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This reflected a U.S. administration view apparently that a price cap of about 5% below the market price would be just right as it would be a level at which Russia could swallow the discount, but not low enough to make it worthwhile for Moscow to set up elaborate by-passing and smuggling schemes.
Since then, however, Russian crude prices have been trending down to below $65, so setting a price cap at that level does not make much sense — it will not be a cap at all.
Moreover, these hawks point out that Russia’s 2023 budget was built on the assumption that it would be able to sell its oil at $65 per barrel, so setting the limit at that level would do nothing in terms of diminishing the Kremlin’s expected ability to finance its war in Ukraine — Putin would get exactly the price he planned for.
Indeed, these three countries say that Russian production costs are $20-25 per barrel, so even with a cap at $30 there would be profit for Moscow. That said, EU officials believe Washington would be amenable to a price cap in the $50-$60 per barrel range, leaving the impression that this is where they expect the landing zone to be.
Talks between EU countries and G7 capitals will continue this week. They are likely to continue through the weekend, but ambassadors involved in the discussions seemed cautiously optimistic a deal is possible before their December 5th deadline in time for the rollout of what was originally a ban on Russian sea-borne oil imports.
EU Agrees to Set $60 Price Cap Level for Russian Oil Exports
The European Union agreed to put a price cap on Russian oil at $60 a barrel, paving the way for a wider Group of Seven deal, according to a Polish diplomat.
The price is higher than where Russia already sells most of its crude. That’s because one of the main aims of the measure is to try to keep Russian oil flowing to global markets. But it’s less generous than an earlier proposal after pressure from Poland and the Baltic countries.
After long negotiations, those countries succeeded in securing additional conditions aimed at punishing Moscow, including a mechanism that would allow for revisions of the price every two months, There’s also a plan to make sure any resetting of the cap should leave it at least 5% below average market rates.
Treasuries Pare Losses After Powell; Target Peak Priced Below 5%
Treasuries pare declines, led by front and belly of the curve, after Fed Chair Jerome Powell says the time for moderating hike pace may come as soon as December.
Treasury yields flip to richer on the day at the long-end of the curve, while 2-year yields moved to be 1bp up on the day and and well off session highs; 2s10s and 5s30s spreads pared earlier flattening move although remain tighter on the day
Over the release volumes spike with around 40k March 10-year note futures trading in move from around 112-21 up to 113-01 -- price action remains inside session range however
Swaps showed a dialing back of expectations for Fed terminal rate to just under 5%, down from level pre-remarks and similar to end of prior day
In a wide-ranging speech about the outlook for monetary policy, Powell said that in order to bring inflation back down to the Fed’s 2 per cent target, the labour market must become substantially softer and there would need to be a “sustained period of below-trend growth”. He said that job gains still remain far too high, at about 290,000 positions per month over the past three months. And wage growth remains well above than the figure that would correspond to inflation falling back to target, he added.
We are now switching our call from leaning 50 (“just barely”), to leaning to 75 for December, under the assumption that some last few data releases, and most importantly the ECB staff forecast revision on December 15, pan out broadly along the lines we expect.
Eurozone Bonds Drop as More Hawkish ECB Comments Stall Rally
A rally in European bonds ground to a halt
on Friday, with investors betting on a faster pace of interest
rate hikes as they digested more hawkish comments from central
bank policy makers.
German 10-year yields rose as much as 13 basis points to
1.98%, trimming what’s set to be the third weekly drop in
European Central Bank policymaker Isabel Schnabel signaled
on Thursday that it may be premature to scale back rate
increases, pushing back against a market watching for signs that
global monetary policy tightening can ease. ECB Governing
Council member Madis Muller echoed the sentiment on Friday,
saying that the main risk in the battle to quench record
inflation is halting the hiking process too soon.
Federal Reserve officials concluded earlier
this month that the central bank should soon moderate the pace
of interest-rate increases to mitigate risks of overtightening,
signaling they were leaning toward downshifting to a 50 basis-
point hike in December.
