MNI ASIA MARKETS ANALYSIS: Treasuries Bull Steepen Amidst Russia Military Build, Mixed Data

US TSYS: Bull Steepening Sees 2s10s At Mid-Nov Highs

• US Treasuries are holding onto a solid bull steepening, with 2YY -4.5bps and 10YY onwards -0.5-1bp after what had been some sizeable gyrations before and after the 20Y re-open stopped through for the second month. The bid in Treasuries was also earlier supported by Russia looking to expand its military, with the first order risk-off overriding potential inflationary elements from a more drawn out conflict.
• Data implications were mixed, with consumer confidence stronger than expected (but as a result of lowest inflation expectations since Sep’21) and existing home sales sliding even more heavily than expected.
• The combination sees longer end yields with minimal retracement of yesterday’s BoJ fallout whilst the curve continues to steepen with 2s10s of -53bps at highs since mid-Nov having been -80bps just last week.
• Tomorrow sees the third release for Q3 GDP whilst weekly jobless claims are of note after recent surprising resilience. Still no Fedspeak scheduled ahead of the Christmas break.

US 2s10s spread (bp) - showing mid not ask pricing per textSource: Bloomberg

FOREX: GBP Wobbles, With Dire Public Finances Data Accelerating the Pullback

• GBP was among the poorest performers in G10 Wednesday, with the currency retracing and pulling back on several strong weeks of constructive price action. EUR/GBP printed a new December high at 0.8790, opening gains toward the next key resistance level at November's 0.8829. Weakness across GBP was aided by a poor set of public sector net borrowing figures, which disclosed the largest November borrowing figure on record, as debt servicing costs shot higher, and far beyond analyst forecast.
• A modest uptick in core inflation for Canada left little impact on the CAD, which traded generally stronger against most others. The monthly run rates for CPI support the takeaway of a report that isn’t wildly stronger than expected but does question the pace of prior moderation. The release was shortly followed by commentary from BoC's Macklem, who claimed that the top for inflation is in. USD/CAD traded inside a relatively tight range, with C$1.3580 marking initial support.
• Following Tuesday's broad strength, JPY pulled back slightly Wednesday, but retains the bulk of the post-BoJ rally. The recovery has been relatively gradual, with volumes across futures markets remaining low ahead of the holiday period. Alongside the US open, less than half the futures notional had traded relative to the same time on Tuesday.
• Focus Thursday turns to final Q3 GDP data from the US and UK, as well as PCE figures, which may take more focus in the event of any revisions. There remains little central bank speak to flag, with no scheduled commentary due.

EGBs-GILTS CASH CLOSE: Bunds Reverse Early Gains

Gilts outperformed Bunds, with periphery EGB spreads narrowing Wednesday. Curves traded mixed, with the UK's bull flattening and German yields higher but mostly parallel.

• 10Y Bund yields had dipped more than 3bp by 1315GMT before reversing. No particular catalyst seen but strong US consumer confidence data helped continue the bearish afternoon trend. Yields closed just shy of the 2.316% session high.
• UK outperformance came despite unexpectedly high Nov gov't borrowing figures, which saw Gilts under pressure early.
• Periphery spreads narrowed in a mainly risk-on session.
• Italy's 2023 debt plan issued today (more here) foresees overall gross issuance of M-T/L-T securities between E310-320bln, vs E285bln in 2022
• Thursday kicks off with final UK GDP data. There is no supply and no central banks featured.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 1bps at 2.527%, 5-Yr is up 1.1bps at 2.344%, 10-Yr is up 1bps at 2.314%, and 30-Yr is up 1.7bps at 2.204%.
• UK: The 2-Yr yield is down 1.5bps at 3.668%, 5-Yr is up 0.1bps at 3.58%, 10-Yr is down 2.5bps at 3.571%, and 30-Yr is down 3.8bps at 3.854%.
• Italian BTP spread down 4.9bps at 212.3bps / Spanish down 1.8bps at 108.3bps

EUROZONE ISSUANCE: Italy 2023 Debt Management Plan

Italy's 2023 Debt Management plan foresees overall gross issuance of M-T/L-T securities between E310-320bln, vs an estimated E285bln in 2022. This amount (plus NGEU funds and cash) is estimated to meet funding needs in 2023 amounting to E260bln in maturing securities (net of BOT bills), and the gov't funding requirement of E90bln.

• This is probably on the slightly high side of estimates we have seen, but there was little market reaction to the release.

We will cover in more detail in our end-year EGB issuance publication, but a few observations on the Treasury's expectations for different segments:

• The monthly auction cycles will not change in 2023 (PDF calendar here).
• Short-Term BTPs will continue to feature in end-month auctions, but the amounts may be lower than in the past, as the Treasury aims to reduce issuance on the short end of the curve.
• 5Y sales will again be overweighted vs 3Y (E43bln vs E37bln in 2022). 7Y BTPs issuance should be in line with 2022 (E36bln); 10Y conversely could be higher vs prior (E40bln).
• Long-term BTP issuance (15, 20, 30, 50Y) could be higher than in 2022 (E31bln); potential syndications are foreseen.
• The Treasury is eyeing introducing new BTPei benchmarks in 2023.
• CCTeu issuance may be higher than in 2022, due in part to large maturities; a new 3-10Y benchmark is under consideration.
• The Treasury will consider larger amounts of Green issuance in 2022.
• One or more BTP Italia retail bond sales is expected.

