Repricing continued in the rates markets this week as central bankers did little to talk rates back up. The market is currently pricing in the US short-term rates to fall below 4% by end of next year. In euro area, short-term rates are priced to approach the 2% mark late next year. Optimism about rate cuts arriving sooner rather than later has driven long-term rates lower and equities higher. The US 10y yield has fallen by more than 100bps from late October to below 4% and the S&P500 index is closing in on the all-time high levels. We agree that rate cuts loom in the horizon but consider market expectations on the pace too optimistic. We also highlight that recent easing in financial conditions poses an upside risk to inflation next year. In this week's meeting, the FOMC cut down its median forecast for core PCE in 2024 while also revising down the dots (now showing a total of 75bps cuts). After the meeting, we were happy to see our long-held call for the first Fed rate cut in March has now become market consensus. Yet, thereafter, we think the market is too aggressive in pricing the pace for cuts.  For the euro area, the market is fully pricing in the first rate cut by April which we think is premature. In the Governing Council meeting this week, the ECB made no changes on rates as expected but announced it would start scaling back its PEPP portfolio starting H2-2024. The staff economic projections saw a downward revision for 2023 and 2024 in GDP, inflation and core inflation, but Lagarde also highlighted that the cut-off-date for the forecast parameters was prior to the recent fall in rates, which means that growth and inflation could turn out higher. It is true inflation has decelerated faster than expected and December flash PMIs on Friday confirmed that EA economy is slowing down. Yet, we are convinced the ECB wants to see further evidence on core inflation and wage dynamics, and hence, we keep our call for the first ECB rate cut in June 2024.  Norges Bank was the major outlier this week in a string of monetary policy holds by other central banks, as also the BOE and SNB kept monetary policy unchanged. Unexpectedly, NB decided to hike its policy rate by 25bp to 4.50% and signalled a 20% probability for another hike. Following the hike, we postponed our first rate cut from March to June, but lifted the number of cuts for next year from 4 to 5.  Before Christmas, we still have the Bank of Japan meeting on Tuesday. There has been some speculation whether the BOJ would tighten policies next week. We continue to believe we need more firm conclusions on 2024 wage negotiations before they will feel confident to abandon yield curve control and raise the rate to zero. Next week is quiet on data front, but in the euro area, we are closely following any news from the EU Council regarding an extraordinary meeting about the new fiscal rules. Also, before Weekly focus returns from Christmas break, we will get euro area December inflation data 5 January. In China, focus will be on December PMIs in early January, and in the US, we will receive November PCE print next week, and the December jobs report before our next publication. Download The Full Weekly Focus

The European Central Bank (ECB) and the Bank of England (BoE) refused to join the Federal Reserve (Fed)-thrown pivot party. Both Christine Lagarde and Andrew Bailey declined to discuss cutting interest rates judging a policy loosening too early as the inflation threat looms. BoE's Bailey pointed at the possibility of another rate hike, as three MPC members favoured hiking rates, while the ECB announced to accelerate EXIT from the PEPP stimulus, and the Norges Bank popped up with a surprise rate hike.  As a result, the rally in global stock and bond markets slowed. The S&P500 hit a fresh nearly 2-year high but closed nearly flat, the Stoxx 600 – I guess didn't hear the news yet so it just - kept rallying. The US 10-year yield rebounded after tipping a toe below the 3.90% level. Note that there is growing speculation that the 10-year yield will fall to 3%, but I think that's overstretched, and the dollar index had a rough day, because the hawkish European central banks further plummeted appetite for the greenback.   The USDNOK fell sharply to the lowest level since summer and the EURUSD shortly flirted with the 1.10 level, as yesterday's ECB announcement threw the foundation of a stronger euro into the next year. The divergence between a more dovish Fed and still hawkish ECB should support a sustainable appreciation. Presently, the EURUSD stands right at the middle of January 2021 peak (near 1.22) and September 2022 dip (below parity). A further rise toward 1.1260 level would reasonably reflect the Fed-ECB divergence.   Cable, on the other hand, came close to the 1.28 level. Zooming out, the pair stands at around the mid-range of the 2021-2022 selloff (leaving the Liz Truss dip out of the analysis). The GBPUSD could reasonably be expected to extend gains toward the 1.30 level on the back of the divergence between the hawkish BoE and a softening Fed stance.   This being said, the Fed is the Fed and you can't fight the Fed for long. This is what traders say, and this is also true for the central banks. The fact that the USD is set to soften will naturally strengthen its counterparts. And a stronger euro and a stronger pound will further help taming inflation in the Eurozone and in Britain. And given the morose economic outlook in the old continent, the ECB and the BoE will easily feel the pressure for lowering rates in Q1, and that could, in the medium run, stall the dollar weakness and limit the euro and sterling strength. Even more so, as the only major central bank which hinted at the end of policy tightening continues to see strong economic data. Released yesterday, the US retail sales unexpectedly rose, business inventories declined, and the weekly jobless claims fell to around 200K.  