“A substantial majority of participants judged that a
slowing in the pace of increase would likely soon be
appropriate,” according to minutes from their Nov. 1-2 gathering
released Wednesday in Washington.
In addition, while Chair Jerome Powell said during his
post-meeting press conference that rates will probably
ultimately go higher than officials’ September forecasts
indicated, Wednesday’s report gave a more nuanced take:
“Various” officials -- a descriptor not commonly used in the
minutes -- had concluded that rates would ultimately peak at a
higher level than previously expected.
What is newsworthy at this juncture is that the arguments and support for a continued front loading of rate hikes are under the surface still very much alive.
Indeed, the lack of public agitation for a 75bp hike in December from traditional hawks within the Council should not be interpreted to mean it will not be on the table as a serious option on December 15. Whether it carries the day remains to be seen, but what appears certain is that the glidepath from 75 to 50 to 25bp hikes in 2023 as envisioned by many ECB officials is very much in doubt.
The European Central Bank will deliver
another “robust” interest-rate increase next month, though it’s
premature to settle on its size just yet, according to
Bundesbank President Joachim Nagel.
Inflation data due before the Governing Council’s Dec.
14-15 meeting and new economic projections through 2025 will be
key to determining whether a third straight 75 basis-point hike
is needed to tackle record inflation, or whether a half-point
step is sufficient, Nagel told journalists in Frankfurt.
Either way, the ECB’s efforts on rates should be
complemented by a reduction in the stash of bonds it bought as
stimulus during recent crises, starting early next year, he
Furthermore, they believe that as long as the Republicans win the House majority, McCarthy or whoever may end up as House speaker will visit Taiwan during their two-year term, compounding the escalation that followed the visit this year by Speaker Nancy Pelosi to Taipei.
Kevin McCarthy, the Republican leader in the U.S. House of Representatives, said on Sunday he would form a select committee on China if he is elected speaker of the chamber, accusing the Biden administration of not standing up to Beijing.
"China is the No. 1 country when it comes to intellectual property theft," he told Fox News in an interview.
"We will put a stop to this and no longer allow the administration to sit back and let China do what they are doing to America."
Fed Daly Says Rate Peak Between 4.75%-5.25% a Reasonable Range
Federal Reserve Bank of San Francisco President Mary Daly said 4.75% to 5.25% was a “reasonable” range for where the US central bank could lift interest rates and then go on hold.
“Somewhere between 4.75 and 5.25 seems a reasonable place to think about as we go into the next meeting,” Daly said in a Wednesday interview on CNBC. “And so that does put it in the line of sight that we would get to a point where we would raise and hold.”
Treasuries rise sharply to fresh highs of the day, soaring after October CPI data prints below estimate. Fed-dated OIS market drops sharply, almost pricing in a 50bp move at the December Fed meeting instead of another 75bp hike.
Futures volumes surge with almost 100k 10-year note contracts trading in the post-CPI bid; 10-year yields drop to around 3.94%, richer by 15bp on the day while 2s10s spread re-steepens
Fed-dated OIS pricing in 52bp rate hikes for the December meeting vs 58bp priced Wednesday close; further out Fed peak drops to 4.88% by May next year, down from 5.05% prior close
At issue is how much guidance Powell provides regarding the path of monetary policy. We believe he will retain the option of 75bp in case the Fed needs to respond to upside surprises to the inflation outlook. That said, we don’t think he will leave us flying completely blind; we think he will need to define the Fed’s reaction function more carefully...
...We don’t think Powell will embrace the idea of a pause at the SEP-implied terminal rate. Although a group of presidents has been unusually vocal in their desire to find a place to pause, that’s still too far in the future to commit to, and could easily change with the December SEP. Indeed, our expectation is that the dots move higher again in December, albeit a nudge rather than another leap...
