MNI ASIA OPEN: Former Fed Economist and Bullard Tout First Cut In 1H24

NEWS

US (MNI): Fed Rate Cuts Will Start In June - Reinhart
A resilient U.S. economy with still-present inflationary risks will mean the Federal Reserve will ease later and more slowly than in past cycles, with rate cuts starting in June, former Fed Board division of monetary affairs chief Vincent Reinhart told MNI. Reinhart said the Fed's December signal of 75 basis points of cuts this year "sounds right," and sees it coming in three 25-basis-point moves starting mid-year. "I think the economy performs well, but as a consequence the Fed only eases on a planned basis to recap the stance of policy rather than the panicky response to economic weakness," Reinhart said.

US (WSJ): Former Fed President: Central Bank Will Cut Rates Before Inflation Hits 2%
Former St. Louis Fed President James Bullard said he expects the Federal Reserve to begin lowering interest rates before inflation hits 2%, and that cuts could come as soon as March. Bullard predicts that the core inflation rate, which excludes food and energy prices, will slow to around 2% before October. (Wall Street Journal)

CANADA (MNI): BOC Keeping 2024 Policy Restrictive- CD Howe
Canada's central bank will keep interest rates well above neutral this year, even in the most optimistic scenario for lowering the highest borrowing costs in decades as inflation moderates, the head of a shadow policy council told MNI.

MNI BOC PREVIEW - JANUARY 2024: Expecting Too Soon For Cuts Reiteration
The BoC is unanimously expected to hold its policy rate at 5% with greater focus on the statement’s tone and macro forecasts before Macklem’s press conference. One important area will be to what extent the BoC sees the recent resurgence in its preferred core inflation metrics as “bumps along the way” in a path back towards the 2% inflation target. The market has pushed back fully pricing a first rate cut from April to June and analysts expect hawkish leaning commentary. We expect similar and accordingly see risk skewed to a dovish surprise if greater weight is put on the softer aspects of nuanced data or inflation forecasts are lowered.

MNI ECB Preview - January 2024: No Change For Now, But Policy Rate Cuts Looming
No changes are expected at this week’s ECB policy meeting. President Lagarde will likely use the press conference to push back against market expectations of policy rate cuts in the near-term, while also entertaining the possibility of easing policy later in the year. In other words, the overall message will be that the ECB is getting closer to easing policy, but it is not there yet. Having misjudged the surge in inflation over 2021-2022 and with uncertainty over the drivers of inflation post Covid, the ECB will be particularly cautious of easing prematurely and repeating the 2011 policy misstep (when rates were raised prematurely).

ISRAEL (MNI): KAN - Netanyahu To Ministers: 3rd Phase Of War 'To Take 6 Months'
Israel's public broadcaster KAN is reporting that PM Benjamin Netanyahu has said to his national unity cabinet that the third phase of fighting in the Gaza Strip will take around six months to complete. The first two phases as identified by Netanyahu were the initial aerial bombardment, followed by the IDF ground offensive.

UKRAINE (MNI): German FinMin Lindner: Germany Can't Support Ukraine On Its Own
Wires reporting comments from German finance minister Christian Lindner stating that, "Germany can't keep up Ukraine's defence capabilities on its own in the long term, others will have to increase bilateral contributions." Lindner added, "anyone who wants to conduct peace negotiations with Moscow over the heads of Ukraine is prepared to sacrifice Ukraine." The remarks are likely directed at the US as President Biden's USD$106 billion supplemental funding request, which includes roughly USD$60 billion for Ukraine, remains gridlocked in Congress due to intractable negotiations on border security.

NATO (BBG): Turkish Parliament Votes to Ratify Sweden’s Entry Into NATO
Turkey’s parliament approved Sweden’s accession to NATO after months of deliberations, leaving Hungary as the lone holdout to the defense alliance’s northern enlargement. The parliament plenary in Ankara voted to accept Sweden’s application on Tuesday, sending the document back to President Recep Tayyip Erdogan for a final sign off before it can be deposited with the US State Department in Washington.

CANADA (BBG): Trudeau Overreached in Quelling Covid-Rule Protests, Court Rules
Prime Minister Justin Trudeau’s decision to use emergency legislation to quell the “freedom convoy” protests that gripped downtown Ottawa and border crossings in 2022 was not justified, the Federal Court of Canada has ruled.

