MNI ASIA OPEN: Fed Having Impact on Inflation

EXECUTIVE SUMMARY

• MNI: Brainard- ‘Restrictive’ Fed Eyeing Wage Growth Moderation
• MNI: Fed's Collins Wants Measured Hikes To Peak Just Above 5%
• MNI: Chicago Business Barometer™- December Adjusted Higher
• MNI PODCAST: FedSpeak - Minneapolis Fed's Raffo Sees CPI Fade
• MNI: EU Green Deal Seen Tapping Existing Funds, Leveraged

US

FED: Federal Reserve policy is already in restrictive territory though the effects of rapid monetary tightening have not yet totally permeated the economy and policymakers are watching the path of wages closely, Fed Vice Chair Lael Brainard said Thursday.

• “The FOMC moved policy into restrictive territory at a rapid pace and subsequently downshifted the pace of increases in the target range at its most recent meeting. This will enable us to assess more data as we move the policy rate closer to a sufficiently restrictive level, taking into account the risks around our dual-mandate goals,” she said.
• The Fed is widely expected to lower the size of its rate hikes further at its Feb. 1 decision. While Brainard did not specify any such preference, many of her colleagues already have.
  
• “Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis,” she said in prepared remarks to an event at the University of Chicago’s Booth School. For more see MNI Policy main wire at 1323ET.

FED: Boston Fed President Susan Collins said Thursday interest rates will likely need to rise in more measured steps to just above 5% and then stay at that level for some time in order to tame inflation that reached near 40-year highs.

• "While it is promising to see the effects of higher rates starting to spread from the most interest-sensitive sectors to the broader economy, more is required to ensure a steady path toward our inflation target," she said. "I anticipate the need for further rate increases, likely to just above 5%, and then holding rates at that level for some time."
• Monetary policy tightening has slowed new rent growth considerably, which should lead to a moderation in shelter inflation starting in the spring of this year, she said, but services inflation remains persistently high. "For services outside of shelter, labor tends to be the most important input – so developments in this component of services inflation are ultimately tied to the behavior of wages," she said. For more see MNI Policy main wire at 0910ET.

EUROPE

EU: A proposed European Sovereignty Fund for “green deal” investment in response to U.S. Inflation Reduction Act subsidies is most likely to be paid for by existing European Union facilities rather than fresh borrowing, and could be leveraged in a similar way to the EU’s Chips Act, officials told MNI.

• While European Commission President Ursula von der Leyen and EU President Charles Michel seemed to open the possibility of new joint borrowing in recent speeches, this idea was given short shrift by countries such as Germany at this week’s ECOFIN meeting of finance ministers. The EU’s current Swedish presidency is also against new joint funding as the bloc seeks to respond to USD379 billion U.S. plans to drive green investment. (See MNI: EU Sovereignty Fund Set To Be Watered Down - Officials).
  
• Von der Leyen and Michel had hoped to sell their plan to smaller states and those with tighter fiscal room, such as Italy and Spain, but officials said tapping existing funds such as repurposed loans from the post-Covid Recovery and Resilience Facility was far more likely. While this may only provide a few billion euros, other existing moneys could be found elsewhere, to be leveraged in a similar way to the Chips Act, which aims to use EUR11 billion in official cash to mobilise over EUR43 billion in public and private investments, officials said.

US TSYS: Aligning for Soft Landing Scenario

• Brainard Offers Broadly Dovish Speech: Headlines that the Fed needs 'sufficiently' restrictive' policy for some time belied a broadly dovish speech from VC Brainard across a number of areas, including full effects of tightening only being felt ahead as some prior accommodation offset initial tightening.
• Earlier in the session, Boston Fed President Susan Collins said interest rates will likely need to rise in more measured steps to just above 5% and then stay at that level for some time in order to tame inflation that neared 40Y highs.
• Post-data volatility, Tsys had been rebounding off pre-open lows, experienced fast two-way post data (claims +190k vs. 214k est; Philly Fed -8.9 vs. -11.0 est; house starts 1.382M vs. 1.358M est) extended bounce briefly.
• Tsy futures bounced slightly after $17B 10Y TIPS sale awarded 1.220% high yld vs. WI 1.277%, 2.79x bid-to-cover best in appr 4 years.
• Short end metrics: Fed funds implied hike for Feb'23: 26.7bp, Mar'23 cumulative 45.1bp to 4.783%, May'23 54.5bp to 4.877%, terminal at 4.880% in Jun'23.

