MNI ASIA OPEN: Payrolls and ISM Dominates Ahead Of Powell, CPI

NEWS

US (MNI): Surprising ISM Miss Doesn't Signal Concern Yet
A surprising contraction in U.S. services in December probably won't lead to a further decline next month, Institute for Supply Management chair Anthony Nieves told MNI Friday.

FED (MNI): Fed Needs To Eliminate Imbalances, Slow Inflation -George
The Federal Reserve faces an "extremely tight labor market" and needs to bring supply and demand into balance to lower inflation this year, Kansas City Fed president Esther George said Friday.

FED (MNI): Fed's Barkin Sees Additional Rate Increases This Year
More interest-rate increases are needed to bring inflation back to 2% despite the risk of a recession, Federal Reserve Bank of Richmond President Thomas Barkin said Friday, warning that backing off too soon could force even tougher action later.

FED (MNI): Fed’s Cook Says Inflation Is Too High, Some Signs Of Hope
U.S. inflation remains “far too high” for the Federal Reserve’s comfort despite recent dips in headline and core figures, Governor Lisa Cook said Friday, although there is some reason to hope for improvement.

US POLITICS (BBG): McCarthy Sees Path to Victory in Hours as House Sets Late Vote
Republican Kevin McCarthy was increasingly confident Friday that he’ll gain the additional votes he needs to be elected as House speaker after converting some of the holdouts that had blocked him over the previous three days. After the 12th and 13th round of balloting Friday afternoon, McCarthy flipped 15 of the 21 Republicans who withheld their support. With the GOP holding a narrow 222-212 majority, he still will need at least two of the six remaining holdouts, depending on absences, to win on a 14th ballot.

US (BBG): Fed Will Restart QE to Stabilize Treasury Market, Pozsar Says
The Federal Reserve will be the backstop of the Treasury market this year to alleviate dysfunction resulting from its increasing size and the retreat of regular buyers. That’s the view of Credit Suisse Group AG analyst Zoltan Pozsar, who in a note to clients Friday predicted the Fed will restart asset purchases during the summer of 2023.

ECB (MNI): December Inflation Lower Than ECB Expected-Centeno
December’s eurozone inflation at 9.2% was “slightly lower” than European Central Bank policymakers had expected, Bank of Portugal Governor Mario Centeno said on Friday, but added that rate hikes should continue. December’s eurozone inflation at 9.2% was “slightly lower” than European Central Bank policymakers had expected, Bank of Portugal Governor Mario Centeno said on Friday, but added that rate hikes should continue.

ECB (BBG): ECB’s Lane Says Inflation Won’t Vanish If Energy Costs Ease
European Central Bank Chief Economist Philip Lane said price pressures in the euro area will remain elevated even if surging energy costs are starting to ease. “This is not conclusive for the overall inflation dynamic,” Lane told a panel discussion in New Orleans. The original energy shock resulting from Russia’s war in Ukraine and pandemic reopening effects will feed into wages “for the next two or three years,” he said.

DATA

**MNI: US ISM DEC SERVICES COMPOSITE INDEX 49.6
US ISM DEC SERVICES NEW ORDERS 45.2
US ISM DEC SERVICES PRICES 67.6
US ISM DEC SERVICES EMPLOYMENT INDEX 49.8
US ISM DEC SERVICES BUSINESS INDEX 54.7

US (MNI): US Dec Job Gains Solid, Keeping Fed On Hiking Path
U.S. employers added 223,000 jobs in December, a tad above Wall Street expectations for a 200,000 gain, while the unemployment rate dipped to a half-century low of 3.5% again, the Bureau of Labor Statistics reported Friday. The strong labor market data should keep the Federal Reserve on its path of "ongoing" rate increases laid out at last month's meeting. Average hourly earnings rose 0.3% over the month, slowing a tenth from November, and were up 4.6% from a year earlier.

**MNI: US NOV FACTORY ORDERS -1.8%; EX-TRANSPORT NEW ORDERS

CANADA (MNI): Canada Dec Job Gains Shatter Expectations, Wages Up 5.1%
Canada added 104,000 jobs in December or about 10 times what the market expected, keeping pressure on the central bank to raise interest rates for an eighth straight time later this month. The unemployment rate fell a notch to 5%, the third decline in four months, bringing it nearer to the record low of 4.9% set last year. Economists predicted 10,000 jobs and a 5.1% unemployment rate.

[See Asia Markets Analysis e-mail from Friday close for further US data analysis]

EU (MNI): EZ Inflation Slows; ECB's Core Acceleration Concern
Eurozone headline inflation slowed markedly in December, dipping to 9.2% from 10.1% in November, helped by declining energy costs and national schemes to help consumers through the cost-of-living crisis. Monthly readings saw headline inflation fall by a preliminary 0.3%. However, core inflation rose 0.6% m/m to 5.2% from 5% previously, underlining the recent trend seen in national data.

