December continued the trend of the previous month. Inflation data softened further, and with it a softening of the narrative for outsized hikes. The one exception being the ECB President Lagarde explicitly spelling out at least two more 50bp hikes, catching the market on the hop. China’s reopening is an oxymoron at this stage as it is unleashing a deadly covid wave over the country replicating the playbook we all have seen in recent years elsewhere. The effect being another supply chain disruption, however this time into the face of dwindling western demand and therefore maybe not as contentious. As they have a propensity to do, the BoJ surprisingly changed their YCC to +-50bp on the 10yr JGB from a previous +-25bp range, adding to market chatter that 2023 brings a new Governor and further policy change. As the G10 data continues to soften, the rates markets are getting excited about a lower peak in the hiking cycles and have started pricing in cuts. The risk/reward is changing rapidly, as the predicted cuts priced in to start H2 2023 are vulnerable to wage inflation data spikes and belligerent central banks. As we debate the last few hikes, the dispersion in these timings becomes more pronounced. A part of the cycle we have traditionally found rich in trading opportunities and able to take advantage of.
Over the month the Fed, BoC, SNB and BoE hiked by 50bp, meanwhile the Norgesbank and RBA hiked by 25bp.
The US 10y closed the month 25.2bps higher and 5s-30s swap was 5bps flatter.