OVERNIGHT DATA

• MNI: US JAN PHILADELPHIA FED MFG INDEX -8.9

• US JOBLESS CLAIMS -15K TO 190K IN JAN 14 WK
• US PREV JOBLESS CLAIMS REVISED TO 205K IN JAN 07 WK
• US CONTINUING CLAIMS +0.017M to 1.647M IN JAN 07 WK

• US DEC HOUSING STARTS 1.382M; PERMITS 1.330M
• US NOV STARTS REVISED TO 1.401M; PERMITS 1.351M
• US DEC HOUSING COMPLETIONS 1.411M; NOV 1.540M (REV)

• CANADA NOV WHOLESALE SALES +0.5%; EX-AUTOS -1.2%
• NOV WHOLESALE INVENTORIES -0.5%: STATISTICS CANADA

MARKET SNAPSHOT

Key late session market levels:

• DJIA down 135.23 points (-0.41%) at 33156.43
• S&P E-Mini Future down 13 points (-0.33%) at 3932.75
• Nasdaq down 56.5 points (-0.5%) at 10898.76
• US 10-Yr yield is up 2.9 bps at 3.3987%
• US Mar 10-Yr futures are down 9.5/32 at 115-19.5
• EURUSD up 0.0039 (0.36%) at 1.0833
• USDJPY down 0.48 (-0.37%) at 128.42
• WTI Crude Oil (front-month) up $1.05 (1.32%) at $80.53
• Gold is up $27.39 (1.44%) at $1931.31

US TSY FUTURES CLOSE

• 3M10Y +4.95, -126.831 (L: -140.082 / H: -125.575)
• 2Y10Y -0.689, -72.375 (L: -73.361 / H: -69.119)
• 2Y30Y -0.691, -55.575 (L: -56.727 / H: -51.916)
• 5Y30Y -2.047, 7.713 (L: 7.093 / H: 11.829)
• Current futures levels:
• Mar 2-Yr futures down 2.625/32 at 103-3.5 (L: 103-02.125 / H: 103-08.375)
• Mar 5-Yr futures down 8.75/32 at 110-0.25 (L: 109-29.25 / H: 110-15.5)
• Mar 10-Yr futures down 10/32 at 115-19 (L: 115-14.5 / H: 116-08)
• Mar 30-Yr futures down 13/32 at 131-21 (L: 131-09 / H: 132-31)
• Mar Ultra futures down 26/32 at 143-29 (L: 143-09 / H: 146-01)

‌‌US 10YR FUTURE TECHS: (H3)‌‌ Bull Cycle Extends

• RES 4: 117-17+ 1.00 proj of the Nov 3 - Dec 13 - Dec 30 price swing
• RES 3: 117-00 High Sep 8 2022
• RES 2: 116-30+ 2.0% 10-dma env
• RES 1: 116-08 High Jan 19
• PRICE: 115-20+ @ 1530ET Jan 19
• SUP 1: 115-11+ High Dec 13 and a recent breakout
• SUP 2: 114-09+ Low Jan 17 and a key support
• SUP 3: 114-03+ 20-day EMA
• SUP 4: 113-26+ Low Jan 10

Treasury futures traded higher Wednesday to confirm a resumption of the current bull cycle. The move higher maintains the positive price sequence of higher highs and higher lows and note that moving average studies are highlighting a bullish backdrop. On the continuation chart, the 200-dma has been pierced. The break higher opens 116-22, the upper band of a moving average envelope. Key S/T support to watch is at 114-09+, the Jan 17 low.

US EURODOLLAR FUTURES CLOSE

• Mar 23 -0.015 at 94.975
• Jun 23 -0.030 at 94.920
• Sep 23 -0.055 at 95.045
• Dec 23 -0.065 at 95.430
• Red Pack (Mar 24-Dec 24) -0.065 to -0.055
• Green Pack (Mar 25-Dec 25) -0.05 to -0.045
• Blue Pack (Mar 26-Dec 26) -0.055 to -0.05
• Gold Pack (Mar 27-Dec 27) -0.05 to -0.04

SHORT TERM RATES

US DOLLAR LIBOR: Latest settlements:

• O/N -0.00100 to 4.30943% (-0.000428/wk)
• 1M +0.02272 to 4.50843% (+0.05400/wk)
• 3M +0.00758 to 4.81529% (+0.02286/wk)*/**
• 6M -0.02714 to 5.08086% (-0.02028/wk)
• 12M -0.05943 to 5.30471% (-0.05229/wk)
• * Record Low 0.11413% on 9/12/21; ** New 14Y high: 4.82971% on 1/12/23

• Daily Effective Fed Funds Rate: 4.33% volume: $106B
• Daily Overnight Bank Funding Rate: 4.32% volume: $293B

