MNI ASIA OPEN: Hedging for Live Fed in March

EXECUTIVE SUMMARY

• MNI INTERVIEW: US Factories Face New Backlogs From Omicron-ISM
• MNI BRIEF: MN Fed Kashkari Says Inflation Should Ease With Pandemic
• JOHNSON: HAVE CHANCE TO RIDE OUT OMICRON WAVE WITHOUT LOCKDOWN, Bbg

US

FED: U.S. manufacturers will likely face renewed bottlenecks as the Omicron variant spreads, Institute for Supply Management manufacturing chair Tim Fiore told MNI Tuesday.

• "I'm definitely expecting problems," he said. "I'm expecting problems on the supplier delivery number," Fiore said, "and the employment numbers are going to to sag quite a bit, maybe even contract." For more see MNI Policy main wire at 1340ET.

FED: Recap Of Likely Biden Picks For Key Roles; Further support for the leading contenders for 2 of the 3 Board positions to be open by end-Jan.

• VC Supervision: Sarah Bloom Raskin is Biden's choice according to Axios late yesterday, pushing her higher from mid-70s to 92c on PredictIt. It could be announced as early as this week.
• Whilst backed by Sen. Warren and in favour of tighter regulation and a greater focus on climate risk, she is seen as having a greater chance of Senate approval than Richard Cordray.
• Board position: Philip Jefferson will likely be nominated according to people familiar with the matter via Bloomberg, adding to WSJ saying he was in contention along with Lisa Cook last week.
• Jefferson is the faculty dean and an economics professor at Davidson College, North Carolina, with a focus on inequality. He had stints at the Fed in the 80s and 90s and would be the fourth Black man to sit on the BoG in its history.
• Not Biden picks but still important: the Boston (2022 voter) and Dallas (2023 voter) Fed presidencies remain vacant, with Dallas holding a town hall on Jan 13 on its search.
• Separately, Powell's Chair renomination and Brainard's VC appointment hearings are also planned for next week.

US TSYS: 10Y Real Yields At Post Dec FOMC High

• A decoupling between 10Y Tsy yields and breakevens has seen the breakeven-derived real yield rise 7.5bps to -0.945% (and 12.5bps since the new year).
• This is the highest since the immediate reaction to the Dec FOMC decision and prior to that since pre-Omicron levels.
• Both 10Y nominal yields and breakevens remain elevated, but the 10Y nominal yield is up 3.5bps today at 1.665% whereas the breakeven has dipped 4bps to 2.608%.
• Today’s further rise in the nominal yield takes it to the top end of the post-pandemic range, close to the 1.7% it has struggled to clear in recent months.
• FOMC minutes tomorrow with markets looking for any discussion on how soon they might hike rates after taper is over and any more detail about balance sheet normalisation.
• Yield curves holding steeper but slightly off midday highs (5s30s +4.07 at 70.75 -- steepest since late November.
  
  • Contributing flow in addition to large 5Y Block buy, trading desks report two-way in short end with foreign real$ selling 2s, domestic real$ buying 3s vs. leveraged acct selling.

OVERNIGHT DATA

• US REDBOOK: DEC STORE SALES +17.6% V YR AGO MO
  
• US REDBOOK: STORE SALES +18.8% WK ENDED JAN 01 V YR AGO WK
• US REDBOOK: WILL RESUME MONTH-TO-MONTH DATA COMPARISON IN FEB 2022

• US ISM PURCHASING MANAGERS INDEX 58.7 DEC VS 61.1 NOV
• US ISM PRICES PAID INDEX 68.2 DEC VS 82.4 NOV (NSA)
• US ISM NEW ORDERS INDEX 60.4 DEC VS 61.5 NOV
• US ISM EMPLOYMENT INDEX 54.2 DEC VS 53.3 NOV
• US ISM PRODUCTION INDEX 59.2 DEC VS 61.5 NOV
• US ISM SUPPLIER DELIVERY INDEX 64.9 DEC VS 72.2 NOV
• US ISM ORDER BACKLOG INDEX 62.8 DEC VS 61.9 NOV (NSA)
• US ISM INVENTORIES INDEX 54.7 DEC VS 56.8 NOV
• US ISM CUSTOMER INV INDEX 31.7 DEC VS 25.1 NOV (NSA)
• US ISM EXPORTS INDEX 53.6 DEC VS 54.0 NOV (NSA)
• US ISM IMPORTS INDEX 53.8 DEC VS 52.6 NOV (NSA)

• US BLS: JOLTS QUITS RATE 3% IN NOV

• CANADA DEC INDUSTRIAL PRICES +0.8% MOM; EX-ENERGY +0.9%
• CANADA DEC RAW MATERIALS PRICES -1.0% MOM; EX-ENERGY +1.2%

MARKETS SNAPSHOT

Key late session market levels:

• DJIA up 253.9 points (0.69%) at 36840.37
• S&P E-Mini Future down 3.5 points (-0.07%) at 4782.5
• Nasdaq down 251.3 points (-1.6%) at 15582.47
• US 10-Yr yield is up 3.5 bps at 1.663%
• US Mar 10Y are down 5/32 at 129-9
• EURUSD down 0.0007 (-0.06%) at 1.129
• USDJPY up 0.82 (0.71%) at 116.14
• WTI Crude Oil (front-month) up $0.92 (1.21%) at $77.00
• Gold is up $13.02 (0.72%) at $1814.46