US STOCKS: Equities Buoyed By Falling Real Yields, Earnings Beats

• ESA briefly clears session highs, pushing through to 3918.75 (+1.8%) before nudging back to 3914, whilst Nasdaq marginally outperforms.
• Earlier clearance of Monday’s high of 3899.0 next opens 3948.02 (50-day EMA) in pullback from the recent bearish theme.
• The moves are supported by real yields sliding on the day (10Y -6bps) and improved consumer confidence, plus idiosyncratic factors from better than expected earnings from Nike and FedEx.
• Within SPX, sizeable gains across all sectors but with energy (+2.2%: WTI +2.8%), consumer discretionary (+2.1%) and IT (+2.1%) outperforming whilst consumer staples lag (+1.0%).

S&P e-mini (yellow index) and US 10y real yield (white)Source: Bloomberg

US OPTIONS: Plenty Of Put Structures In US Rates

Wednesday's US Treasury / Rate options flow included:

• SFRZ3 95.50/95.25/95.12 broken p fly, bought for 5.5 in 2.5k
• SFRZ3 95.62/95.18/94.75p ladder, bought for 2 in 2k
• SFRM3 97.37 vs 0QM3 97.00 cs, bought the mid for 1.25 in 3k
• SFRM3 95.37/95.12/95.00 broken p fly traded 8.5 in 1.5k
• 0QF3 95.50/95.00ps traded 1.5 in 4k
• EDM3 95.00/94.62ps, traded 15.5 in 5.5k

EU OPTIONS: Mixed Trade In Bund And Bobl

Wednesday's Europe rates / bond options flow included:

• OEF3 117.00/116.75ps, bought for 11.5 in 6.7k
• RXF3 138/137 ps sold at 90 down to 88 in 3.5k
• RXG3 133/130ps, bought for 48 in 3k
• RXG3 132.00/129.50ps sold at 30 and 29.5 in 5k
• UBG3 129/125ps, bought for 22 up to 24 in 4k
• UBG3 136/134/133 broken put fly bought for 2 in 3k
• ERJ3 96.75/96.25 put spread sold from 23 to 22.5 in 10k
• Buys ERM3 96.625/96.375 put spread in 6.5k, sells ERM3 97.00 calls in 6.5k, covered vs 96.57. Net paid 1.75

COMMODITIES: WTI Opens 50-Day EMA Amid Tight US Supply

• Crude oil has been buoyed today by US supply tightness and a more supportive macro backdrop with Treasury yields easing and consumer confidence stronger than expected. The former showed a larger than expected 5.9m barrel draw in crude inventories along with bullish signals for implied demand for both gasoline and diesel fuels.
• WTI is +2.9% at $78.43, clearing resistance at both $76.8 (20-day EMA) and $77.83 (Dec 15 high) to next open $79.79 (50-day EMA).
• Light volumes in the CLG2 see the most active strike for $71/bbl puts.
• Brent is +3.0% at $82.37, clearing resistance at $82.03 (20-day EMA) and opening $83.18 (Dec 15 high).
• Gold is -0.2% at $1814.5, keeping a bullish sequence intact with focus on the bull trigger at $1824.5 (Dec 13 high).

CANADA DATA: CPI Edges Above Expectation, Core Back At Y/Y Cycle Highs

• Headline above consensus and at the top end of the analyst range, edging lower from 6.9% to 6.8% Y/Y (cons 6.7%).
• BoC’s preferred core measures also slightly stronger than expected, led by CPI-median accelerating from an upward revised 4.9% to 5.0% Y/Y (cons 4.9%).
• CPI-trim being in line at 5.3% meant a rounded average of 5.2% Y/Y, back at its June-July peak having touched 5.0% in Aug-Sep.

CANADA DATA: Modest Uptick In Monthly Core Inflation Goes Against Latest Downtrend

• The monthly run rates support the takeaway of a report that isn’t wildly stronger than expected but does question the pace of prior moderation.
• Simple core of headline excl food & energy increased to 0.35% M/M from an upward revised 0.28% (initially 0.21%), which meant that instead of hovering ~3.5% annualised, the 3-month run rate now sits at 4.2%.
• The Bank’s policy statement on Dec 7 noted “Three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum.” This likely still holds but perhaps with added emphasis on may.
• The Q4 inflation expectations surveys hit Jan 16 before Dec CPI on Jan 17 ahead of the BoC on Jan 25.

US DATA: Conf. Board Labour Gauge Sees Largest Increase Since March

• Helping the large beat for overall consumer confidence (up from 101.4 to 108.3, cons 101.0) was a bucking of the recent downward trend in the labour differential.
• Jobs were seen as more plentiful (47.8 from 45.2%) whilst hard to get fell back (12 from 13.7%). The differential of 35.8% is the highest since Sept after the largest monthly increase since March - see chart.

US DATA: Existing Home Sales Slide Accelerates

• Existing home sales fell more sharply than expected in November, with the decline accelerating from -5.9% to -7.7% M/M (cons -5.2%).
• It’s the fastest monthly decline since Feb and before that the depths of the pandemic in Apr/May’20.
• The level of existing sales catches up with the continued slide in pending sales, with existing just 0.5% higher than May’20 low prior to which it’s the lowest since 2010 stimulus distortions and then mid-2009.
• However, "the market may be thawing since mortgage rates have fallen for five straight weeks," NAR Economist Yun added. "The average monthly mortgage payment is now almost $200 less than it was several weeks ago when interest rates reached their peak for this year."
• Unsold inventory was unchanged at 3.3 months of supply at the current sales pace (3.5 months in seasonally adjusted terms), trending higher from the 2.1 months in Nov’21 but still off the 4 months averaged in 2019.