Pressure finally off the Fed

Core bond trading remained confined to tight ranges yesterday, despite several potential triggers. Initial European stock market weakness (eventually erased during US dealings) was bluntly ignored, as was a strong improvement in the December German ZEW expectations component. That component is regarded as a leading indicator for German growth and suggests that the stabilization in the likes of e.g. PMIs might flip in recovery early 2020. Core bonds marginally grinded lower around the start of US trading as DJ reported on plans to delay Sunday's scheduled US tariff increases on Chinese goods. US government officials later all denied such plans. US President Trump meets tomorrow with his trade committee. The US $24bn 10-yr Note auction was plain vanilla. The US yield curve bear steepened with yields rising by 3.8 bps (2-yr) to 1.1 bp (30-yr). German yields added 0.1 bp (2-yr) to 1.2 bps (10-yr). Greece, Ireland (both -3 bps) and Italy (-5 bps) outperformed on EMU bond markets.Most Asian stock markets eke out gains this morning with Japan slightly underperforming. The German Bund and US Note future are going nowhere. UK Gilts could outperform after the opening following the latest YouGov poll (see below), but we don't expect spill-over effects to other bond markets.Today's eco calendar contains November US CPI inflation and the final FOMC meeting of the year. Core CPI is expected to remain above the Fed's 2% target (2.3% Y/Y), stressing the larger than usual gap between this price metric and the Fed's favorite PCE deflators (core running at 1.6% Y/Y). The Fed is forecast to keep policy rates unchanged tonight following three consecutive 25 bps rate cuts. Fed Chair Powell is happy with the mid-cycle policy rate adjustments and will stay sidelined for coming months. The recent data strength, mainly on the domestic (labor) market, supports his case. We think the fresh Fed dot plot will point to a flat policy rate throughout 2020, with first normalization hints remaining in 2021. Against the background of the Fed's ongoing policy review, Powell might stress that the central bank will allow for a period of inflation overshooting to compensate before taking fresh action. Finally, the Fed might take action on a more permanent solution to stem strains in the US money market. Overall, Powell will probably try to stem whatever expectations around 2020 policy. The hurdle to hike rates will remain much higher than the one to cut in case of (unexpected) fresh eco data weakness. We don't expect any strong directional action in the US Note future. The German 10-yr yield in October broke above - 0.41% resistance, improving the technical picture. Targets of this double bottom formation are -0.25% and -0.13%. The 38% retracement level of the Oct-Aug decline stands at -0.24%. The US 10-yr yield trades in the upper half of the 1.43%-1.94% sideways trading channel. First tests to take out 1.94% failed. First support kicks in around 1.7%. We expect more sideways action.

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