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EU fiscal rules: Yesterday evening, the EU economy and finance ministers struck a deal on a new set of fiscal rules for the EU. The new rules include stricter overall limits on spending while it provides leeway for countries to invest in key EU priorities like defence and the green transition and allow structural reforms. The old thresholds of a maximum public deficit of 3% of GDP and the 60% debt to GDP remain. Countries with debt over 90% of GDP must trim it by 1 percentage point per year, while countries with debt between 60% and 90% need to make half that effort. Countries that both breach the 60% and 3% thresholds must aim at cutting deficits to 1.5% of GDP by improving the structural balance with 0.4% of GDP each year. Enforcement of the new rules will be tougher and countries that deviates from their spending plans will have to reduce spending by 0.5% of GDP per year. However, a last-minute concession won by France secured that for such countries interest payments will be exclud ....
Risk sentiment was somewhat mixed on Friday as growth signals from Europe pointed towards continuing headwinds in December. Hawkish comments from NY Fed chief Williams, stating that a March cut seems 'premature', countered further declines in UST yields, though markets are still pricing quite aggressive rate cuts of 140bp next year. In Europe, long-end bond yields fell throughout the day following the weak PMIs. Risk sentiment has turned sour in Asia this morning with equity indices declining across the board. ....
Norges Bank: Norges Bank was the major outlier in a string of monetary policy holds from the ECB, SNB and BoE yesterday. Norges Bank decided to hike its policy rate by 25bp to 4.50% and signal a 20% probability of another hike in March. Heading into the decision, most analysts - ourselves included - had called for unchanged policy rates while markets had priced a small hike probability (+4bp). Following the decision, we postponed our first rate cut from March to June, but lifted the number of expected rate cuts next year from 4 to 5. ....
The Euro area HICP inflation declined more as expected as also hinted by early country releases. The monthly decline of euro area HICP by 0.5 % m/m versus consensus of -0.2% m/m translated into a yearly growth rate of just 2.4% y/y, even below the market pricing of 2.5%. ....
FI: Global yields declined gradually yesterday as markets priced in more rate cuts from major central banks to be delivered in 2024. No single factor appeared to be driving the move. Bund yields closed down by 10bp across the curve, while the 10-year US Treasury yield fell 8bp throughout the session. German ASW spreads widened marginally along with European credit spreads during the day. Markets are now pricing the ECB to cut rates by 88bp next year, up from 80bp last Friday. ....