MNI ASIA OPEN: Curves Steepen as Mkt Prices In More Rate Hikes

EXECUTIVE SUMMARY

• MNI: Fed’s Peak Rate Looking Perkier As Jobs Boom-Ex-Officials
• MNI INTERVIEW: Lockhart Sees Fed Lifting Rate Estimates in SEP
  
• MNI: Philly Fed Survey Trims Year-End Jobless Rate Call Rate Call
  
• MNI SOURCES: 100bp Gap Between Hawk-Dove ECB Peak Rates

US

FED: Federal Reserve officials could raise interest rates more than the FOMC's December forecasts, pushing the peak above what investors expect toward 6% as the decline in inflation proves bumpy and the labor market remains ultra-tight, former Fed policymakers and staffers told MNI.

• That could evolve through ongoing quarter-point increases, they said, or, less optimally for the central bank, with a pause followed later by a resumption of rate hikes.
• “If they pause they're prepared to resume again if conditions call for it -- they have to put that disclaimer in some form of communications. That is understood, really, all the time, but they need to make it explicit,” said Dennis Lockhart, former president of the Atlanta Fed, in an interview with MNI’s FedSpeak podcast. “Having said that, I think the ideal policy does not involve a restart after a pause.”
• The Fed this month reduced the pace of hikes to a more traditional quarter-point clip, down from more drastic increases last year as it sought to catch up with inflation at 40-year highs. The decision to slow tightening could prolong the rate hike cycle well above policymakers’ median December forecast for rates to top out at 5.1%. For more see MNI Policy main wire t 1131ET.

FED: Federal Reserve officials are likely to again revise higher their projected path for interest rates next month as they reassess the degree of restraint needed to cool a booming labor market, former Atlanta Fed President Dennis Lockhart said in an interview.

• Just as the market outlook finally converged with the Fed's above-5% December rate projection this week after a remarkably strong January jobs report, the FOMC could spring another hawkish surprise, Lockhart told MNI's FedSpeak podcast. Employers added over half a million workers last month and revisions to 2022 data showed job growth was even better than previously thought.
  
• "It is stronger than they expected and stronger than they desire. I think that adds up by March to a set of projections that perhaps show a higher terminal rate and show a conceivably longer or at least sustaining the long picture of the hold period," Lockhart said. The majority of FOMC members late last year expected rates to pause at just above 5% this year. "If I were to handicap it, I would say it would be a touch more hawkish in March than it was in December." For more see MNI Policy main wire at 0821ET.

EUROPE

ECB: Hawkish European Central Bank officials want to push rates higher than 4% this year, but doves see the cycle peak as much as 1 percentage point lower, and are preparing to argue for a slowdown in hikes in May after what is likely to be another 50-basis-point increase in March, Eurosystem sources told MNI.

• While Dutch central bank chief Klaas Knot argued in an MNI Webcast this week for considering a further 50 basis points in May if necessary, and could find hawish support, others will point to the need to balance the risks of inflation with those to growth as energy prices slide, and highlight the four significant inflation data releases between now and the June meeting. This data, together with the ECB’s March projections, will be key in deciding a potential downshift to a 25-basis-point increment in May, said one highly-placed source at a national central bank.
  
• While some national central banks want to see more than 150 basis points in additional hikes, the centre of gravity in the Council would probably favour a peak rate somewhere between 3% and 3.5%, said the source. Another, with links to one of the more hawkish banks agreed that resistance to taking the deposit rate above 3.5% would be significant. For more see MNI Policy main wire at 1015ET.

Market Roundup: Nov-Dec CPI Revision Little Hotter, Jan CPI Next Tue

• Knock on pressure after Canada employment data came out much stronger than expected (+150k vs. +15k est), underscoring CB bank messaging this week to continue to hike rates (data dependent) until inflation meets targets.
• Session focus on BLS Seasonal Adjustment revisions to CPI. Core CPI inflation running 0.1pps hotter in M/M terms in both Nov and Dec at 0.31% and 0.40% M/M respectively, with a weaker than first thought period in the spring.
• However, potentially supporting the muted market reaction to the annual revision is that most of this recent strength came through core goods.
• Muted react to UofM February Consumer Sentiment of 66.4 vs. 65. est, 64.9 prior.
• No react to midday comments from Philly Fed Harker: favours getting rates above 5% and then pausing (previously slightly above 5%). In other comments, he sees it “more probable now” that we can pull off a soft landing, with a good chance of doing so if inflation keeps easing.
  
• Focus turns to Jan CPI next Tue: MoM (0.1% rev, 0.5%); YoY 6.5%, 6.2%).

