The Next Fed Chair Becoming Ever More Certain
Samantha LuanThe Japanese-inspired core bond selloff eased yesterday. An unconvincing attempt to eke out a few more bps during European dealings was more or less killed off in the US session.
Markets
The Japanese-inspired core bond selloff eased yesterday. An unconvincing attempt to eke out a few more bps during European dealings was more or less killed off in the US session. Net daily changes for US Treasury yields eventually varied between -2.1 bps to +0.9 bps in technical trading. The German curve shifted similarly by shedding 1.4 bps at the front.
Even UK yields swapped earlier gains for minor declines across the curve. We wouldn't call it a day on the underlying forces though. Japanese yields this morning are again headed north with new highs for the (ultra) long maturities including the 30-year ahead of a closely watched auction tomorrow. News in any case was scarce yesterday and that seemed to suffice for riskier assets to recover some ground.
European and US equities inched 0.3-0.6% higher and crypto markets rebounded in a daily perspective after the violent selloff in recent weeks. The likes of Bitcoin extend gains to almost 94k, the strongest level since mid-November. The meeting between US envoy Witkoff and Russian president Putin and his entourage was called constructive by the Kremlin but no compromise was reached yet.
Sticking to event risks, French politics reared its head again with local newspaper Le Figaro reporting that Horizons won't back premier Lecornu's social security budget bill in the upcoming vote December 9. Being part of the coalition government, Horizons' lack of support is a reminder of how fragile and perhaps deceiving the current French calm is. OATs underperformed compared to European peers.
The euro ignores the matter for now. After an uninspiring session yesterday, EUR/USD is gently trending north this morning towards first resistance around 1.165-1.167 (short term highs). The trade-weighted dollar index depreciates back to the 99 area. The economic agenda has things in store that could spice up the session today. ECB president Lagarde appears before parliament. The ADP job report and services ISM are to further shape Fed expectations for December.
A rate cut is priced for 95% now. At this stage it would take blow-out numbers to flip the balance again by December 10. The next Fed chair meanwhile is becoming ever more certain. Hassett emerges as the frontrunner and favours a growth-supporting policy – perhaps the most compared to the other contestants. President Trump will officially announce Powell's successor early 2026.
Barring renewed risk aversion for whatever reason (France, public finances, equity valuation … ) we'd expect the dollar to remain on the backfoot. Were EUR/USD to take out the recent highs, the 1.1728 October top – 1.1747 61.2% recovery on the Sep-Nov decline emerges as the next reference. EUR/GBP's three-day win streak ran into resistance around 0.88. We hold our negative bias for sterling though and assume EUR/GBP's fundamental level to be 0.90+.
News & Views
Australian GDP growth slowed from an upwardly revised 0.7% Q/Q in in Q2 to 0.4% in Q3 (vs +0.7% consensus), the average quarterly growth pace since the end of the COVID-19 pandemic. Annual growth ticked up from 2% to 2.1%. Details showed final consumption rising by 0.6% Q/Q with both household (+0.5%) and government (+0.8%) spending contributing to growth. The household saving ratio rose from 6% in Q2 to 6.4% in Q3 with gross disposable income (+1.7%) rising faster than nominal household spending (+1.4%).
Total gross fixed capital formation rose a strong 3% Q/Q mainly due to a rebound in public investments (+3% Q/Q after -3.5% Q/Q in Q2). Net trade detracted 0.1 ppt from GDP growth, with imports up 1.5%, and exports up 1%. Today's numbers strengthen market belief that the next move by the Reserve Bank of Australia will a rate hike next year. AUD/USD builds on its recent comeback, eyeing first resistance around 0.66. The Aussie yield curve bear flattens this morning with yields rising by 5.8 bps (2-yr) to 3.2 bps (30-yr).
The EU agreed to gradually prohibit Russian LNG gas import by the end of 2026, one year faster than originally planned. Russia is still the second-largest LNG-provider (15% of total) to Europe after the US. The deadline now matches with the ban of seaborne deliveries which is already part of EU sanctions against Russia.
The EU's RePowerEU plan also targets halting to pipeline gas imports under long-term deals by the end of Q3 2027. The commission also plans to put forward a legislative proposal on phasing out Russian oil imports no later than the end of 2027.
