courtesy of Newsquawk

Asia-Pac stocks were pressured on spillover selling from global counterparts following the slew of central bank rate hikes and with markets also unnerved by a flurry of dismal US data releases. ASX 200 was lower with sentiment not helped by a deterioration in the latest Australian flash PMI data releases. Nikkei 225 underperformed after the ruling LDP tax panel agreed and provided details on the tax hike plan to boost the defence budget and with index-heavyweight Fast Retailing hit by the announcement of a 3-for-1 stock split. Hang Seng and Shanghai Comp lacked firm direction amid mixed headlines with some encouragement from reports related to US audits in which Chinese companies averted a delisting after the US was given full inspection access, while there was also a constructive tone in discussions between US Treasury Secretary Yellen and China’s Ambassador to the US in which they agreed to step up coordination on trade and policies.

Top Asian News

• China National Health Commission issued a plan to step up COVID control and prevention in rural areas where it will strengthen reserves of essential drugs and COVID home test kits. China will also accelerate COVID vaccination of the rural population, especially among the elderly and said that people returning to their hometowns in rural areas should monitor their health and reduce contact with the elderly at home, according to Reuters.
• China’s NDRC said the economy is facing more complex and grim external environments but added that the long-term positive trend hasn’t changed and it approved CNY 1.5tln of major projects as of end-November. NDRC said China’s economic growth is expected to continue picking up following the implementation of new COVID rules and that they will focus on stabilising growth, employment and prices, as well as speed up infrastructure project construction and expand effective investment, according to Reuters.
• China’s securities regulator said it welcomes the US PCAOB decision on auditing and will continue supervision work on auditing in the future, while it will create a more stable regulatory environment with the US, according to Reuters.
• China’s ambassador to the US met with US Treasury Secretary Yellen to discuss their views on global macroeconomic and financial developments, while it was reported that they agreed to step up coordination on trade and policies.
• Japan’s government is to implement defence tax hikes in stages over multiple years to secure more than JPY 1tln by fiscal 2027, while it is to adopt a new corporate surtax of 4.0%-4.5% and will introduce a surtax of 1% on incomes for the time being. Furthermore, it is to raise the tobacco tax in stages by JPY 3 a piece and said it will implement defence taxation at an appropriate time from 2024 onwards, according to a draft by the ruling LDP cited by Reuters.

European bourses remains on a downward trajectory as the post-ECB slump continues, Euro Stoxx 50 -1.0%. Sectors were initially mixed but are now all underwater with Real Estate lagging giving the detrimental rate environment. Stateside, US futures are pressured in-line with the above price action and ahead of a handful of Fed speakers, ES -1.1%.

Top European News

• UK Companies Brace for Recession as Manufacturing Slumps
• UK Dec. Flash Services PMI 50; Est 48.5
• Most Banks See More ECB Rate Hikes With Potentially Higher Peak
• Russian Missile Barrage Knocks Out Power to Ukrainian Cities
• UK Civil Aviation Regulator Raises Concerns With Wizz Air
• Bunzl Sinks as Barclays Cuts to Underweight, RS Group Upgraded

FX

• USD has whipsawed within a 104.20-73 range, well within yesterday’s bands, though an overall underlying bid has emerged, with the DXY climbing to incremental new peaks on multiple occasions.
• Though, this action is capped by marked JPY upside given its traditional haven allure and post-data; USD/JPY down to 136.83 at worst.
• GBP impaired further post-BoE dissent on the USD’s move and as the EUR proves comparably more resilient given the hawkish ECB; Cable to 1.2120 and EUR/USD holding above 1.06.
• Elsewhere, G10 peers are generally downbeat given the above narrative, though CAD has proven relatively resilient to the crude action.
• PBoC set USD/CNY mid-point at 6.9791 vs exp. 6.9844 (prev. 6.9343)

Fixed Income

• EGBs continue to slide. With Bunds lower by over 150 ticks and the associated 10yr yield above 2.2% post-ECB.
• Gilts are pressured in-turn, though to a slightly lesser extent given the BoE’s dovish dissenters.
• USTs are in the red, but with magnitudes much more contained and the curve steepening ahead of Fed speak and the region’s PMIs.

Commodities

• Currently, the crude benchmarks are posting losses in excess of 2.0%; though, WTI still has around USD 4.0/bbl of downside required to bring it back to the WTD low of USD 70.25/bbl which printed on Monday.
• Qatar Energy sells February Al-Shaheen crude at USD 1.30-1.50/bbl above Dubai quotes, according to sources.
• French President Macron said EU energy policy is likely to be finalised during the meeting on Monday, while it was separately reported that the Czech PM said EU leaders agreed the gas price cap deal must be done by Monday at the energy ministers’ meeting, according to Reuters.
• ICE warned it may pull the gas market from the EU over the Brussels price cap, according to FT.
• Currently, Dutch TTF Jan’23 is lower by around 8% on the session, though seemingly found a floor around EUR 120/MWh.
• Panama’s government ordered the suspension of operations at First Quantum Minerals‘ copper project.
• Spot gold and silver are experiencing some marked divergence with the yellow metal essentially unchanged, while silver has slipped by around 2% to the mid-USD 22/oz region