OVERNIGHT DATA

• U.S. DEC CPI REVISED TO +0.1 PCT (PREV -0.1 PCT)
• U.S. DEC CPI EXFOOD/ENERGY REVISED TO +0.4 PCT (PREV +0.3 PCT)

• The Seasonal Adjustment revisions leave core CPI inflation running 0.1pps hotter in M/M terms in both Nov and Dec at 0.31% and 0.40% M/M respectively, with a weaker than first thought period in the spring.
  
• However, potentially supporting the muted market reaction to the annual revision is that most of this recent strength came through core goods.
• Core services were revised up a smaller 0.06pps in Nov and Dec, most recently printing 0.61% M/M in Dec.

• University of Michigan Prelim. February Consumer Sentiment at 66.4; Est. 65 -bbg
• University of Michigan 5-Yr Inflation Forecast +2.9%

• CANADA JAN JOBLESS RATE 5% VS 5.1% FORECAST, PRIOR 5%
• CANADA JAN HOURLY WAGES 4.5% YEAR-OVER-YEAR VS PRIOR 4.8%
• CANADA JAN FULL-TIME JOBS +121.1K, PART-TIME +28.9K
• CANADA JAN JOB GAIN LED BY WHOLESALE AND RETAIL TRADE

MARKETS SNAPSHOT

Key late session market levels:

• DJIA up 103.82 points (0.31%) at 33802.36
• S&P E-Mini Future down 1 points (-0.02%) at 4091
• Nasdaq down 97.1 points (-0.8%) at 11692.77
• US 10-Yr yield is up 8.6 bps at 3.7435%
• US Mar 10-Yr futures are down 11/32 at 112-22
• EURUSD down 0.0064 (-0.6%) at 1.0676
• USDJPY down 0.15 (-0.11%) at 131.44
• WTI Crude Oil (front-month) up $1.7 (2.18%) at $79.76
• Gold is up $3.18 (0.17%) at $1865.04

• EuroStoxx 50 down 52.2 points (-1.23%) at 4197.94
• FTSE 100 down 28.7 points (-0.36%) at 7882.45
• German DAX down 215.44 points (-1.39%) at 15307.98
• French CAC 40 down 58.63 points (-0.82%) at 7129.73

US TSY FUTURES CLOSE

• 3M10Y +8.557, -103.176 (L: -112.202 / H: -102.603)
• 2Y10Y +5.709, -77.12 (L: -82.98 / H: -76.407)
• 2Y30Y +7.268, -68.712 (L: -76.523 / H: -67.416)
• 5Y30Y +3.528, -9.87 (L: -14.33 / H: -9.061)
• Current futures levels:
• Mar 2-Yr futures down 0.375/32 at 102-7.125 (L: 102-06.375 / H: 102-09.375)
• Mar 5-Yr futures down 5.5/32 at 107-28.75 (L: 107-28 / H: 108-06.5)
• Mar 10-Yr futures down 11/32 at 112-22 (L: 112-20.5 / H: 113-07)
• Mar 30-Yr futures down 31/32 at 126-29 (L: 126-26 / H: 128-03)
• Mar Ultra futures down 56/32 at 137-28 (L: 137-23 / H: 140-00)

US 10YR FUTURE TECHS: (H3)‌‌ Approaching Trendline Support

• RES 4: 115-22+ High Feb 3
• RES 3: 115-00 Round number resistance
• RES 2: 114-06+ 20-day EMA
• RES 1: 114-00+ 50-day EMA
• PRICE: 112-28 @ 11:52 GMT Feb 10
• SUP 1: 112-25 Intraday low
• SUP 2: 112-14+ Trendline support drawn from the Oct 21 low
• SUP 3: 112-00 Round number support
• SUP 4: 111-28 Low Dec 30 and a key support

Treasury futures remain bearish and the contract is trading lower today. Attention is on a trendline support that today intersects 112-14+. The trendline is drawn from the Oct 21 low. A break of this level would strengthen the current bearish theme and expose 111-28, the Dec 30 low. Key short-term resistance is seen at the 50-day EMA which intersects at 114-00+. A break of this EMA would ease bearish pressure.

