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Source：Bloomberg

(Dec 20): France’s debt agency kept its issuance plans for 2025 unchanged from an initial target as it awaits a new budget following the ouster of the government earlier this month.

Agence France Tresor, or AFT, said it will sell €300 billion ($312 billion) in government bonds next year, net of buybacks. That’s in line with the forecast in the original plan announced in October, following €285 billion of sales this year.

“If this amount has to be changed later in the year, we will do so and communicate to investors,” AFT Chief Executive Antoine Deruennes said.

France is in political and fiscal tumult after leftist and far-right lawmakers united to topple the government of Michel Barnier over his fiscal plans. The former prime minister planned to narrow the budget deficit to 5% of economic output in 2025 from 6.1% this year through €60 billion of tax increases and spending cuts.

President Emmanuel Macron last week appointed Francois Bayrou to succeed Barnier, but the new premier still has not picked a cabinet to attempt to pass a new budget. In the meantime, France will rely on emergency legislation from January that rolls over the same taxes as last year, allows the government to borrow money and issue spending decrees.

“The special law authorizes the AFT to continue to carry out all the cash and debt operations to ensure the financial continuity of the state,” Deruennes said.

While Bayrou has not detailed his policy priorities, his government may have to make concessions on taxation and expenditure that would swell the deficit to be financed by debt issuance. Moreover, France’s economic prospects have deteriorated sharply amid the political uncertainty, making financial objectives harder to reach.

The political and fiscal uncertainty has sent tremors through French debt markets since Macron called snap elections in June, as investors demanded higher compensation given doubts over the country’s ability to tackle its debt mountain.

The gap between French and German 10-year yields, a proxy for French bond risk, is trading around 81 basis points, nearly double where it was in the first half of the year. The gap hit a peak of 90 basis points in late November, the widest since 2012.

Source: Theedgemarkets

TOKYO (Dec 20): Japan’s core inflation accelerated in November as rising food and fuel costs hit households, data showed on Friday, keeping the central bank under pressure to raise interest rates.

The data, which came in the wake of the Bank of Japan’s (BOJ) decision to maintain interest rates at 0.25% on Thursday, highlights broadening inflationary pressure that could prod the bank to raise borrowing costs further.

Renewed yen declines could pressure prices higher by pushing up import costs. The BOJ’s decision to stand pat and BOJ governor Kazuo Ueda’s dovish comments drove the dollar to a five-month high of 157.80 yen (RM4.50)7 on Friday.

The nationwide core consumer price index (CPI), which includes oil products but excludes fresh food prices, rose 2.7% in November from a year earlier, government data showed, roughly in line with a median market forecast for a 2.6% gain.

It accelerated from a 2.3% rise in October due partly to stubbornly high prices of rice and the phase-out of government subsidies to curb utility bills.

"November’s surge in inflation wasn’t a surprise," Capital Economics wrote in a research note. "The Bank of Japan will have known it was on the cards when it decided not to hike rates yesterday. But it should add to the bank’s confidence that it can resume rate hikes over the months ahead," it said.

A separate index that strips away the effects of volatile fresh food and fuel, scrutinised by the BOJ as a better gauge of demand-driven inflation, rose 2.4% in November from a year earlier after a 2.3% gain in October.

Service-sector inflation was steady at 1.5%, in a sign firms continued to pass on rising labour costs, the data showed.

The BOJ ended negative interest rates in March and raised its short-term policy rate to 0.25% in July, on the view that Japan was on the cusp of durably achieving its 2% inflation target.

It has stressed the BOJ’s readiness to raise rates again if Japan continues to make progress in durably achieving its price target, backed by domestic demand and sustained wage gains.

Ueda said on Thursday that the BOJ needed more information to hike rates again, stressing the need for clarity on next year’s wage growth and incoming US president Donald Trump’s economic policies.

"Given the (BOJ’s) assessment that import price rises are subsiding, it’s hard to expect the BOJ to hike rates in January," said Naoya Hasegawa, chief bond strategist at Okasan Securities, who projects a hike in March. "Most market players likely viewed Ueda’s news conference as quite dovish," he said.

Source: Theedgemarkets

The BoE delivered a dovish vote split but continues to emphasise a gradual approach to reducing the restrictiveness of monetary policy. We think this supports our base case of the next cut coming in February and a quarterly pace thereafter.

The market reaction was modest with Gilt yields tracking slightly lower and EUR/GBP moving higher.

As expected, the Bank of England (BoE) decided to keep the Bank Rate unchanged at 4.75% yesterday. The vote split had a dovish twist with 6 members voting for an unchanged decision and Dhingra, Ramsden and newcomer Taylor voting for a 25bp cut.

The BoE retained much of its previous guidance noting that “a gradual approach to removing policy restraint remains appropriate” and that “monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further”. The MPC now judges that the labour market is “broadly in balance” and has similarly revised its expectation for Q4 growth down from 0.3% q/q to no growth as a reflection of the latest weakening in growth indicators. We also note that in the unchanged camp of the MPC, one member considered that a more “activist strategy” could be warranted, hinting at a more dovish shift in the centrist camp.

Given the recent topside surprises to wage and inflation data combined with an expansionary fiscal stance, we think a continuation of a gradual cutting cycle is warranted. We therefore adjust our call, expecting quarterly cuts in 2025 at the meetings associated with updated economic projections. We expect the next 25bp cut in February with the Bank Rate ending the year at 3.75% (prev. 3.25%). We maintain our terminal rate forecast unchanged at 2.75% but expect it to be reached by Q4 2026 (prev. Q2 2026). However, we highlight that the risk is skewed towards a swifter cutting cycle in the first half of 2025, as highlighted by the MPCs communication yesterday.

Rates. Gilt yields moved lower across the board on the dovish vote split but overall, the reaction was muted. Markets price 18bp worth of cuts for February and 55bp by YE 2025. We highlight the potential for BoE to deliver more easing in 2025 than currently priced, expecting a cut in February and a total of 100bp worth of easing in 2025.

FX. EUR/GBP moved higher on the announcement with the dovish vote split taking centre stage. The still cautious guidance delivered yesterday highlights the more gradual approach of the BoE compared to European peers. We think this supports our case of a continued move lower in EUR/GBP. This is further amplified by relative UK economic outperformance and tight credit spreads. The key risk is a soft BoE.