Central Banks

• ECB’s Villeroy says must not speculate on the number of interest rate rises, too early to talk about the terminal rate.
• ECB’s Muller says rates are likely to increase by more than the market expects. Cannot rely on an economic slowdown to tame inflation.
• ECB’s Rehn says rates need to rise significantly. Interest rates will still have to rise significantly to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target.
• ECB’s Holzmann says inflation still poses a challenge, does not want to say where the terminal rate is, the hawkish statement is equivalent to a 75bp hike.
• Bundesbank: German recession now expected in 2023, downturn not seen severe. Click here for more detail.

Geopolitics

• North Korean Leader Kim Jong Un guided a successful test of a ‘high-thrust solid-fuel motor’ at the satellite launching ground and the test was said to have provided a guarantee for the development of another new strategic weapon system, while Kim hopes the new-type strategic weapon would be made in the shortest span of time, according to KCNA.
• HKEX (388 HK) welcomed Asia’s first crypto assets ETFs after the listing of CSOP Bitcoin Futures ETF & CSOP Ether Futures ETF, according to Reuters.
• FTX is reportedly seeking permission to sell off LedgerX, Ember and its branches in Japan and Europe before they lose value and have their licences revoked, according to Cointelegraph.
• Kraken says “We are investigating reports from clients having difficulty connecting to the site and API as well as via mobile apps.”.
• Binance reports that Mazars is to pause work for crypto clients, via Bloomberg.

US Event Calendar

• 09:45: Dec. S&P Global US Composite PMI, est. 46.9, prior 46.4
• 09:45: Dec. S&P Global US Services PMI, est. 46.5, prior 46.2
• 09:45: Dec. S&P Global US Manufacturing PM, est. 47.8, prior 47.7

DB’s Jim Reid concludes the overnight wrap

At this age in life I generally have an idea of what I like and new experiences are rarer, for mostly good reasons. However, tomorrow I’ll attend my first ever artistic swimming (synchronised swimming in old parlance) Christmas performance. Maisie is the youngest in it but has taken to the sport very well in spite of her hip issues. I never thought in a million years I’d go to such an event but here goes.

Talking of year end performances, it would have been completely out of character for 2022 to go out with a whimper and with the last major act of the year, the ECB ensured that we didn’t. Following the hawkish message from the Fed, yesterday saw the ECB join in with a clear signal for markets to price in more aggressive rate hikes. Indeed, there could be no doubt about their message as they 1) pointed to further rate hikes ahead, 2) outlined their plans for quantitative tightening, and 3) upgraded their inflation forecasts significantly. Meanwhile, Bloomberg even reported afterwards that over a third of the Governing Council wanted a larger 75bps hike. That led to some massive market moves coming on the heels of the Fed, with yields on 2yr German debt (+22.1bps) seeing their largest daily increase since September 2008 if you use the generic 2yr series on Bloomberg and to the highest since that point too. And with the Fed and the ECB now pledging to take rates further into restrictive territory in 2023, risk assets took another major hit, with the S&P 500 (-2.49%) and the STOXX 600 (-2.85%) both seeing sizeable losses. The first punch from the Fed didn’t really land on markets but the second punch from the ECB did.

In terms of the details, the main headline was much as expected as they unveiled a 50bps rate hike, thus taking the deposit rate up to a post-GFC high of 2%. However, just about every other detail leant in a hawkish direction. First, there was the comment at the top of the ECB’s statement that rates would “still have to rise significantly”, even after the 250bps worth of hikes we’ve already had. Second, President Lagarde then followed that up in her press conference, saying that “we should expect to raise interest rates at a 50 basis-point pace for a period of time”, which dampened investor hopes that the ECB might downshift again to 25bps at the next meeting. And third, the staff inflation forecasts were much more hawkish than in September, with the 2023 projection upgraded to +6.3% (vs. +5.5% in September), 2024 at +3.4% (vs. +2.3% in September), and 2025 still above target as well at +2.3%.

Alongside those hawkish details, the ECB also outlined plans to begin quantitative tightening from March. They said that their Asset Purchase Programme portfolio would start declining by €15bn per month from March until the end of Q2 2023, and that afterwards the pace “will be determined over time.” The statement said we should get “the detailed parameters” for QT at the next meeting in February, and that by the end of 2023, they’d also review the “operational framework for steering short-term interest rates, which will provide information regarding the endpoint of the balance sheet normalisation process.”

