MNI (NEW YORK) - HIGHLIGHTS:
- USD Regains Further Ground With European Assets Dipping On US/Ukraine Rhetoric
- Treasuries Outperform Peers As Fed Minutes Spur Speculation On QT End
- Multiple Fed Speakers, US Jobless Claims Data Coming Up Thursday
US TSYS: Bull Steepening As Fed Muses On QT End
The Treasury curve leaned bull steeper Wednesday.
- Futures started on the back foot in a continuation of the bearish price action following last Friday's post-retail sales peak, with developments in Europe (hawkish ECB member commentary, mixed UK inflation data) weighing.
- But Tsys would reclaim ground largely in two moves: first around the equity cash open, through no particular trigger (data including housing starts were soft but overall mixed), and second after the release of the January FOMC minutes which suggested that some participants eyed a precautionary end to QT earlier than markets are anticipating.
- Conversely, the 20Y Bond auction tailed by 1bp, a return to weak form after a strong prior sale in January - the Treasury market reaction was negative but brief (half a tick lower in TYs).
- With Fed cut expectations ticking higher (about 3bp for 2025), the belly of the curve outperformed. Latest cash levels: The 2-Yr yield is down 3.8bps at 4.2676%, 5-Yr is down 3.9bps at 4.363%, 10-Yr is down 2.2bps at 4.5288%, and 30-Yr is down 0.5bps at 4.7607%. In futures, Mar 10-Yr futures (TY) up 4.5/32 at 108-31.5 (L: 108-21.5 / H: 109-00)
- Looking ahead, Fed's Jefferson speaks after the cash close (subject: household balance sheets).
- Thursday's schedule includes the Philly Fed manufacturing survey alongside weekly jobless claims, while the highlight of the Fedspeak schedule is St Louis's Musalem.
US ISSUANCE
US TSY 20Y BOND AUCTION: HIGH YLD 4.830%; ALLOT 37.10%
- US TSY 20Y BOND AUCTION: HIGH YLD 4.830%; ALLOT 37.10%
- US TSY 20Y BOND AUCTION: DEALERS TAKE 17.51% OF COMPETITIVES
- US TSY 20Y BOND AUCTION: DIRECTS TAKE 19.51% OF COMPETITIVES
- US TSY 20Y BOND AUCTION: INDIRECTS TAKE 62.99% OF COMPETITIVES
- US TSY 20Y BOND AUCTION: BID/COV 2.43
US TSYS/SUPPLY: Review: 20Y Bond Auction Tails, Weak Bid-Cover
February's $16B 20Y Bond new issue auction was slightly weak, with a 1bp tail on a 4.830% high yield vs 4.820% when-issued yield.
- Peripheral stats were on the soft side: bid-cover of 2.43x was the lowest in 4 auctions (2.54x 5-auction average), with primary dealers taking down 17.5% of competitives (16.8% 5-auction average). Directs took 19.5% (16.4% 5-auction average) with indirects taking 63.0% (66.8% 5-auction average).
- From another perspective, it was much weaker result than January's unusually strong auction, and the 5th tail in the last 6 auctions.
- Treasury futures edged very slightly lower on the result, with front TYs down 0.5 ticks at 108-24.5.
- The first re-open of this 20Y Bond is tentatively scheduled for March 18 ($13B).
MNI ANALYSIS
FED: FOMC Minutes: More QT Discussion Than Anticipated
The first thing that stands out in the January FOMC minutes was the surprising amount of balance sheet discussion, considering there was little said at the meeting press conference or indeed since then by participants. This appears to have been a modest surprise to markets as well: 10Y Swap spreads widened by about 2bp after the minutes release.
- Overall on QT, there doesn't appear to be much of a rush to shift gears. The SOMA manager "noted that a range of indicators continued to suggest that reserves had remained abundant over the intermeeting period. However, the manager cautioned that the debt limit situation may cloud the signals provided by the indicators. In addition, reserves might decline quickly upon resolution of the debt limit and, at the current pace of balance sheet runoff, might potentially reach levels below those viewed by the Committee as appropriate."
- One of the theories behind an early-2025 end to QT was that the Fed would lose visibility on reserve scarcity when Treasury was impacted by the debt limit, and the uncertainty would lead to an end to runoff, but that hasn't happened and doesn't seem to be the prevailing sentiment by FOMC members.
- The Committee was briefed on post-QT reinvestment options, which unsurprisingly involved reinvesting MBS proceeds back into Treasuries, though there seems to be some optionality in the approach to adjusting the maturity composition of the Treasury portfolio: "The scenarios presented corresponded to different trajectories of the holdings of Treasury securities in the SOMA. Under all scenarios considered, the maturity composition of Treasury holdings in the SOMA portfolio moved into closer alignment with the maturity composition of the outstanding stock of Treasury securities. The scenarios differed on how quickly this alignment would be achieved and, correspondingly, on the assumed increase over coming years in the share of Treasury bills held in the SOMA portfolio."