BOJ (MNI): Ueda Hints at April End to Negative Rates
The Bank of Japan’s 2% inflation target is in sight as signs build of a virtuous cycle between wages and prices, Governor Kazuo Ueda said on Tuesday after the BOJ left policy unchanged at its meeting, in comments which pointed to a possible move away from negative rates in April. “If the virtuous cycle strengthens and if the BOJ can be confident of the 2% price target, the Bank will examine whether it is appropriate for the BOJ to continue with easy policy, including the negative interest rate policy,” Ueda told reporters

EUROZONE (MNI): EZ Bank Credit Standards Tighten In Q4 - ECB Survey
Banks across the eurozone tightened credit standards further for loans or credit lines to enterprises in Q4 2023, the ECB's latest Bank Lending Survey showed. The BLS is closely watched by policymakers on the ECB's Governing Council and will in part guide the thinking behind the timing of the first cycle rate cut. The tightening of conditions added to the "substantial cumulative tightening since 2022", the survey noted, which, together with weak demand, has contributed to the strong fall in loan growth to firms.

NORWAY - MNI NORGES BANK WATCH: Eyes On Guidance As Rates On Hold
Norges Bank looks set to leave its policy rate unchanged at 4.5% at its January meeting, in line with comments by Governor Ida Wolden Bache following December’s 25-basis-point increase, and while there has been speculation it could change its guidance to remove the possibility of further hikes this seems less likely than otherwise.

TURKEY (MNI): Turkish Cenbank To Balance Growth Vs Inflation
The Central Bank of the Republic of Turkey is likely to increase interest rates to 45% later this month in what looks to be its last hike of the cycle, but it may be tempted to ease later in the year to support economic growth with inflation still above target, a former Fed economist and leading Turkish commentator told MNI.

DATA

• The Philly Fed non-mfg index fell 6pts to -3.7 in January, unwinding December's pop to the first positive reading since Sep'22.
• The special questions are of note. "For all categories, the average percent change in costs expected for 2024 was smaller than the average percent change in costs reported for 2023"
• "The respondents were also asked to rank the importance of various factors in setting prices. Demand for their own goods/services was again the most important factor, followed by wages and labor costs and maintaining steady profit margins.

US JAN. RICHMOND FED FACTORY INDEX -15; EST. -8 - bbg

• The Richmond Fed manufacturing index surprisingly slipped further in January, down to -15 (cons -8) from -11.
• The -11 had marked the lowest since April but -15 is a new low since the Apr/May'20 depths and otherwise the lowest since 2009.
• It continues a theme of weaker than expected regional Fed manufacturing surveys, after Empire State (-43.7 vs cons -5.0, from -14.5) and Philly Fed (-10.6 vs cons -6.5, from-12.8) surveys.
• Richmond mfg prices: "The average growth rates of prices paid and prices received were nearly unchanged in January. Firms expect both growth rates to moderate over the next 12 months."

US TSYS: 2s10s Steepening Extends As Front End Rallies On Bullard, Long End Weighed By EU Supply

• 2Y Tsys have seen a decent rally over the past hour, seemingly following former St Louis Fed’s Bullard seeing prospects for the Fed cutting in 1H24 before inflation returns to the 2% target, in absence of clearer drivers.
• The WSJ article was published at 1345ET but it took another 15mins for any reaction, which then built and saw a helping hand from a block suggested buy of almost 24k in TUH4 at 102-19+ at 1431ET.
• With 2YY now -0.5bp on the day (retracing 0.5bps of the bid), the move extends prior steepening with 2s10s +4.5bps at -24bps but only back to late Friday levels.
• Fed Funds implied cuts have lifted modestly to a cumulative 12bp for March, 56bp for June and 135bp for Dec.
• Recall the longer end has been under pressure throughout the day. Moves through early European hours could be seen as delayed BoJ impetus and impending EU bond supply from the dual tranche, with January's total bond sale tally of €293bln marking the busiest January in European bond sales ever.
• Tomorrow sees flash US PMIs, the BoC decision and 5Y supply (after today’s 2Y landed on the screws, with lower bid-to-cover but higher indirect take), before Thursday sees the ECB decision plus first estimates for Q4 US GDP/core PCE and 7Y supply.

