MNI ASIA MARKETS ANALYSIS: DXY Buoyed By EUR/USD In Bear Mode Ahead Of Thursday's ECB

US TSYS: 2s10s Steepening Extends As Front End Rallies On Bullard, Long End Weighed By EU Supply

• 2Y Tsys have seen a decent rally over the past hour, seemingly following former St Louis Fed’s Bullard seeing prospects for the Fed cutting in 1H24 before inflation returns to the 2% target, in absence of clearer drivers.
• The WSJ article was published at 1345ET but it took another 15mins for any reaction, which then built and saw a helping hand from a block suggested buy of almost 24k in TUH4 at 102-19+ at 1431ET.
• With 2YY now -0.5bp on the day (retracing 0.5bps of the bid), the move extends prior steepening with 2s10s +4.5bps at -24bps but only back to late Friday levels.
• Fed Funds implied cuts have lifted modestly to a cumulative 12bp for March, 56bp for June and 135bp for Dec.
• Recall the longer end has been under pressure throughout the day. Moves through early European hours could be seen as delayed BoJ impetus and impending EU bond supply from the dual tranche, with January's total bond sale tally of €293bln marking the busiest January in European bond sales ever.
• Tomorrow sees flash US PMIs, the BoC decision and 5Y supply (after today’s 2Y landed on the screws, with lower bid-to-cover but higher indirect take), before Thursday sees the ECB decision plus first estimates for Q4 US GDP/core PCE and 7Y supply.

EGBs-GILTS CASH CLOSE: Supply Continues To Weigh Ahead Of Event Risk

Gilts underperformed Bunds Tuesday, in a weak session for global government bonds.

• There were few evident drivers in the session - most attention is on upcoming event risk, including Thursday's ECB decision (our preview is here), and next week's Federal Reserve/BoE meetings.
• However, continued heavy supply continued to weigh, today's examples being EU dual-tranche tap syndication and long end Gilt syndication.
• BoJ post-meeting press conference that was seen as less dovish than hoped weighed early, while an uptick in oil prices had a negative impact.in afternoon European trade.
• In contrast, data was largely shrugged off, including soft Eurozone consumer confidence data, and the ECB's bank lending survey showing continued tightening conditions amid weaker demand.
  
• The German curve bear steepened, with weakness in the UK concentrated in the belly of the curve as rate cut expectations were pared.
• Periphery spreads finished a little wider, mirroring a pullback in equities.
• Wednesday's calendar highlight is the release of January flash PMIs.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 2.5bps at 2.714%, 5-Yr is up 4.2bps at 2.267%, 10-Yr is up 6.2bps at 2.352%, and 30-Yr is up 8bps at 2.538%.
• UK: The 2-Yr yield is up 6.8bps at 4.375%, 5-Yr is up 8.5bps at 3.93%, 10-Yr is up 8.2bps at 3.986%, and 30-Yr is up 5.3bps at 4.583%.
• Italian BTP spread up 1.7bps at 156.6bps / Spanish up 0.4bps at 91.8bps

FOREX: Greenback Recovery Prompts Fresh YTD Highs For USD Index

• Despite some early greenback weakness on Tuesday, bear steepening across the Treasury curve prompted a firm dollar recovery, with the DXY extending year-to-date highs and printing the best levels since mid-December. The Japanese yen made a notable round trip following the latest Bank of Japan decision, however, the most notable laggard in G10 has been the Euro as Thursday’s ECB decision approaches.
• Clearance of Jan 17's 103.692 in the DXY tripped the late leg lower for major currency peers, narrowing the gap with the next key upside levels at December's 104.263 and the 100-dma of 104.436.
• USDJPY’s daily range spanned 171 pips in total following a broadly uneventful BOJ release overnight. A small USDJPY pop on the release was aggressively faded as Governor Ueda made some slightly hawkish leaning remarks and short-term positioning aided the sell-off down to 146.99 lows. However, momentum waned and as treasury yields ticked higher throughout the session, USDJPY followed suit, eventually reaching a new intra-day high of 148.70.
• Late slippage for EURUSD retains the bear-mode condition. Last week’s move lower resulted in the break of a trendline drawn from the Nov 1 low, signalling scope for a continuation of the corrective cycle. Price action since Jan 17 appears to be a flag formation - a bearish continuation signal. Further weakness would target 1.0793, a Fibonacci retracement.
• The likes of AUD, NZD and CAD have shown relative outperformance alongside late strength in Chinese equities, helped by reports of China eyeing a $278bln rescue package for stocks, on top of news that Alibaba's Jack Ma was a buyer of his company's shares across Q4.
• Wednesday’s calendar kicks off with New Zealand CPI, before a host of European Flash PMIs preview the latest strength of regional economies. The Bank of Canada rate decision will also highlight.