That's meant to put that question really as the important one now going forward. I've also said that we think that the level of rates that we estimated in September, the incoming data suggests that that's going to be higher. That's been the pattern. I would have little confidence that the forecast, if we made a forecast data, if we did SEP today, one after another that will go up. That will end when it ends. There's no sense that inflation is coming down. If you look at the -- I have a table of the last 12 months of 12-month readings, there's really know pattern there. We're exactly where we were a year ago. Okay. So I would also say it's premature to discuss pausing. It's not something that we're thinking about. That's really not a conversation to be had now. We have a ways to go. The last thing I'll say is that I would want people to understand our commitment to getting this done and to not making the mistake of not doing enough or the mistake of withdrawing our strong policy and doing that too soon. I control those messages. That's my job.
As to where markets are today, color us skeptical that the cycle will end at 2.5%. Barring the materialization of a deeper geopolitical shock, for which we must of course always be on alert, we suspect that is a view that is shared by many ECB officials...
*ECB'S VISCO: MARKETS' PEAK RATE OF 3% IS `A POSSIBILITY'
*ECB'S VISCO: RATE HIKES SHOULD BE `GRADUAL, CONTINUOUS'
*ECB'S VISCO: NORMALIZATION MEANS TIGHTENING GRADUALLY
...I repeat my mantra that it is ill-advised to bet against the consumer in the absence of substantial job losses. To be sure, we get a fresh read on the labor market this week, but initial unemployment claims clearly tells us that the labor market is not coming unglued:
Following is the FOMC statement released today by the Federal Reserve in Washington:
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3-3/4 to 4 percent. The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.
Job Openings in US Unexpectedly Rise, Keeping Pressure on Fed
Vacancies climbed by 437,000 to 10.7 million in September
Quits rate held at 2.7%, while number of hires eased
US job openings unexpectedly rose in September, highlighting enduring tightness in the labor market and risking sustained upward pressure on wages that will likely keep the Federal Reserve on a path of steep interest-rate increases.
The number of available positions increased to 10.7 million in September from a revised 10.3 million a month earlier, the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, showed Tuesday. The median estimate in a Bloomberg survey of economists called for a drop to about 9.8 million.
The surprise pickup in vacancies highlights unrelenting demand for workers despite mounting economic headwinds. The persistent imbalance between labor supply and demand continues to underpin robust wage growth, adding to widespread price pressures and reinforcing expectations for yet another large rate hike on Wednesday.
Xi particularly emphasized the need to take corresponding measures to stabilize the stock market, to ensure that the RMB does not depreciate in a disorderly manner, and to make foreign investors have confidence in China, as well as help Hong Kong to stabilize its financial market...
People’s Bank of China Governor Yi Gang gave
an optimistic outlook for the economy on Wednesday, saying it
remains “broadly on track” and he hoped the property market can
achieve a “soft landing.”
We follow a flexible and, by and large, market-determined
exchange rate regime with reference to a basket of currencies.
Since the beginning of the year, thanks to sound long-term
fundamentals of China’s economy, the RMB remained relatively
stable against a basket of currencies, with some depreciation
against the USD and somewhat appreciation against other major
currencies. In the future, we will keep on with the market-
determined exchange rate regime. The RMB exchange rate will
continue to remain relatively stable at a reasonable and
appropriate level, maintaining its purchasing power and keeping
its value stable.
I should say that the Chinese economy has remained broadly
on track, despite some challenges and downward pressures. The
Chinese economy has proved to be quite resilient. In Q3 the GDP
grew by 3.9%, up by 3.5 percentage points over the second
quarter. The job market remains stable with the surveyed
unemployment rate posting 5.5% in September.
Thanks to a bumper grain harvest and stable supply of coal
and electricity, inflation remained subdued. The CPI increased
by only 2.8% year-on-year in September and PPI increased by 0.9%
I expect China’s potential growth rate to remain in a
reasonable range. China has a super large market, as there is
still much room for urbanization and demand of middle-class
consumers is still on the rise. Thanks to a large group of
engineers and skilled workers, China has built a full-fledged
modern industrial system, and a high-quality infrastructure