Across the Atlantic Ocean, the flash PMI figures for December could show some improvement, but all the numbers are still comfortably in the contraction zone. The contrast between the resilient US economy adopting a dovish stance and faltering European economies holding on to a hawkish position gives the impression that something is amiss.  Speaking of divergence, the People's Bank of China (PBoC) infused an impressive 1.45 trillion yuan during the Medium-term Lending Facility (MLF) rate setting and rollover. Out of this, 650 billion yuan matured, and the rest was a substantial monthly injection of 800 billion yuan, marking its largest to date.   On the data front, industrial production was stronger in November, but investment and retail sales missed expectations. China announced earlier this week that it will shift its focus to boosting industrial activity than consumer appetite – as consumers are difficult to cheer up with the tumbling property market. That's a big U-turn for Xi Jinping who wanted to do things differently. In fact, China always boosted investment without caring much about transforming investment into consumption. That was one of the biggest problems regarding the whopping Chinese growth. Hence, originally, Xi Jinping was not wrong in wanting to throw the foundation of a healthier economy. But the way things happened was harsh. To tidy things up requires going back to a model that worked: boost investment, and spit growth. While the Chinese efforts will hardly bring masses back to the Chinese markets, industrial metals should benefit from China's efforts to ramp up industries and real estate.

What a week it's been. Central bank anticipation first. Then, evidence of a holiday party at the Fed. Followed by failed attempts from Frankfurt and London to poop that party. But there's no stopping this one. Everything is getting bought in a one-way market. We know we can't simply extrapolate the last few days endlessly. But leaving the party early is tough. Central banks are acting to diverge rates, but direction is one way and bullied by the US Two things we can say about current price action. First, it is clearly being directed from the US. The change of tone from Chair Powell after the FOMC was as dramatic as it could be against a backdrop where, in fact, a whole lot hasn't actually changed. Rate cuts in 2024 are, therefore, a go. At least there is no clear objection from the Fed. The question is when and by how much. We've been at 150bp of cuts in 2024 for some time, so no change here. We've noted before that the bond markets love cycle turns towards cuts, and we're getting a strong flavour of that. Second, the ECB and the Bank of England are adopting a more traditionally hawkish stance. The implication of this for market rates has been a tightening in spreads. For example, the Treasury vs Bund spread is tighter by some 20bp, and it's in by 30bp in the 2yr. But even with this tightening (US outperformance), both gilt yields and eurozone ones have been pulled lower. Had it not been for Chair Powell, it's highly unlikely that we'd have had the move lower in peripheral yields beyond the US over the course of this full week. There is a global rate-cutting narrative for 2024 acting to fuel falls in market rates too It's not that the US is the be-all and end-all, as in fairness, there is a rate-cutting narrative in play on a global scale. A glance at any of the rate cut expectation functions on terminals shows that economies still hiking rates are in a clear minority. Across EMEA, it's all cut expectations, bar Morocco. In Latam, it is practically all cuts from the major markets (excluding the ultra-high-yielders). In Asia, it mostly cuts. Japan is the clearest exception. The tone from the Fed helps to validate these wider rate cut ambitions. The dollar trade-weighted index has had a big move most from the FOMC, one of dollar weakness. A weaker US dollar and dollar rate cut expectations make rate cuts elsewhere that bit easier to engineer, whatever the individual domestic circumstances are. The remaining couple of weeks of 2023 are unlikely to see a change in mood. Lagarde and Bailey had a go, but it's clear the markets are hearing what they want to hear. Probably right too. We think the 10yr yield is overshooting to the downside, but stay with it all the same One thing to bear in mind, though, is the following. We think that 4% is long-run fair value for the US 10yr yield. It's now below 4%. So it's overshooting to the downside. This will continue. We think it can comfortably head to 3.5% in 2024. If it got to 3% it would be a significant overshoot, as we are anchored by an expectation that the Fed bottoms at 3% when it completes it's rate cutting cycle. And we want to see a fair value 100bp curve on top of that. Hence the fair value at 4% for the 10yr. Enjoy the overshoot while it lasts (and it will persist for a quarter or two). We're still bullish. But don't forget that it is an overshoot. Read the original analysis: Rates spark: Already overshooting to the downside