FX Option Expiries

OPTIONS: Expiries for Jan24 NY cut 1000ET (Source DTCC)
* EUR/USD: $1.0900(E2.2bln)
* USD/JPY: Y150.00($600mln)
* AUD/USD: $0.6565-80(A$4.1bln), $0.6610-30(A$2.6bln)

Larger FX Option Pipeline
* EUR/USD: Jan25 $1.0975-80(E1.2bln), $1.1000-10(E1.4bln); Jan26 $1.0875-90(E1.2bln)
* USD/JPY: Jan26 Y145.00($2.1bln)
* USD/CAD: Jan26 C$1.3390($1.2bln)
* USD/CNY: Jan25 Cny7.1900($1.4bln); Jan26 Cny7.2000($2.3bln)

US FI Options: Notable Options Summary

Tuesday's US rates/bond options flow included:

• SFRG4 94.87p, traded 6.5 in 6k
• SFRG4 95.00/94.93/94.87/94.75p condor, traded -0.5 in 2k
• SFRH4 94.87/94.93/95.00c fly traded half in 25k
• SFRH4 94.93/94.87/94.81/94.68p condor traded -0.5 in 4k
• SFRH4 95.00/95.06cs, traded 0.75 in 2k
• SFRH4 95.06/95.112cs, traded 0.25 in 3k
• SFRJ4 95./50/95.62/95.68 broken c fly, traded 1.5 in 4k
• SFRJ4 94.87/94.62 ps 2x3, bought for 3.75 in 15k
  
• SFRU4 97.00/97.12cs, traded 1 in 20k
• SFRG4 94.75/94.93^^ sold at 3.25 in 1k
• SFRH494.81/94.87^^ vs 0QH4 96.37/96.75cs, sold the strangle at half in 2k
• SFRH4 95.00/95.25cs, bought for 1.5 in 10k
• SFRU4 97.00/97.12cs, bought for 1 on 45k (25k pit/20k screen)

European FI Options: Notable Downside In UK Rates Tuesday

Tuesday's Europe rates/bond options flow included:

• ERJ4 96.50/96.25ps with ERJ4 96.37/96.25ps, bought as a strip for 8.75 in 10k
• SFIJ4 95.35/95.55cs, bought for 4 in 5k.
• SFIK4 95.10/95.00/94.90/94.80p condor, bought for 1.5 in 13k
• SFIK4 95.05/94.95/94.85/94.75p condor, bought for 2.25 in 5k
• SFIH4 94.95/95.05/95.15/95.25c condor,. Bought for 1.5 in 3k
• SFIH4 94.85/94.95/95.05c fly, bought for 1.25 in 4.5k

US STOCKS: ESA Sees Late Lift Back Towards Initial Resistance

• ESH4 has seen a strong lift in recent trade, touching a high of 4896.00 (4892.5 latest) to leave it close to yesterday’s 4898.25, helped by Fed cuts building after Bullard’s comments on the rate cut prospects.
• Yesterday’s high marks initial resistance with the bullish price sequence still intact and with next resistance at the round 4900.00.
• The NYSE TICK index has recorded two buy programs in excess of 1400 names, some of the largest in the month to date.
• In e-mini space, the S&P 500 (+0.25%), lags the Nasdaq 100 (+0.35%), but outperforms the Russell 2000 (+0.1%) and Dow (-0.25%).
• The SPX is led by consumer staples (+1.2%) and communication services (+0.8%), whilst real estate (-0.35%) and consumer discretionary (-0.15%) lag.
• Consumer staples are driven by Proctor & Gamble (+4.4%) following above-estimate earnings and its more optimistic profit outlook. Communication services meanwhile receive firm boosts from Netflix (+0.8%), Meta (+0.5%) and Google (+0.4%). Real estate names meanwhile come under pressure with a sizeable lift in real yields (10Y real +4bps on the day).