- In the end, no decisions were made, and it sounds like those who were concerned about the impact of the debt limit on reserves were in the minority. For now while it is notable that details of post-QT operations have been discussed, we would think that this is still a decision for mid-year at the earliest (consensus is shifting toward Q3 as opposed to Q2 at the outset of the year). That's particularly since Fed leadership including Powell and NY Fed's Williams seem to regard reserves as remaining abundant.
- Per the minutes: "Regarding the potential for significant swings in reserves over coming months related to debt ceiling dynamics, various participants noted that it may be appropriate to consider pausing or slowing balance sheet runoff until the resolution of this event. Several participants also expressed support for the Desk's future consideration of possible ways to improve the efficacy of the SRF."
MNI UK Inflation and Labour Market Insight: Feb 2025
For the full PDF document click here.
- There was a small downside surprise in services inflation but upside surprises for food and core goods.
- On the labour market there was encouraging data on the quantities side with a small downside surprise to AWE wage data while PAYE wage data continued its downtrend.
- Overall, we don't think there is a huge amount in these data to change the mind of either the doves or central group on the MPC.
MACRO ANALYSIS: Threat Of More Penal Tariffs On Autos & Pharma Downplayed [1/2]
- US President Trump’s latest threats late yesterday on large tariffs on autos (“in the neighborhood of 25%”) and pharmaceuticals and semiconductors (“25% and higher”) hasn’t been met with the same growth-negative market reaction in EU rates today as in previous episodes.
- On top of the offsetting theme from prospects of notable increases in EU defense spending, the continued pushing back of effective dates is also likely at play. The latest date of Apr 2 is a further delay from previously focused tariffs on iron/steel & aluminium (due Mar 12) and it tallies with the proposed report on reciprocal tariffs due Apr 1, with previously discussions potentially getting rolled up into these early April deadlines/discussions.
- The assumption seems to be that this is a continuation of a Trump’s negotiation strategy of proposing penal policies in order to strike a deal, but if these tariffs do start to grow in likelihood then it’s worth noting that the latest proposals are far more damaging than those on iron/steel & aluminium.
- EU exports of medicinal and pharmaceutical products to the US were worth 0.7% of EU GDP in 2024 whilst vehicle exports were worth 0.3% GDP vs just 0.1% GDP for iron/steel & aluminium.
- With Trump also focused on trade imbalances, the EU sees sizeable trade surpluses of 0.4% GDP (pharma), 0.2% GDP (vehicles) and 0.0% GDP (iron/steel & aluminium).
MACRO ANALYSIS: German Sensitivity Could Support Firmer Retaliation [2/2]
- One area where there can be a greater argument for the lack of dovish reaction at today’s open is that Germany’s greater sensitivity to these sectors sees stronger support from the largest EU member for retaliation beyond non-tariff measures (NTMs).
- This Sunday’s German election muddies proceedings but comes sufficiently ahead of these early April deadlines.
- German exports of vehicles to the US were worth 0.8% German GDP in 2024 (vs an equivalent 0.3% GDP for EU exports to the US) whilst medicinal and pharmaceutical products were worth 0.6% GDP (similar to the 0.7% for the EU).
- On the same net trade basis as in part one, auto net exports were worth 0.6% GDP in 2024 (vs 0.2% for EU) and 0.5% GDP for pharma (0.4% for EU).
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
US TSYS/OVERNIGHT REPO: Secured Rates See (Likely Temporary) Upside Pressure
As largely expected, secured rates saw some upside pressure Tuesday, coinciding with large Treasury coupon auction settlements from last week's refundings. SOFR rose 4bp to the highest level of February so far (4.37%), with BGCR and TGCR up 3bp.
- It's anticipated that these rates will pull back later this week as the Treasury settlement impact subsides, though pressures are likely to return at the end of the month as usual.
- Effective Fed funds unsurprisingly remained unchanged at 4.33%, though there was some upside pressure at the extreme high end of the distribution (volume-weifghted 99th percentile up 5bp to 4.45%, joint-highest since the December Fed rate cut)
REPO REFERENCE RATES (rate, change from prev. day, volume):
* Secured Overnight Financing Rate (SOFR): 4.37%, 0.04%, $2452B
* Broad General Collateral Rate (BGCR): 4.34%, 0.03%, $936B
* Tri-Party General Collateral Rate (TGCR): 4.34%, 0.03%, $913B
New York Fed EFFR for prior session (rate, chg from prev day):
* Daily Effective Fed Funds Rate: 4.33%, no change, volume: $89B
* Daily Overnight Bank Funding Rate: 4.33%, no change, volume: $246B
US TSYS/OVERNIGHT REPO: Overnight Reverse Repo Takeup Dips
Overnight reverse repo facility takeup dipped by $4.6B to $73.2B Wednesday, a retracement from Tuesday's $19.0B jump but still higher vs the month's multi-year low of $58.8B set last week.