After getting off to a strong start yesterday, with both the DAX and CAC 40 trading up at new record highs, European markets lost momentum after firstly the Bank of England, and then the European Central Bank decided to play the Grinch in contrast to the Fed's Santa and push back on following a similar rate cut outlook, with the DAX finishing the session lower. While yields in the US managed to finish close to their lows of the day, German yields closed well above their daily lows, helping to pull the euro up towards the 1.1000 level against the US dollar. The contrast between the ECB's tone and the Fed's tone could not have been starker, and yet when you look at the numbers the divergence becomes even more bizarre. Here we have a situation with the Fed announcing a dovish pivot with Q3 GDP growth of 5% and headline CPI of 3.1%, while the ECB has maintained its hawkish stance when its 2 largest economies are showing a contraction in Q3, and its headline inflation rate is lower. If anything, the policy stances should be in reverse, especially given the ECB says it is data dependent, which would mean on that basis it really ought to be leaning towards rate cuts in the same way the Fed already is, and yet it isn't, with Christine Lagarde saying that rate cuts were not discussed. This stubbornness on rate policy is likely to face further scrutiny today with the latest flash PMI numbers from Germany and France for November which are expected to point to some modest improvement in economic activity but still very much in recession territory. French manufacturing PMI is expected to edge higher to 43.3, from 42.9, with German manufacturing forecast to improve to 43.2 from 42.6. Service sector activity is also expected to see a modest improvement as well with France rising to 46 from 45.4 and Germany, 49.8 from 49.6. The UK economy is faring slightly better which may help explain why the Bank of England was also hawkish yesterday, also keeping rates on hold even as 3 rate setters voted for another 25bps rate hike. In some respects, one can understand the reticence of the Bank of England to come across as too dovish given that headline inflation is almost double the level of EU inflation, at 4.6%. In the absence of any formal forward guidance this could simply be the Bank of England's way of pushing back on market expectations of an imminent rate cut and stopping markets getting ahead of themselves. This is because a weaker pound can slow the disinflation process when it comes to pulling inflation lower and is likely something the central bank will want to avoid. Having 3 hawkish outriders can help keep markets guessing. Today's manufacturing PMI is expected to edge up to 47.5, while services is forecast to remain in expansion territory at 51. US markets also underwent a strong session yesterday, with another record high for the Dow, although it was notable that the Nasdaq 100 struggled to hang onto most of its gains closing well off their intraday highs. With the recent euphoria showing signs of petering out markets in Asia shifted their focus to the latest Chinese retail sales and industrial production numbers for November, with European markets set to open modestly higher. The Chinese economy has been giving the impression of some level of improvement if recent economic data is any guide, however the bar remains low in the context of what it might be capable of given that last weekend saw domestic prices slip into deflation. This economic weakness prompted the Chinese central bank to inject support in the form of one year loans into the financial system this morning. The recent trade and inflation numbers continued to point to evidence of weak demand and disinflation, as the problems in the real estate weigh on the economy as Chinese authorities wrestle with the problems posed by Evergrande and Country Garden. In October there was a modest improvement in retail sales while industrial production remained steady at 4.6%. Having seen September retail sales end the quarter with a 5.5% gain, October saw a better-than-expected rise of 7.6%, however this number needs to be set in the context of a 0.5% decline in October 2022, when the economy was still in lockdown, so the numbers may well have flattered to deceive. Chinese consumers do appear to be starting to spend a little more, however as various European luxury brands can attest the products aren't flying off the shelves. Today's November numbers have seen retail sales come in at 10.1%, which fell short of expectations despite the numbers including Chinese Singles Day sales, and weak comparatives given that a lot of China still hadn't...

EUR/USD stabilized at around 1.1000 following a two-day rally. Near-term technical outlook highlights overbought conditions for the pair. ECB-Fed policy divergence is likely to continue to support EUR/USD. Following Wednesday's upsurge, EUR/USD gained more than 1% and touched its highest level since late November above 1.1000. Although the pair's near-term technical outlook suggests that there could be a downward correction, investors could refrain from betting against a steady rebound in the US Dollar (USD) after the dovish Federal Reserve (Fed) surprise. The European Central Bank (ECB) left key rates unchanged following the December meeting as anticipated. Although the ECB revised inflation projections lower, it reiterated that future decisions will ensure that policy rates will be set at sufficiently restrictive levels for "as long as necessary." In the post-meeting press conference, ECB President Christine Lagarde said that they did not discuss rate cuts at the meeting and added that it wasn't time to lower their guard since they had more work to be done. Lagarde's hawkish tone provided a boost to the Euro, allowing EUR/USD to gather bullish momentum.

