US CPI has been in focus for a while, so price action was choppy as the market adjusted positioning in a thin market. With only a couple more data points before the December FOMC meeting, today's CPI report and Wednesday’s retail sales report could have particularly large implications for the prospects of any further rate hikes. Deutsche Bank analysts note that almost all Fed policymakers across the hawk-dove spectrum have indicated that more tightening may be possible. Meanwhile the market assumes a high bar to another rate hike with less than 8bps priced into the December and January meetings.
The majority of pundits believe that we are at the apex of the rate cycle and views on how we regress are pretty diverse. UBS is at the extreme. In a 2024 Outlook UBS suggests that the Fed may implement 2.75% of cuts next year. Given the Fed only has 8 monetary policy meetings next year that is quite a pace. The bank points out that historical precedent suggests that the first indications of a weaker economy, especially negative payrolls, could prompt an outsized policy reaction. Consensus looks for 75bps. The prospect of such an aggressive move in rates would motivate clients to put money to work, looking to longer tenors and further down the credit curve. Just saying.
There is more confidence in the market. Barclays reports that last week bond ETF and mutual funds had nearly $6bn in inflows, at the expense of short-term funds which had notable outflows. High yield, bank loan, and intermediate/long-term credit funds had the higher inflows.
US IG supply was expected to be active this week with estimates of around $30bn, but Monday was slow. In total just $2.65bn printed, against $20bn on each of the past two Mondays. There are sufficient deals in the pipeline doing roadshows to suggest a more active second half to the week.
ICBC’s hacking issue has caused some distress in the markets as they have a large third-party clearing business. Once they recognized the situation they shut down connections to the clearing houses and they, and their clients, were forced to stop trading. Messengers were running round with USB’s loaded with trade details to get stuff cleared, reminiscent of the messenger traffic in the City of London in the 1980's.. The disruption could be prolonged as their systems need to be proven uncompromised before being reconnected to BONY and the FICC. Meanwhile accounts are scrambling to find alternative clearers.