COMMODITIES: WTI Crude Futures Moderately Decline, Silver Rises Despite Stronger Greenback

• Crude has moderately softened today as the return of Libyan production and higher Norwegian output offset ongoing Middle East tensions and disruption to Russian loadings from Ukrainian attacks.
• Trend signals in WTI futures remain bearish and the latest recovery appears to be a correction - for now. The contract has pierced the 50-day EMA at $74.25. A clear break of it would strengthen a bullish theme and expose $76.31, the Dec 26 high and a near-term bull trigger. Moving average studies remain in a bear-mode position and continue to highlight a downtrend.
• Despite a firmer greenback, precious metals have remained in the green on Tuesday, with spot silver showing some outperformance and rising 1.6%, as we approach the APAC crossover. A bearish theme in Silver remains intact and the metal traded sharply lower yesterday, resulting in a clear break of support at $22.510, the Dec 13 low. This signals scope for a move to $21.883, Nov 13 low.
• Analysts note that bullion has traded in a relatively tight band this month as investors seek further clues on whether the Federal Reserve will start reducing interest rates as soon as March.
• US data scheduled for later in the week include the latest GDP figures and core PCE index, which is the central bank’s preferred gauge of underlying inflation and will likely drive sentiment for precious metals in the short-term.

PRIOR SESSION REFERENCE RATES

REPO REFERENCE RATES (rate, change from prev. day, volume):
* Secured Overnight Financing Rate (SOFR): 5.31%, no change, $1595B
* Broad General Collateral Rate (BGCR): 5.30%, no change, $659B
* Tri-Party General Collateral Rate (TGCR): 5.30%, no change, $649B SOFR unchanged at 5.31% whilst volumes fade from $1688bn to $1595bn for one of the lower amounts over the past two months.

New York Fed EFFR for prior session (rate, chg from prev day):
* Daily Effective Fed Funds Rate: 5.33%, no change, volume: $94B
* Daily Overnight Bank Funding Rate: 5.31%, no change, volume: $265B
EFFR unchanged and Fed Funds volumes within recent ranges.

FED: RRP Usage Pushes Closer To Recent Lows

• RRP usage fell from $647bn to $621bn today, but remains after last week’s lows of $583bn.
• 82 counterparties compares with 84 yesterday, but is at the high end for recent weeks.

MNI ECB Preview - January 2024: No Change For Now, But Policy Rate Cuts Looming

No Change For Now, But Policy Rate Cuts Looming

• No changes are expected at this week’s ECB policy meeting.
• President Lagarde will likely use the press conference to push back against market expectations of policy rate cuts in the near-term, while also entertaining the possibility of easing policy later in the year.
• In other words, the overall message will be that the ECB is getting closer to easing policy, but it is not there yet.
• Having misjudged the surge in inflation over 2021-2022 and with uncertainty over the drivers of inflation post-Covid, the ECB will be particularly cautious of easing prematurely and repeating the 2011 policy misstep (when rates were raised prematurely).

ECB Preview January 2024.pdf

MNI BoC Preview, Jan'24: Expecting Too Soon For Cuts Reiteration

EXECUTIVE SUMMARY

• The BoC is unanimously expected to hold its policy rate at 5% with greater focus on the statement’s tone and macro forecasts before Macklem’s press conference.
• One important area will be to what extent the BoC sees the recent resurgence in its preferred core inflation metrics as “bumps along the way” in a path back towards the 2% inflation target.
• The market has pushed back fully pricing a first rate cut from April to June and analysts expect hawkish leaning commentary. We expect similar and accordingly see risk skewed to a dovish surprise if greater weight is put on the softer aspects of nuanced data or inflation forecasts are lowered.
• A couple analysts also start to look at the possibility of reducing the pace of QT amidst liquidity concerns.
• Housekeeping: note the new format for BoC decisions, with announcements 15mins earlier at 0945ET and all to be followed by a press conference at 1030ET. Possibly confusing matters, the opening statement to the press conference will be released with the decision statement. The MPR will remain quarterly.

PLEASE FIND THE FULL REPORT HERE:

BOCPreviewJan2024.pdf

Key Inter-Meeting FedSpeak – Jan 2024

We have just published our review of Federal Reserve officials' commentary on current monetary policy since the mid-December FOMC meeting - see PDF link below

FedSpeakersJan2024.pdf

CANADA DATA: Recent House Price Declines Unusually Concentrated In Toronto

• Released last week, Teranet-National Bank house prices fell a seasonally adjusted -0.5% M/M in December.
• It was the third consecutive decline and left prices down -0.5% annualized on a 3M/3M basis, the first decline on this basis since May after a brief surge higher in the summer and autumn.
• The peaking in 5Y GoC yields north of 4% in September and October likely played a part in the cooling of housing activity with a lag.
• However, the regional breakdown suggests unusual dispersion, with declines heavily concentrated in Toronto yet five of the eleven regions still growing strongly including Montreal +12% (see table below).
• These five regions have been resilient to that prior tightening in financial conditions and could and could be due a tailwind ahead with 5Y yields since falling more than 100bps from their peak.