EUR/NZD achieved the 1.7400's target from 1.8200's while GBP/NZD completed target at 2.0200's from 2.0900. Trade duration was 22 days and 800 pips or 1600 total. The NBER definition of Recession in found in Economic peaks and troughs. NBER views peaks and troughs as cycles identified from Indicators as real personal income less transfers (PILT), nonfarm payroll employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, employment as measured by the household survey, and industrial production. However, declines in real PCE usually account for only a small part of the declines in real GDP. Beside PCE, NBER indicators are slow and late term and react after recession began. NBER assumes in my estimation, Economic indicators are specific to the United States. Today is different as one world economy exists. Every nation in the past 3 years suffered lower GDP and Money Supplies and higher Inflation and Interest rates. Recession is the determination of GDP and Money supplies vs Inflation and Interest rates. Either side of the equation is the exact same as GDP = Money Supplies and Inflation = Interest rates. Same as saying GDP = Interest rates and money supplies = Inflation. All apply equally to every nation. From a market perspective, Powell arrived with the 3M and 10 year not inverted. Volker arrived with the 3M and 10 year not inverted. Aurther Burns from 1970 - 1978 arrived with the 3M and 10 year not inverted. Under William McChesny Martin 1951 to 1970, the 3M and 10 year wasn't inverted. All Fed chairman caused Inflation to travel higher and GDP and money supplies lower by fighting Inflation to higher Interest rates. All failed as each instance of higher Inflation lasted easily 3 years and lasting economic slowdown. The 3M to 10 year inversions also lasted 3 years. All Fed chairs fought Inflation head on as the primary focus while Inflation is a subordinate Indicator to Interest rates and  GDP. They fought the wrong battle. Next week EUR/USD trades from 1.0870 to 1.1053. EUR/USD at 1.0900's trades deeply overbought. Next above 1.0946, 1.0959 and 1.0972. Break 1.0870 targets 1.0824. EUR/USD long term targets 1.0974 and the top of a multi year channel. GBP/USD Lower must break 1.2568 and current ranges from 1.2568 to 1.2780.  GBP/USD also trades deeply overbought. The upper level from a multi year perspective is located at 1.2665. GBP/USD targets 1.2557 and 1.2480. NZD/USD trades 0.6262 to 0.6075. Above 0.6262 targets 0.6297 and 0.6403. Lower targets 0.6144 and 0.6110. AUD/USD trades from 0.6552 to 0.6759. Next long term targets above 0.6748 and 0.6883. Lower target 0.6609 and 0.6595. Maintain focus to AUD trades as AUD/USD will move well over next weeks. USD/JPY next lower target 138.01. USD/JPY remains deeply overbought as well as all JPY cross pairs. For 2024 is the same as 2023, USD/JPY and JPY cross pairs will trade not only far and wide but result in many profitable trades. USD/JPY at 141.68 bottoms at 141.47. Longs target 143.36, 144.30 and 144.77. USD/JPY's big line for higher at 146.19 is dropping by the day and this line is not expected to break higher anytime soon. The BOJ intervention is a moot point as the BOJ won't intervene nor are Japanese officials to comment on current levels. Deeply oversold GBP/JPY and EUR/JPY targets 181.23 and 156.15, CAD/JPY 106.74. Notrhing special at all exists to AUD/JPY and NZD/JPY. Recall AUD/JPY and NZD/JPY long term targets: AUD/JPY: 95.49, 92.22, 90.78, 89.91. NZD/JPY: 88.58, 85.51, 83.98, 82.83.    GBP/JPY, EUR/JPY and CAD/JPY as GBP/JPY: 181.06, 172.87, 168.89, 167.40. EUR/JPY: 157.78, 150.05, 145.89, 143.39. CAD/JPY: 107.74, 102.97, 100.21, 98.59. The big 3 trades are GBP/JPY, EUR/JPY and CAD/JPY. Deeply oversold EUR/AUD trades just above vital 1.6103 and expected to hold for many weeks. Higher targets easily 1.6399. GBP/AUD trades massive oversold just above 1.8614. GBP/AUD is far more oversold than EUR/AUD and is the better trade. GBP/AUD targets easily 1.9067. Deeply oversold EUR/NZD targets 1.7628 and 1.7705 while GBP/NZD trades just above vital 2.0100's and targets 2.0504. For 28 currency pairs, 14 are worth the trouble to offer good profits. SPX 500 Remember2 weeks ago,  overbought high 4600's, low 4700's. We're here. Next trade = Shorts below 4727 to break 4653.31 to target 4579.4.