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US Treasury yields held steady on Thursday after witnessing a sharp drop a day earlier following a dovish FOMC meeting. On the data front, US Retail Sales showed signs of strength, up 0.4% MoM in November, higher than expectations of 0.2%. Retail Sales Ex-Auto also improved by 0.2%, higher than expectations of a -0.1% print. Also, the prior week’s initial jobless claims dropped to 202k vs. estimates of 220k and near historic lows. US credit markets saw IG CDS spreads widen by 1bp while HY spreads were flat. US equity markets continued to move higher on Thursday with the S&P and Nasdaq up 0.2-0.3%.
European equity markets ended higher. In credit markets, European main CDS spreads were 5bp tighter while crossover spreads tightened by a sharp 24bp. Unlike the Fed, the ECB and BoE in their policy meetings yesterday did not talk about any plans of loosening monetary policy in the near future. The ECB said policy easing was not even brought up in the two-day meeting, while the BoE said rates would remain high for “an extended period”. Asian equity markets have opened in the green today. Asia ex-Japan IG CDS spreads were tighter by 4.4bp.
The deposit facility rate (DFR) is one among the three key interest rates set by the ECB. This rate defines the interest rate that banks receive on the surplus liquidity that they deposit overnight in an account with a national central bank. The Eurosystem has several national central banks with ECB being the prime central bank that works with the other national central banks of all EU countries. There are two other key interest rates that the ECB governs – the rate on main refinancing operations (MROs) and the rate on the marginal lending facility (MLF). The MRO rate refers to the cost of borrowing for banks from the central bank for a period of one week. The MLF rate refers to the overnight rate that banks can borrow at from the central bank.
The ECB kept rates unchanged yesterday with the DFR at 4%, the MRO rate at 4.50% and MLF rate at 4.75%.
On Seeing a Big Credit ‘Reckoning’ in 2024 – JPMorgan Asset Management’s Oksana Aronov
“The interest rate reckoning took its time to arrive — I think the credit reckoning will as well. There is going to be a big one, just as there was a big one in interest-rate risk… there is more of a risk of a hike next year than these aggressive cuts that people are pricing in… The default drumbeat will continue… have a lot of dry powder in the portfolio”
On Buying Bonds for 2024 – Ashish Shah, Goldman Sachs Asset Management strategist
“What I think we’re seeing right now is not just a slowing in the economy, but inflation that is actually coming down, and that sets up a fantastic total return for the bond market… Take every opportunity you can when people get scared about what the Fed’s doing to build your position… this coming year is going to be the year of bonds. So don’t mess it up”
On China’s weak property sector, retail sales keep stimulus calls alive
Dan Wang, chief economist at Hang Seng Bank China
“Transactions are typically depressed towards the end of the year, and the property sector in general does not want to take on more leverage and house prices are still too high compared to urban incomes”
Bruce Pang, chief economist at Jones Lang Lasalle
“The market expected pro-growth policies to quickly bear fruit, which has not yet been effectively translated into near-term growth due to the constraints of policy transmission and business confidence”