Economic Indicators - The Empire State manufacturing index unexpectedly fell to -3.9 in December, weaker than the expected 10.0 [3] - Economists forecast that Nonfarm Payrolls for November will be 51K, with October payroll data expected to show substantial losses in government jobs [6] - U.S. Average Hourly Earnings for November are expected to rise by +0.3% month-over-month and +3.6% year-over-year, compared to +0.2% month-over-month and +3.8% year-over-year in September [8] - Retail sales for October are anticipated to rise by +0.1% month-over-month, while core retail sales are expected to increase by +0.2% month-over-month [9] - The December S&P Global Manufacturing PMI is expected to be 52.0, and the S&P Global Services PMI is expected to be 54.0 [10] Stock Market Movements - Wall Street's main stock indexes ended in the red, with ServiceNow (NOW) plunging over -11% after news of a potential acquisition for $7 billion [4] - Cryptocurrency-exposed stocks fell as Bitcoin's price dropped more than -4%, with Riot Platforms (RIOT) down over -10% and Strategy (MSTR) down more than -8% [4] - iRobot (IRBT) plummeted over -72% after filing for Chapter 11 bankruptcy protection [4] - KLA Corp. (KLAC) rose more than +2% after being upgraded to Buy from Hold with a price target of $1,500 [4] Central Bank Insights - Fed Governor Stephen Miran indicated that the central bank's policy stance is overly restrictive for the economy, citing a benign inflation outlook [2] - New York Fed President John Williams stated that monetary policy is well-positioned for next year following a recent rate cut [2] - Boston Fed President Susan Collins supported the recent rate cut, noting that the balance of risks had shifted [2] European Market Developments - The Euro Stoxx 50 Index is down -0.14%, with defense stocks slipping due to progress in Ukraine peace talks [11] - Eurozone business activity growth slowed more than anticipated in December, with manufacturing contraction deepening [11] - The German December ZEW Economic Sentiment Index came in at 45.8, stronger than expectations of 38.4 [13] Asian Market Trends - China's Shanghai Composite Index closed down -1.11%, with economic indicators showing weakened momentum in November [15] - Japan's Nikkei 225 Stock Index closed sharply lower, with financial and energy stocks leading the declines [16] - The Japanese December au Jibun Bank Manufacturing PMI (preliminary) stood at 49.7, stronger than expectations of 49.0 [18]

In well-connected circles within China, the yuan’s persistent weakness is increasingly being seen as an obstacle to the country’s growth https://t.co/R4ovZPbpF1 ...

Core Points - The Federal Reserve has cut its benchmark interest rate by a quarter point for the third time since September, bringing it to approximately 3.6%, the lowest in nearly three years [1] - The Fed's dual goals in setting the benchmark rate are to manage prices and encourage full employment, which also influences consumer borrowing rates [2] - Inflation remains above the Fed's 2% target while the job market has cooled, complicating the Fed's decision-making process [3] Impact on Savings and Loans - Falling interest rates will continue to reduce yields on savings accounts, affecting the attractiveness of certificates of deposit and high-yield savings accounts [3] - Major banks like Ally, American Express, and Synchrony have already reduced their savings account rates since the last Fed cut, with top rates for high-yield savings accounts around 4.35% to 4.6% [4] - The national average for traditional savings accounts is currently 0.61%, indicating a significant difference compared to high-yield options [5] Mortgage Market Outlook - The mortgage market has already priced in the recent rate cut, with current mortgage rates at their lowest levels in over a year [5] - Mortgage rates are influenced by bond market expectations regarding the economy and inflation, typically following the 10-year Treasury yield [6] - There is optimism that homebuyers may see mortgage rates drop below 6.00% in the next year, potentially encouraging refinancing and new home purchases [7]

Core Viewpoint - The Federal Reserve is expected to cut interest rates by a quarter of a point, but the commentary following the cut is likely to be hawkish, indicating a divided stance within the committee [1][2]. Group 1: Interest Rate Expectations - Traders are pricing in a nearly 90% chance of a rate cut by the Federal Reserve [1]. - There is dissent among FOMC committee members, suggesting that while a cut may occur, future cuts are not guaranteed, particularly in January [2][3]. - The market's expectation for rate cuts next year may not be sustainable, as the recent rally has been driven by liquidity and the anticipation of easier monetary policy [4]. Group 2: Economic Indicators and Risks - There is no compelling reason for the Fed to cut rates if inflation remains around 3% and economic growth continues at its current pace, which could lead to higher interest rates [5]. - High valuation speculative investments, including cryptocurrencies and meme stocks, are heavily influenced by liquidity and expectations of a dovish Fed, posing risks to the broader market [6].