US EURODOLLAR FUTURES CLOSE

• Mar 23 steady at 94.935
• Jun 23 -0.015 at 94.645
• Sep 23 -0.030 at 94.610
• Dec 23 -0.045 at 94.880
• Red Pack (Mar 24-Dec 24) -0.045 to -0.015
• Green Pack (Mar 25-Dec 25) -0.05 to -0.02
• Blue Pack (Mar 26-Dec 26) -0.06 to -0.055
• Gold Pack (Mar 27-Dec 27) -0.065 to -0.06

SHORT TERM RATES

US DOLLAR LIBOR: Latest settlements:

• O/N +0.00072 to 4.55929% (+0.00658/wk)
• 1M +0.00543 to 4.57800% (+0.00614/wk)
• 3M -0.00314 to 4.86943% (+0.03529/wk)*/**
• 6M +0.01457 to 5.12714% (+0.06971/wk)
• 12M +0.02886 to 5.48457% (+0.23343/wk)
• * Record Low 0.11413% on 9/12/21; ** New 14Y high: 4.87257% on 2/9/23

• Daily Effective Fed Funds Rate: 4.57% volume: $111B
• Daily Overnight Bank Funding Rate: 4.57% volume: $287B

• Secured Overnight Financing Rate (SOFR): 4.55%, $1.212T
• Broad General Collateral Rate (BGCR): 4.52%, $481B
• Tri-Party General Collateral Rate (TGCR): 4.52%, $466B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

NY Fed reverse repo usage slips to $2,042.893B w/ 97 counterparties vs. prior session's $2,058.942B. Compares to Friday, Dec 30 record/year-end high of $2,553.716B (prior record high was $2,425.910B on Friday, September 30.

PIPELINE: $60.2B High-Grade Corporate Debt on Wk

No new issuance Friday after total $60.2B high-grade corporate debt issued on week

EGBs-GILTS CASH CLOSE: Upward Hike Repricing Keeps Pressure On Short End

European curves continued to flatten Friday, with short-end UK yields continuing to rise sharply.

• 2Y UK yields hit a fresh 2023 high (3.635% intraday), though German Schatz stole the headlines by briefly hitting the highest since 2008 (2.773%).
• The main catalyst was continued upward repricing of central bank hike prospects and pricing out of cuts, with more speakers today (including ECB's Kazaks in an MNI interview) pointing to the hiking cycle extending beyond March.
• 110bp of further ECB hikes are now seen (up 6bp), just off the late Dec highs; the BoE is seen closer to its peak (52bp away), though that's up 11+bp.
• Just as they narrowed Thursday on rallying equities/risk, so did EGB periphery spreads widen Friday as European stocks retreated.
• A quieter schedule ahead Monday, with focus firmly on UK employment, Eurozone GDP and US CPI Tuesday.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 6.9bps at 2.761%, 5-Yr is up 7bps at 2.4%, 10-Yr is up 6.1bps at 2.364%, and 30-Yr is up 5.1bps at 2.323%.
• UK: The 2-Yr yield is up 12.8bps at 3.628%, 5-Yr is up 12.1bps at 3.336%, 10-Yr is up 10.5bps at 3.396%, and 30-Yr is up 7.7bps at 3.813%.
• Italian BTP spread up 2.9bps at 184.5bps / Spanish up 1.6bps at 94.9bps

FOREX: Greenback Firms, CAD Bolstered By Large Jobs Beat

• The USD index has firmed roughly 0.4% on Friday and is edging back towards the February highs around the 1.0400 mark. This caps off a stronger week for the greenback as markets have adjusted Fed terminal rate pricing and provides an interesting backdrop ahead of key inflation data in the US next week.
• The Canadian dollar received a substantial boost from January employment figures and is the best performing currency across G10. At the bottom of the board sits the Swedish Krona, retracing some of the Riksbank inspired strength on Thursday, closely followed by weakness in EUR, GBP and the Chinese Yuan.
• EURUSD (-0.66%) has drifted lower into the Friday close amid the more pessimistic tone across equity markets this week, and is testing/has breached support at 1.0674, the 50-day EMA. This represents a key short-term level with the recent move down being considered corrective up to this point.
• Given USDJPY’s sensitivity to movement in core yields and the key US inflation data due next Tuesday, the pair will naturally be in focus for currency traders next week.
• Price action today and throughout the week has been centred around BOJ headlines which, while providing volatility, has not garnered any meaningful adjustment with the pair residing just 0.2% higher on the week.
• Resistance at the 50-day exponential moving average remains intact, currently intersecting at 132.77. This average represents a key short-term level and a clear break is required to suggest scope for an extension higher that would expose 134.77, the Jan 6 high.
• Not expecting much to come from Eurogroup meetings on Monday. First data will be Eurozone flash readings for unemployment and GDP on Tuesday followed by the key risk event of the week, US January CPI.

Monday Data Calendar

Date	GMT/Local	Impact	Flag	Country	Event
13/02/2023	0730/0830	***		CH	CPI
13/02/2023	-			EU	ECB Lagarde & Panetta at Eurogroup Meeting
13/02/2023	1300/0800			US	Fed Governor Michelle Bowman
13/02/2023	1630/1130	*		US	US Treasury Auction Result for 26 Week Bill
13/02/2023	1630/1130	*		US	US Treasury Auction Result for 13 Week Bill