FOREX: Greenback Recovery Prompts Fresh YTD Highs For USD Index

• Despite some early greenback weakness on Tuesday, bear steepening across the Treasury curve prompted a firm dollar recovery, with the DXY extending year-to-date highs and printing the best levels since mid-December. The Japanese yen made a notable round trip following the latest Bank of Japan decision, however, the most notable laggard in G10 has been the Euro as Thursday’s ECB decision approaches.
• Clearance of Jan 17's 103.692 in the DXY tripped the late leg lower for major currency peers, narrowing the gap with the next key upside levels at December's 104.263 and the 100-dma of 104.436.
• USDJPY’s daily range spanned 171 pips in total following a broadly uneventful BOJ release overnight. A small USDJPY pop on the release was aggressively faded as Governor Ueda made some slightly hawkish leaning remarks and short-term positioning aided the sell-off down to 146.99 lows. However, momentum waned and as treasury yields ticked higher throughout the session, USDJPY followed suit, eventually reaching a new intra-day high of 148.70.
• Late slippage for EURUSD retains the bear-mode condition. Last week’s move lower resulted in the break of a trendline drawn from the Nov 1 low, signalling scope for a continuation of the corrective cycle. Price action since Jan 17 appears to be a flag formation - a bearish continuation signal. Further weakness would target 1.0793, a Fibonacci retracement.
• The likes of AUD, NZD and CAD have shown relative outperformance alongside late strength in Chinese equities, helped by reports of China eyeing a $278bln rescue package for stocks, on top of news that Alibaba's Jack Ma was a buyer of his company's shares across Q4.
• Wednesday’s calendar kicks off with New Zealand CPI, before a host of European Flash PMIs preview the latest strength of regional economies. The Bank of Canada rate decision will also highlight.

EQUITIES: ESA Sees Late Lift Back Towards Initial Resistance

• ESH4 has seen a strong lift in recent trade, touching a high of 4896.00 (4892.5 latest) to leave it close to yesterday’s 4898.25, helped by Fed cuts building after Bullard’s comments on the rate cut prospects.
• Yesterday’s high marks initial resistance with the bullish price sequence still intact and with next resistance at the round 4900.00.
• The NYSE TICK index has recorded two buy programs in excess of 1400 names, some of the largest in the month to date.
• In e-mini space, the S&P 500 (+0.25%), lags the Nasdaq 100 (+0.35%), but outperforms the Russell 2000 (+0.1%) and Dow (-0.25%).
• The SPX is led by consumer staples (+1.2%) and communication services (+0.8%), whilst real estate (-0.35%) and consumer discretionary (-0.15%) lag.
• Consumer staples are driven by Proctor & Gamble (+4.4%) following above-estimate earnings and its more optimistic profit outlook. Communication services meanwhile receive firm boosts from Netflix (+0.8%), Meta (+0.5%) and Google (+0.4%). Real estate names meanwhile come under pressure with a sizeable lift in real yields (10Y real +4bps on the day).

COMMODITIES: WTI Crude Futures Moderately Decline, Silver Rises Despite Stronger Greenback

• Crude has moderately softened today as the return of Libyan production and higher Norwegian output offset ongoing Middle East tensions and disruption to Russian loadings from Ukrainian attacks.
• Trend signals in WTI futures remain bearish and the latest recovery appears to be a correction - for now. The contract has pierced the 50-day EMA at $74.25. A clear break of it would strengthen a bullish theme and expose $76.31, the Dec 26 high and a near-term bull trigger. Moving average studies remain in a bear-mode position and continue to highlight a downtrend.
• Despite a firmer greenback, precious metals have remained in the green on Tuesday, with spot silver showing some outperformance and rising 1.6%, as we approach the APAC crossover. A bearish theme in Silver remains intact and the metal traded sharply lower yesterday, resulting in a clear break of support at $22.510, the Dec 13 low. This signals scope for a move to $21.883, Nov 13 low.
• Analysts note that bullion has traded in a relatively tight band this month as investors seek further clues on whether the Federal Reserve will start reducing interest rates as soon as March.
• US data scheduled for later in the week include the latest GDP figures and core PCE index, which is the central bank’s preferred gauge of underlying inflation and will likely drive sentiment for precious metals in the short-term.