Summary of US Rates Outlook 2026 Fixed Income Industry Overview - The report focuses on the US rates market and the economic backdrop as it enters 2026, characterized by stalled inflation progress, uneven growth, and signs of labor market weakness [2][7][8]. Key Points and Arguments Economic Conditions - Economic growth in the US is more resilient than expected, potentially boosted by the One Big Beautiful Bill Act (OBBBA) and AI-driven capital expenditures [7]. - Consumer spending is mixed; higher-income consumers are driving spending while lower-income households face affordability challenges [7]. - Labor market indicators show a modest increase in unemployment and slowing nonfarm payroll growth, but the labor market has not collapsed [7][22]. Inflation and Interest Rates - Disinflation towards the Federal Open Market Committee's (FOMC) 2% inflation target has stalled, with both headline and core inflation measures remaining around 3% [7][29]. - The report forecasts 10-year Treasury yields at 4.30% by the end of 2026, higher than the Bloomberg consensus of 4.06% [2][8]. - The Fed is expected to maintain a neutral duration conviction, with potential for yields to rise due to dual-sided risks to policy [6][8]. Federal Reserve Dynamics - The conclusion of Jerome Powell's term as Fed Chair is a focal point, with potential personnel changes at the FOMC that could influence policy views [4][51]. - The Fed is likely to commence net asset purchases, particularly in T-bills, starting in Q1 2026 to mitigate funding pressures [4][65]. Treasury Supply and Demand - The Treasury's strategy of holding coupon issuance sizes steady is expected to continue through H1 2026, with maturity extension anticipated due to persistent deficit pressures [5][71]. - The report highlights that long-dated Treasuries may underperform swaps in the coming months due to supply and demand dynamics [5][89]. Yield Curve Scenarios - Four policy paths are outlined to frame potential rates outcomes: resilient growth with sticky inflation, inflation resurgence, moderate slowdown, and severe slowdown [3][35]. - The baseline scenario anticipates bear steepening of the yield curve, while an inflation resurgence could push 10-year yields to test 5% [10][39]. Risks and Market Positioning - The balance of risks skews towards further curve steepening, with optimal positioning suggested in the belly of the curve where structural risks are lower [3][46]. - The report cautions against long positions in the front-end due to negative carry and labor market concerns limiting hawkish repricing [9][46]. Additional Important Content - The report discusses the potential impact of the IEEPA tariff decision on fiscal deficits and the Treasury's reliance on T-bills for funding [81][84]. - It notes that the relative value of T-bills may decline as policy rates decrease, potentially shifting demand towards higher-returning risk assets [80][81]. - The report emphasizes the importance of monitoring repo market pressures and their implications for Treasury supply absorption [100]. This comprehensive analysis provides insights into the US rates outlook for 2026, highlighting key economic indicators, Federal Reserve dynamics, and potential investment strategies within the Treasury market.

Core Viewpoint - Oil prices are at two-week highs due to expectations of a Federal Reserve interest rate cut, which is anticipated to boost economic growth and energy demand, while also considering geopolitical risks affecting oil supplies from Russia and Venezuela [1] Group 1 - Oil prices are currently elevated, reaching levels not seen in two weeks [1] - Investors are anticipating a Federal Reserve interest rate cut this week [1] - The expected rate cut is likely to enhance economic growth and increase energy demand [1] Group 2 - Geopolitical risks are being monitored, particularly those that could impact oil supplies from Russia and Venezuela [1]

Core Insights - Consumer spending increased in September, indicating a likely strong economic growth in the third quarter [1] Group 1 - The rise in consumer spending is expected to be a precursor to robust economic growth [1]

Economic Growth and Market Impact - The overall economy is showing weakness with real GDP growth at 2% year-on-year, employment growth at 0.8%, retail sales up only 1.3%, and industrial production increasing by 0.9% [2][3] - There is a concern that economic conditions will continue to deteriorate into the new year, prompting the Federal Reserve to implement more aggressive policy measures to avoid recession and support recovery [3][4] Government Debt and Inflation - Governments worldwide, including the US, are expected to face increasing deficits due to aging populations and demands for more services, which will likely lead to inflation [5] - The issuance of government bonds will necessitate money printing, contributing to inflationary pressures in the economy [6]

Currency Stability - Bank Indonesia prioritizes currency stability to cushion the rupiah [1] Economic Strategy - Bank Indonesia aims to boost growth while maintaining currency stability [1] Market Sentiment - Investors are currently avoiding Indonesian assets [1]

US-India Trade Relations - US 50% tariffs have caused a decline in India's exports to the US for two straight months [1] - A trade deal with the US, India's biggest partner, is still pending, but a resolution may be near [4] - The US and India are close to a deal that benefits both parties [4] Indian Economy - Despite headwinds, the Indian economy is growing at over 8% [1] - India's economy is currently the fastest-growing among major economies [2] - The rupee is at record lows, impacting businesses and investors [1] Government Initiatives - Prime Minister Modi has implemented measures to counter high tariffs [2] - Tax breaks are being used to stimulate domestic spending [2] - New labor laws provide companies with greater flexibility in hiring and firing [2] - Modi has promised further reforms to improve the ease of doing business and attract foreign investment [3] International Relations - India is exploring opportunities globally, including easing tensions with China [3] - India has improved its relationship with Canada, signaling a willingness to do business [3]