- Takeup is expected to remain relatively steady until late next week, at which time it would be unsurprising to see it rise above $100B for the first time in February amid month-end dynamics.
| SOFR FIX - Source BBG/CME | ||
| 1M | 4.32021 | 0.00841 |
| 3M | 4.33003 | 0.00811 |
| 6M | 4.30668 | 0.01088 |
| 12M | 4.24548 | 0.01391 |
US SOFR/TREASURY OPTION SUMMARY
Wednesday's US rates/bond options flow included:
- SFRK5 95.81/95.68ps 1x2, bought for 1.75 in 1k.
- SFRU5 96.25c, bought for 9.5 in 30k total (Screen and Pit).
- SFRU5 96.00/96.25/96.50c fly, bought for 2.5 in 1k.
EGBs-GILTS CASH CLOSE: Bear Steepening With Multiple Factors At Play
Multiple factors weighed on EGBs and Gilts Wednesday.
- The space was weighed upon from overnight/early developments, including mixed UK CPI data (MNI's review of this week's UK inflation and labour market data is here), and later by supply including Gilt and Bund auctions.
- Bunds saw their biggest downside move of the day in late morning on the publication of an FT interview with ECB's Schnabel who said that the ECB is getting closer to a pause or stop in rate cuts.
- The German curve bear flattened sharply as ECB rate cuts were duly faded, though the curve re-steepened over the course of the day amid long-end underperformance.
- For a second day, losses were fairly steady throughout the session. Both the German and UK curves bear steepened, with Bunds underperforming Gilts.
- Periphery and semi-core EGB spreads widened as the recent equity rally pared back, with BTPs and GGBs underperforming.
- Thursday's calendar includes UK CBI and Eurozone consumer confidence readings, along with appearances by ECB's Nagel and Makhlouf. We also get supply from France and Spain.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is up 4.6bps at 2.178%, 5-Yr is up 6bps at 2.327%, 10-Yr is up 6.4bps at 2.557%, and 30-Yr is up 5.8bps at 2.803%.
- UK: The 2-Yr yield is up 3.4bps at 4.277%, 5-Yr is up 5.2bps at 4.305%, 10-Yr is up 5.3bps at 4.611%, and 30-Yr is up 4.9bps at 5.195%.
- Italian BTP spread up 3bps at 108.4bps / Greek up 1.8bps at 84.4bps
EUROPE OPTIONS: A Downside Tilt To A Busy Session
Wednesday's Europe rates/bond options flow included:
- OEH5 117.00/117.25ps, bought for 18 in 7.5k.
- OEH5 117.25/117.75cs, bought for 7.5 in 3k.
- RXH5 130.5/129.5ps, sold 3 in 8k.
- RXK5 134.50 calls paper paid 24 on 3.1K.
- ERJ5 97.62/9750ps, bought for 1 in 11.5k.
- ERM5 97.9375c, sold at 4.75 in 10k (ref 97.825)
- ERM5 97.9375/98.1875 1x2 call spread, paper sells for 2.75 in 12k.
- ERM5 97.9375/98.0625/98.1875c fly, bought for 1.25 in 7k.
- ERU5 97.875/97.750/97.625 put ladder 10K given at -0.25.
FOREX: USDMXN Rises 1% as US/Mexican Officials Discuss Trade
- The USD index is firming for a second consecutive session, with the likes of EUR and GBP underperforming in G10. Comments from President Trump on Zelensky have weighed on EURUSD, reflective of the souring sentiment towards how the potential Russia/Ukraine negotiations might progress.
- EURUSD continues to press towards 1.0400, placing weight on EURJPY (0.65%), which continues to hover near session lows as we approach the European close.
- Overall, EURJPY has pulled back from its recent high, and resistance at 160.68, the 50-day EMA, remains intact. A stronger reversal south would refocus the attention on 155.61, the Feb 10 low and a bear trigger. Furthermore, a trendline drawn from the August 2022 lows currently intersects just above this level, bolstering the significance of this area of support.
- UK inflation rose at the fastest pace in almost a year in January, outpacing even the Bank of England's expectation for a move higher. However, the small downside surprise in services inflation provided a cloudy signal for GBP, which has been dominated by broader dollar sentiment. As such, GBPUSD has slipped back below 1.2600, but overall is holding onto its recent gains.