Given the comments from Lagarde about further 50bp hikes ahead, investors moved to price in a more aggressive path of ECB rate hikes over the months ahead. For instance, if you look at overnight index swaps, the rate hike priced in for the next meeting in February moved up from +40.1bps the previous day to +58.1bps now, so fully pricing in another 50bp move. Our own European economists now think the terminal rate will be 3.25% rather than the 3% expected before the meeting. This was always the direction they saw the risks moving with Mark Wall now expecting hikes of 50bps in February, 50bps in March and 25bps in May. There is risk of another 50bps in May but Mark thinks the ECB growth forecast is too strong for H2 2023 and into 2024, and that an earlier start to QT and a rapid rate means he thinks they’ll step down at that point. See Mark’s team’s excellent review of a very important ECB meeting here.

Against the backdrop of mounting expectations of further ECB hikes, sovereign bonds saw a massive selloff across the Eurozone yesterday. For instance, yields on 10yr bunds (+14.0bps), OATs (+15.9bps) and BTPs (+28.9bps) all rose significantly after the policy decision was announced. Furthermore, there was a significant widening in peripheral spreads, with the gap between Italian and German 10yr yields moving back above 200bps for the first time in a month. In the meantime, the moves at the front-end of the curve were even more pronounced, with yields on 2yr German debt hitting 2.44% intraday, before closing at 2.39%, a post-2008 high.

With the two major DM central banks having taken a very hawkish stance over the last 48 hours, risk assets struggled yesterday as investors grappled with the prospect of further rate hikes into 2023. The S&P 500 (-2.49%) had its worst day in over a month, and Europe’s STOXX 600 (-2.85%) put in its worst day since May. Those losses were seen across the board, with just 32 companies in the S&P 500 moving higher on the day. We will see if now the big event risk days are out the way, whether the market just calms down massively into Xmas and we pick up the battle again next year.

Whilst the focus was understandably on the ECB yesterday, the Bank of England also announced their latest policy decision, where they confirmed that the Bank Rate would rise 50bps as expected, taking it up to a post-2008 high of 3.5%. Six of the nine members on the committee were in favour of the hike, but one preferred a larger 75bps move, and two others wanted no change at all. Looking forward, they echoed the other central banks in pointing to further hikes ahead, with a majority saying that if the economy evolved in line with their November projections, then “further increases in the Bank Rate might be required for a sustainable return of inflation to target.” Market pricing for the upcoming meetings saw little change following the decision, but gilts outperformed significantly, with 10yr yields down -6.9bps on the day.

Elsewhere in markets, yesterday brought a mixed bag of US data releases for investors to react to. On the plus side, the weekly initial jobless claims unexpectedly fell to 211k (vs. 232k expected) over the week ending December 10, and that’s one of the most timely indicators we get. However, the decline in November retail sales of -0.6% (vs. -0.2% expected) was faster than anticipated, whilst industrial production also contracted by -0.2% (vs. unch expected). Some of the surveys for December didn’t look too good either, with the Empire State manufacturing survey down to -11.2 (vs. -1.0 expected), and the Philadelphia Fed’s business outlook came in at -13.8 (vs. -10.0 expected).

One asset that didn’t follow the pattern elsewhere yesterday was Treasuries. In spite of the hawkish tone from Fed Chair Powell on Wednesday, they strongly outperformed their counterparts in Europe, with the 10yr yield down -3.1bps to 3.45%. So this was a strong day for the DB house view of bunds underperforming Treasuries. The 10yr UST move was driven by a -2.6bps decline in the 10yr inflation breakeven to 2.17%, which is just above its recent closing low in late-September of 2.1545%. If it breaches that point, then it would be at its lowest since February 2021, and demonstrates that for the time being, investors still have confidence that central bankers aren’t going to let longer-term inflation get out of control. Nevertheless, there’s still something of a divergence between the Fed’s dots from Wednesday and market pricing, with the Fed pointing to end-2023 rates at 5.1%, whereas futures are still only at 4.40%. Something will eventually have to give. Meanwhile, in Asia this morning, yields on 10yr USTs (+3.64 bps) slightly pulled back, trading at 3.48% as we go to print.

Asian stock markets are trading in negative territory for a second consecutive day on concerns that the hawkish stance of global central banks will push the economy into a recession. Across the region, the Nikkei (-1.74%) is leading losses with the Shanghai Composite (-0.25%), the CSI (-0.33%) and the KOSPI (-0.26%) all moving lower. Elsewhere, the Hang Seng (+0.09%) is fractionally higher in early trading. Outside of Asia, stock futures tied to the S&P 500 (-0.06%) and the NASDAQ 100 (-0.03%) are trading just below flat.

We had mixed data from Japan as manufacturing activity contracted at the fastest pace in more than two years in December with the au Jibun Bank flash manufacturing PMI falling further to 48.8 from a level of 49.0 in the previous month amid soft demand. At the same time, the au Jibun Bank flash services PMI rose to a seasonally adjusted 51.7 in December, from November’s final reading of 50.3 as the sector activity expanded on tourism reopening.

To the day ahead now, and data releases include the global flash PMIs for December. Central bank speakers include the Fed’s Daly, and the ECB’s Rehn, Holzmann and Centeno. Finally, earnings releases include Accenture.