• Secured Overnight Financing Rate (SOFR): 4.30%, $1.193T
• Broad General Collateral Rate (BGCR): 4.27%, $449B
• Tri-Party General Collateral Rate (TGCR): 4.27%, $429B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

NY Fed reverse repo usage slips to $2,110.145B w/ 100 counterparties vs. prior session's $2.131.678B. 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: $1.75B Serbia 2Pt Priced

• Date $MM Issuer (Priced *, Launch #)
• 01/19 $2.75B #PNC Financial 4NC3 +125a, 11NC10 +190a
• 01/19 $1.75B *Serbia +5Y +330a, 10Y +385a
• 01/19 $1.5B #CAF +3Y SOFR+125
• 01/19 $1.25B #BFCM (Credit Mutuel) 3Y +118, dropped 3Y SOFR leg
• 01/19 $1B *Council of Europe Dev Bank (CoE) WNG 5Y SOFR+41a
• 01/19 $800M Israel Discount Bank 5Y +190a

EGBs-GILTS CASH CLOSE: Bunds Underperform As The ECB Strikes Back

European curves flattened with Bunds weakening and Gilts strengthening Thursday, as hawkish ECB commentary contrasted with a slightly softer tone from the BOE.

• ECB's Knot and, to a lesser extent, Lagarde pushed back against recent speculation that the Gov Council would downshift to 25bp hikes by March.
• The hawkish tone was heightened by December meeting accounts showing a "large number" of officials sought a 75bp hike (vs the actual 50bp).
• Comments on inflation by BOE Gov Bailey ("will fall quite rapidly this year") were a reiteration of the bank's November forecasts, but the subsequent headline saw UK rates briefly rally. Separately, the BOE's quarterly credit conditions survey also showed banks were the most pessimistic they'd been on household lending since 2007.
• Periphery spreads compressed slightly on the day.
• Attention early Friday is on UK retail sales data, while ECB's Lagarde speaks later in the morning.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 6.5bps at 2.528%, 5-Yr is up 6.3bps at 2.124%, 10-Yr is up 4.2bps at 2.065%, and 30-Yr is up 0.9bps at 1.998%.
• UK: The 2-Yr yield is down 4.1bps at 3.454%, 5-Yr is down 2.6bps at 3.237%, 10-Yr is down 3.9bps at 3.275%, and 30-Yr is down 6.1bps at 3.612%.
• Italian BTP spread down 2.8bps at 171bps / Spanish down 1.3bps at 92.7bps

FOREX: Mixed Performance Across G10, NZD Maintains Decline

• The modest bounce for equity indices late on Thursday kept the greenback trading with a bearish tone on Thursday. G10 currencies traded in a much more subdued manner to Thursday, with mixed performance across the board.
• The Euro trades on a slightly firmer footing which can be attributed to comments from ECB's Knot, who stated he sees "multiple" 50bps rate hikes from the bank, adding that markets may be underestimating the bank's policy path. EUR/USD spent the majority of the session back above the 1.08 handle and eyes Wednesday’s cycle high at 1.0887.
• Weaker Australian employment data has weighed on AUD, which despite paring a large portion of its early declines, still resides 0.35% lower on the day. Additionally, the unexpected resignation of the NZ PM Jacinda Ardern leaves NZD at the bottom of the G10 leaderboard, falling 0.62% on Thursday.
• Slightly more pronounced moves in the EM space where the negative tilt to risk sentiment across global markets has further weighed on the likes of ZAR (-0.98%) and MXN (0.56%), in the face of the weaker US dollar.
• UK and Canadian retail sales data will be published on Friday, as well as US existing home sales. There remains potential for commentary from central bankers and politicians in Davos. Most notably, ECB’s Lagarde will be participating in a panel discussion titled "Global Economic Outlook: Is this the End of an Era?"

Friday Data Calendar

Date	GMT/Local	Impact	Flag	Country	Event
20/01/2023	0001/0001	**		UK	Gfk Monthly Consumer Confidence
20/01/2023	0700/0700	***		UK	Retail Sales
20/01/2023	0700/0800	**		DE	PPI
20/01/2023	0745/0845	*		FR	Retail Sales
20/01/2023	1000/1100			EU	ECB Lagarde Panellist at World Economic Forum
20/01/2023	1330/0830	**		CA	Retail Trade
20/01/2023	1330/0830	**		US	WASDE Weekly Import/Export
20/01/2023	1400/0900			US	Philadelphia Fed's Pat Harker
20/01/2023	1500/1000	***		US	NAR existing home sales
20/01/2023	1530/1630			EU	ECB Elderson Into at European Financial Services Roundtable
20/01/2023	1800/1300			US	Fed Governor Christopher Waller