- ZAR weakness was notable in EM amid the adjournment of the budget delivery, prompting a firm rally for USDZAR (+0.91%). This has weighed on the EM basket on Wednesday, with similar weakness being noted for the Mexican peso.
- USDMXN has risen a little over one percent on the session, to trade around 20.45 at typing. Key support at 20.1343 remains intact and the currency will remain particularly sensitive to developments in Washington, where US and Mexican officials are discussing the future trade relationship.
OPTIONS: Expiries for Feb20 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.0315(E916mln), $1.0350(E895mln), $1.0370(E590mln), $1.0400-10(E2.9bln), $1.0425-40(E4.4bln), $1.0450(E1.4bln), $1.0520-25(E1.5bln)
- USD/JPY: Y151.00($514mln), Y151.80-00($1.1bln), Y152.45($515mln), Y154.00($3.0bln)
- GBP/USD: $1.2520(Gbp932mln)AUD/USD: $0.6325(A$549mln), $0.6350(A$685mln), $0.6375(A$858mln), $0.6400(A$424mln)
- USD/CAD: C$1.4100($655mln)l C$1.4175($716mln)
- USD/CNY: Cny7.2000($1.9bln), Cny7.2500($1.9bln), Cny7.3700($1.3bln)
EQUITY TECHS: E-MINI S&P: (H5) Key Resistance Remains Exposed
- RES 4: 6205.38 0.764 proj of the Jan 13 - 24 - Feb 3 price swing
- RES 3: 6200.00 Round number resistance
- RES 2: 6178.75 High Dec 6 and key resistance
- RES 1: 6162.25 High Jan 24
- PRICE: 6132.00 @ 14:26 GMT Feb 19
- SUP 1: 6075.54 20-day EMA
- SUP 2: 6014.00/5935.50 Low Feb 10 / 3
- SUP 3: 5892.37 76.4% retracement of the Aug 5 - Dec 6 bull leg
- SUP 4: 5842.50 Low Jan 14
S&P E-Minis have faded off highs intraday, but remain firm and hold the bulk of the recent phase of strength. Attention remains on resistance at 6162.25, the Jan 24 high. Clearance of this level would expose the key resistance at 6178.75, the Dec 6 ‘24 high. A move above this hurdle would resume the primary uptrend. On the downside, initial key support has been defined at 6014.00, the Feb 10 low. A break would highlight a bearish development.
DATA/EVENTS CALENDAR
| Date | GMT/Local | Impact | Country | Event |
| 19/02/2025 | 2200/1700 |  US | Fed Vice Chair Philip Jefferson | |
| 20/02/2025 | 0030/1130 | *** |  AU | Labor Force Survey |
| 20/02/2025 | 0700/0800 | ** |  DE | PPI |
| 20/02/2025 | 1000/1100 | ** |  EU | Construction Production |
| 20/02/2025 | 1100/1100 | ** |  GB | CBI Industrial Trends |
| 20/02/2025 | 1330/0830 | * |  CA | Industrial Product and Raw Material Price Index |
| 20/02/2025 | 1330/0830 | *** | US | Jobless Claims |
| 20/02/2025 | 1330/0830 | ** | US | Philadelphia Fed Manufacturing Index |
| 20/02/2025 | 1435/0935 | US | Chicago Fed's Austan Goolsbee | |
| 20/02/2025 | 1500/1600 | ** | EU | Consumer Confidence Indicator (p) |
| 20/02/2025 | 1530/1030 | ** | US | Natural Gas Stocks |
| 20/02/2025 | 1600/1100 | ** | US | DOE Weekly Crude Oil Stocks |
| 20/02/2025 | 1630/1130 | ** | US | US Bill 04 Week Treasury Auction Result |
| 20/02/2025 | 1630/1130 | * | US | US Bill 08 Week Treasury Auction Result |
| 20/02/2025 | 1705/1205 | US | St. Louis Fed's Alberto Musalem | |
| 20/02/2025 | 1800/1300 | ** | US | US Treasury Auction Result for TIPS 30 Year Bond |
| 20/02/2025 | 1930/1430 | US | Fed Governor Michael Barr | |
| 21/02/2025 | 2200/0900 | *** | AU | Judo Bank Flash Australia PMI |
| 20/02/2025 | 2200/1700 | US | Fed Governor Adriana Kugler | |
| 21/02/2025 | 2330/0830 | *** |  JP | CPI |
| 21/02/2025 | 0001/0001 | ** | GB | Gfk Monthly Consumer Confidence |
| 21/02/2025 | 0030/0930 | ** | JP | Jibun Bank Flash Japan PMI |
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