Markets on hold: Rising yields ahead of a crucial Fed decision

Markets

The link between intraday price developments and data/eco headlines on Friday was again thin. Both for US and EMU yields ‘north’ still was the by default market choice. EMU eco data mostly were tier. US data were outdated (September spending and income data annex price deflators) or mixed (U. of Michigan consumer confidence, assessment on future development better than expected, but with easing inflation expectations). It didn’t provide any clear guidance as markets were counting down to Wednesday’s Fed policy decision. US yields closed the session 3.7-3.9 bps higher across the curve. It pushed yields again further off recent support levels. The 2-y yield (3.56%) holding in the middle of the 3.45/3.65 range suggests some rather neutral positioning going into the Fed decision. Despite expectations for further Fed easing, longer maturities in the US recently didn’t escape the trend of higher LT risk premia globally. EMU (swap) yields similarly added 3-4+ bps. The spread of France (against Bunds) eased slightly (-3 bpn) as Parliament took a small step in the way to reach a budget agreement by approving the income part of the social security budget. Without providing a clear driver for FX trading though. EUR/USD closed the session little changed near 1.164. Idem for DXY (close near 99). Equities in the US and European both closed with limited gains. (S&P 500 +0.19%).

At the start of the week, markets are still mainly looking forward to Wednesday’s Fed meeting. The Bank of Canada and the National Bank of Brazil decide on policy at the same day (both expected unchanged). The Swiss national bank policy announcement is on Friday. The Fed is widely expected to continue with a next precautionary 25 bps rate cut to balance against the risk of further labour market weakness as policy is still mildly restrictive. Looking forward, just as is the case for markets, FOMC members didn’t receive much hard data evidence to change their highly divided dots guidance. A new ‘hawkish’ rate cut in this respect shouldn’t be a surprise for markets. Real guidance whether there is already room for additional easing early next year will have to come for the labour market and CPI updates that will be released in the two weeks after the Fed decision. We see downside risks, but probably its too early for the market to already anticipate on such a scenario this week. On the EMU side of the equation, ECB’s Schabel at least didn’t make any efforts to arrest recent rebound in EMU yields as she indicated she is comfortable with the markets positioning that the next ECB move will be a rate increase. EMU yields and the euro are again heading north this morning. At 1.1664, EUR/USD is nearing last week’s top off 1.1682,with next minor resistance at 1.1728 (Oct 17 top). However, a sustained break probably isn’t evident until markets have made up their mind on the timing of the post-December Fed trajectory.

News and views

Fitch kept Hungary’s BBB credit rating but cut the outlook to negative from stable. The outlook’s revision resulted from a significant worsening in public finances that reflected measures taken into the 2026 parliamentary elections. It forecasts the deficit to widen from 5% this year to 5.6% in 2026, well above the June projections, and does not rule out further “ad-hoc fiscal easing measures in early 2026”. Debt would rise to 74.6% of GDP by end-2027 from 73.5% in 2024. Fitch noted Hungary’s strong structural indicators relative to peers (including GDP per capita) that warrant its BBB rating are balanced amongst others against high public debt, unorthodox economic policies, high exposure to external shocks including potential supply disruptions in Russian energy. Economic growth is expected to have flatlined on average in 2023-2025 with a pickup seen next year (2.3%). Inflation of 4.5%-3.5%-4.4% implies (risks of) the central bank overshooting its target. Fitch anticipates the policy rate at 6% from 6.5% currently by end-2026.

S&P Global UK’s November report on jobs indicated a further downturn in recruitment activity. Permanent placements fell again, although at an easier rate for a fifth consecutive month. Temp billings were down modestly. Permanent salaries increased but with staff availability rising steeply and competition for positions fierce, it was at a historically subdued degree. The survey takers noted the environment remains a complex one, adding that pre-Budget nerves had knocked temporary recruitment back after growing in October. The absence of big tax hikes was a relief, they said, but is unlikely to jumpstart a labour market that does show signs of stabilizing.

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