STIR: Year-end ECB Implied Rates Largely Look Through Source Report
Steady/hawkish leaning trade in year-end ECB implied rates so far Thursday, with more focus paid to the Swiss short-end (see above) given few fresh signals this morning.
- ECBspeak has been relatively sparse this week, with Holzmann and Nagel presenting unsurprisingly cautious views and Lagarde re-iterating the message from the January decision. Generally, there has been little meaningful pushback against current market pricing, which assigns a ~75% implied probability of 3x25bp cuts across the next three decisions.
- Dec ’25 ECB-dated OIS is just 0.5bps more hawkish from the open (76.5bps of cumulative easing priced) and are looking through an ECB sources report, which looks at possible wording tweaks to the March policy statement - suggesting the March policy statement could modify language around policy being restrictive by adding a qualifier (e.g. “less” or “mildly”), or remove the reference to “restrictive” altogether.
- MNI’s ECB sources piece posted on February 4th suggested the ECB is likely to adjust its reference to policy restrictiveness in its next statement in March, but there would be resistance on the Governing Council to completely removing it, as estimates of the neutral rate edge downwards but remain uncertain.
| Meeting Date | ESTR ECB-Dated OIS (%) | Difference Vs. Current Effective ESTR Rate (bp) |
| Mar-25 | 2.425 | -24.0 |
| Apr-25 | 2.268 | -39.7 |
| Jun-25 | 2.096 | -56.9 |
| Jul-25 | 2.033 | -63.2 |
| Sep-25 | 1.957 | -70.8 |
| Oct-25 | 1.936 | -72.9 |
| Dec-25 | 1.899 | -76.6 |
| Feb-26 | 1.899 | -76.6 |
| Source: MNI/Bloomberg. | ||
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ITALY DATA: Trend In Transport Equipment IP Remains Weak
Italian November industrial production was stronger-than-expected at 0.3% M/M (vs 0.1% cons, one tenth upwardly revised 0.1% prior). On a 3m/3m basis, industrial production remains negative at -0.5%, though this was a tenth above October’s reading.
- Industrial sentiment in Italy remains weak, with the manufacturing PMI in contractionary territory for 9 consecutive months (46.2 in December), and the ISTAT manufacturing confidence series below its 2000-2019 average (85.8 in December vs 91.0 average).
- In its 2024/2025 outlook report, ISTAT noted that “the declining trend in industrial production, driven by the weakness of the German economy—Italy's primary export market—and the crisis in specific production sectors (predominantly automotive), has negatively impacted gross fixed investments and imports”
- Looking at the manufacture of transport equipment specifically, production fell 0.3% in November, corresponding to a -5.1% 3m/3m rate. The 3m/3m series has been negative since December 2023.
- 3m/3m production in consumer goods and energy production remained positive in November, though eased from last month's levels. Conversely, 3m/3m intermediate and capital goods production ticked higher, but stayed in negative territory.
UK: Chancellor Reeves To Address Commons ~1230GMT
Chancellor of the Exchequer Rachel Reeves is set to deliver a ministerial statement in the House of Commons at around 1230GMT (0730ET, 1330CET) regarding her recent trip to China for talks with senior officials. While the China trip is ostensibly the reason for the statement, it is likely that - if she does not address it herself - then during questions after the statement, the chancellor will be asked about the state of the UK's public finances amid elevated borrowing costs, the prospect of gov't spending cuts or tax rises to address the issue, and indeed the longevity of her own position.
- Prime Minister Sir Keir Starmer was asked on 13 Jan whether Reeves would remain in office throughout the current parliament. He refused to do so, instead only saying that she had his full confidence. This was seen as swerving the issue. Later, a Downing St. spox did eventually confirm that Reeves would remain as chancellor for the entire parliament.
- Public perceptions of drift and inability to deal with issues has seen Labour's support slump. The latest 12-13 Jan YouGov poll shows Labour retaining the lowest proportion of its 2024 cohort, with just 54% of those who voted Labour in the last GE saying they would do so again. This compares to the right-wing populist Reform UK, retaining 87% of its 2024 voters. The latest poll has Labour on 26% support to Reform UK's 25%. The main opposition centre-right Conservatives sit third on 22%.
Chart 1. General Election Opinion Poll, %
Source: YouGov. Fieldwork: 12-13 Jan
BONDS: Away From Highs
FI markets continue to edge away from session highs.
- A few factors at play here:
- Recovery from lows in crude oil futures.
- Medium-term French political and fiscal risks remaining evident despite the potential for some short-term respite if the Socialists come to an agreement with the government (increased odds of this following the headlines covered in detail earlier). OATs now 1.5bp tighter to Bunds on the day after briefly printing ~3bp tighter at one point this morning. Still, short-term French positives and bid in European equities leaves EGB spreads to Bunds tighter on the day.
- Potential that modest EGB/EU syndication pressure is being felt, although demand across those books remains notable, leading to spreads being set at tighter than guidance levels.