• EuroStoxx 50 up 35.8 points (0.83%) at 4367.62
• FTSE 100 up 120.61 points (1.63%) at 7505.15
• German DAX up 131.88 points (0.82%) at 16152.61
• French CAC 40 up 100.19 points (1.39%) at 7317.41

US TSY FUTURES CLOSE

• 3M10Y +1.979, 157.679 (L: 152.039 / H: 159.781)
• 2Y10Y +4.491, 90.109 (L: 84.026 / H: 91.814)
• 2Y30Y +6.678, 131.898 (L: 123.182 / H: 133.768)
• 5Y30Y +4.377, 71.054 (L: 64.685 / H: 72.636)
• Current futures levels:
• Mar 2Y up 1.625/32 at 109-0.875 (L: 108-30.625 / H: 109-01.375)
• Mar 5Y up 0.25/32 at 120-14.25 (L: 120-10.25 / H: 120-17.5)
• Mar 10Y down 4.5/32 at 129-9.5 (L: 129-04 / H: 129-19)
• Mar 30Y down 1-04/32 at 156-25 (L: 156-13 / H: 158-02)
• Mar Ultra 30Y down 2-13/32 at 189-27 (L: 189-06 / H: 192-16)

US EURODOLLAR FUTURES CLOSE

• Mar 22 steady at 99.645
• Jun 22 +0.015 at 99.405
• Sep 22 +0.030 at 99.195
• Dec 22 +0.040 at 98.950
• Red Pack (Mar 23-Dec 23) +0.025 to +0.035
• Green Pack (Mar 24-Dec 24) -0.02 to +0.005
• Blue Pack (Mar 25-Dec 25) -0.04 to -0.03
• Gold Pack (Mar 26-Dec 26) -0.04 to -0.035

SHORT TERM RATES

US DOLLAR LIBOR: Settlement resumes:

• O/N +0.00791 at 0.07229% (-0.00537 total last wk)
• 1 Month +0.00246 to 0.10371% (+0.00000 total last wk)
• 3 Month +0.00687 to 0.21600% (-0.00875 total last wk) ** Record Low 0.11413% on 9/12/21
• 6 Month +0.00411 to 0.34286% (-0.00450 total last wk)
• 1 Year +0.01987 to 0.60300% (+0.01600 total last wk)

• Daily Effective Fed Funds Rate: 0.07% volume: $74B
• Daily Overnight Bank Funding Rate: 0.07% volume: $249B

• Secured Overnight Financing Rate (SOFR): 0.04%, $972B
• Broad General Collateral Rate (BGCR): 0.05%, $344B
• Tri-Party General Collateral Rate (TGCR): 0.05%, $321B
• (rate, volume levels reflect prior session)

• TIPS 1Y-7.5Y, $1.501B accepted vs. $5.048B submission
• Next scheduled purchases:
• Wed 01/05 1010-1030ET: Tsy 7Y-10Y, appr $2.425B vs. $2.825B prior
• Wed 01/05 1100-1120ET: Tsy 22.5Y-30Y, appr $1.825B
• Thu 01/06 1100-1120ET: TIPS 7.5Y-30Y, appr $0.925B
• Fri 01/07 1010-1030ET: Tsy 0Y-2.25Y, appr $9.325B

FED Reverse Repo Operation

NY Fed reverse repo usage continues to recede after from last Friday's all-time high of $1,904.582B -- down to $1,495.692B (72 counterparties) from $1,579.526B on Monday.

EGBs-GILTS CASH CLOSE: Post-Holiday Gilt Sell-Off

German bonds vastly outperformed the UK's Tuesday, though this was distorted by the return to Gilt cash trading from holidays.

• Overall it was a risk-on session in Europe with equities gaining and curves steepening.
• Gilts sold off sharply (vs Dec 31 levels), with short-end/belly yields rising to 2+ year highs. The 10Yr segment underperformed though, with yields up 11+bp (to 'just' 2-month highs).
• GBP strength vs EUR was notable, and largely attributable to a relatively more hawkish policy rate outlook in the UK vs Eurozone.
• Italian curve steepening was exacerbated by a syndication mandate for new 30Yr BTP.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 1.3bps at -0.613%, 5-Yr is down 0.7bps at -0.418%, 10-Yr is down 0.4bps at -0.122%, and 30-Yr is up 0.5bps at 0.257%.
• UK: The 2-Yr yield is up 8.1bps at 0.768%, 5-Yr is up 9.3bps at 0.913%, 10-Yr is up 11.4bps at 1.085%, and 30-Yr is up 9.5bps at 1.212%.
• Italian BTP spread up 1.3bps at 133.7bps / Spanish down 0.3bps at 71.2bps

FOREX: JPY Stays Weak Despite Equity Backtrack

• JPY headed into US hours at the bottom of the G10 table, and holds that position into the NY close. USD/JPY made light work of resistance ahead of the 116 handle, topping the mark and rallying to touch the best levels since early 2017.
• USD/JPY front-end risk reversals rose in sympathy with spot, prompting 1m RR to almost entirely reverse the omicron-inspired plunge at the end of November, with the contract closing in on the -0.2 points last seen on Nov25.
• Stocks charged higher at the open, helping boost the likes of AUD, NOK and CAD, which held their strength despite a moderation in equity prices after the open.
• The greenback held its ground for much of the European morning, but a miss on expectations for the ISM Manufacturing release worked against the USD Index, with particular attention paid to the subpar prices paid index - another metric that may suggest inflation could be nearing a medium-term peak.
• Final Eurozone PMI data crosses Wednesday as well as the December ADP Employment Change report. Fed minutes are also on the docket.