STIR: Euribor Futures Underperform Peers
Jan-03 13:15
Euribor futures underperform vs. SOFR and SONIA equivalents on the day.
- Euribor contracts last 1.5 to 6.5 lower, helping explain Bund underperformance vs. U.S. Tsys & gilts.
- The SOFR/Euribor Dec ’25 (Z5) spread is now 23bp below its December closing high, with the SONIA/Euribor equivalent 18bp below its own December closing high.
- While there isn’t a clear driver at play on the day (making non-committal trade a simple explainer), some may be wagering that the degree of easing priced into USD & GBP STIRs looks shallow (~45bp of cuts priced for the Fed & ~60bp of BoE cuts through December vs. 110bp for the ECB).
- Ultimately, fundamentals and relative central bank stances suggest that the pricing of a deeper ECB easing cycle is justified at this stage.
- Inflation risks tied to Trump’s second Presidential term and a mix of UK fiscal and sticky inflation risks, coupled with the BoE’s preference for gradual easing, help explain the wideness of the spreads.
- A further reduction in U.S. inflation and/or deeper labour market weakness is probably required when it comes to forcing meaningful narrowing of the SOFR/Euribor spread.
- Meanwhile, greater progress on UK inflation and/or slower wage growth is probably needed to generate meaningful SONIA/Euribor spread narrowing.
Fig. 1: SOFR/Euribor & SONIA/Euribor December '25 (Z5) Spreads (bp)
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STIR: SONIA/Euribor Dec ’25 Spread Below Cycle Highs, Fundamentals Underpin
Dec-04 13:10
SONIA/Euribor Dec ’25 spread continues to hover below cycle/all-time closing wides of 222.5bp, last 209.5bp.
- Market-implied easing path for the ECB remains much more aggressive at this stage, with almost twice as many cuts priced through the end of next year vs. the BoE (~155bp priced into ECB-dated OIS vs. a little over 80bp in the UK).
- Some ECB pushback against the idea of a 50bp December cut has limited widening in recent days.
- However, stickier inflation in the UK, respective betas to U.S. rates markets and the BoE’s current preference for gradual easing leave the spread close to cycle highs.
Fig. 1: SONIA/Euribor December ’25 (Z5) Spread
Source: MNI - Market News/Bloomberg
CANADA: Further Declines In CAD Productivity Eyed, USDCAD In Narrow Range
Dec-04 13:09
- USDCAD at 1.4065 sits within a narrow range as it consolidates the renewed increases seen this week.
- Initial resistance is seen at 1.4090 (Dec 2 high) before the bull trigger at 1.4178 (Nov 25 high) seen in the aftermath of US President-elect Trump’s tariff threats. To the downside, support is seen at 1.3985 (20-day EMA).
- BoC-dated OIS sits close to a 50/50 call for next week’s decision between a second 50bp cut or reverting to a 25bp clip.
- There’s a heavy US data and Fedspeak docket today, starting with US ADP, whilst domestic releases see labor productivity (0830ET) and the S&P Global Canadian serv/comp PMI for Nov (0945ET).
- Productivity is seen at -0.3% Q/Q non-annualized in Q3 after -0.17% in Q2, at what would see an eighth negative quarter in the past nine. That dire trend left productivity growth of -0.7% Y/Y back in Q2 (vs US productivity of 2.0% Y/Y in Q3) and ULCs at a still elevated 3.5% Y/Y.
GILT PAOF RESULTS: The PAOF for the 4.00% Oct-31 Gilt was not exercised.
Dec-04 13:08
- GBP1000.0mln had been on offer.
- This leaves GBP23.743bln of the gilt in issue.