US TSYS: Yields Tumble With Average Earnings, ISM Services Misses

• Cash Tsys have swung from modest cheapening through 2-10Y tenors at the start of the US session to a substantial rally. The latter sees front end to belly yields currently down 21-22.5bps after notably weaker than expected average hourly earnings growth (offset somewhat by a new recent low for the u/e rate) before a significant miss for ISM Services as new orders cratered.
• US CPI on Jan 12 will most likely still be pivotal but for now, the market leans more heavily towards a 25bp hike from the FOMC on Feb 1 with 32bp priced vs 36-37bp prior to the data and the implied terminal cut 10bps to 4.95% for June (cumulative 62bps of hikes).
• Further along the curve, still significant rallies of 15bp for the 10Y (led by lower real yields, in turn pushing risk assets materially higher) have limited the steepening in 2s10s to just +5.5bps at -68bps, within yesterday's range. .
• TYH3 climbs to session highs of 114-09+ (+1-09) on very high volumes currently at 1.85M. It's easily through resistance at 113-15+ (Dec 23 high) to next eye 114-17 (76.4% retrace of Dec 13 – 30 bear leg).
• Looking to next week, Powell talking twice on Tue (Jan 10) at the Riksbank event will be firmly in focus, all with an eye on CPI on Thu (Jan 12).

FOREX: Greenback Weakness Prevails Following Key US Data

• Despite early USD strength on Friday, weaker US wage growth combined with a large miss for ISM Service activity have been the main drivers for a substantial greenback turnaround, resulting the in the USD index looking set to post a 1.1% decline on the day.
• Greenback weakness across the board was evident throughout the US session with the greenback pressing on intra-day lows approaching the week’s close. With a substantial recovery for major equity indices, AUD (+1.85%), NZD (+1.88%) and GBP (+1.53%) are the most notable performers in G10 amid the more optimistic sentiment. This is also filtering through to significant gains for some EM currencies, notably the Brazilian Real and Colombian Peso, both rallying over 2%.
• Additionally, the Onshore Yuan has traded to fresh trend lows and breached its 200day moving average against the USD in the process. It is worth highlighting that this is the first test of this average since April 2022. This follows an earlier break of the same average for USDCNH, which has gathered downside momentum across the session.
• Another significant round trip for USDJPY, which after briefly piercing above key resistance at 134.50 before the data now finds itself gravitating towards the 132 handle, substantially trimming the week’s advance following an impressive 525 pip weekly range.
• With expectations for the next Fed hike size in question, focus turns to Chair Powell who speaks next Tuesday, ahead of the important December CPI print which is due Thursday.

US STOCKS: Day's Relief Rally Still In Full Flow, ESA Clears Key Resistance

• ESA sees a third wind heading later in the session, hitting new highs of 3928.75 (+2.5%), extending an intraday rally from a low of 3819 10mins before payrolls. It breaks a key resistance level of 3914.41 (50-day EMA), a sustained break of which could open 4043 (Dec 15 high).
• A substantial rally in Treasuries on expectations of less Fed hikes from weaker wage growth before a large miss for ISM Service activity is the main driver for the day’s turnaround, with larger gains in Nasdaq (+3.0%) in a reversal of yesterday’s oversized decline for the latter.
• SPX gains led by materials (+3.4%) but with sizeable gains across a broad swathe of sectors.

EGBs-GILTS CASH CLOSE: Weak US Data Steals EZ Core CPI's Thunder

US data sparked a strong afternoon rally across EGBs and Gilts Friday.

• Bund futures hit session lows on the 1100CET Eurozone Dec inflation release which showed core inflation ticking higher, cementing pricing for a 50bp ECB hike in February.
  
• But shortly after, EGBs and Gilts bottomed and began a sustained intraday rally that accelerated in the afternoon on weaker-than-expected wage data in the US employment report, and on a contractionary US ISM Services reading that spurred recession talk.
• Curve bellies outperformed and periphery EGB spreads came off their wides as ECB tightening pricing faded.
• Looking ahead, BoE's Mann and Pill speak over the weekend, while Monday opens with German IP data (following today's weak factory orders print).

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 7bps at 2.581%, 5-Yr is down 10bps at 2.251%, 10-Yr is down 10.6bps at 2.21%, and 30-Yr is down 10.7bps at 2.155%.
• UK: The 2-Yr yield is down 9.4bps at 3.438%, 5-Yr is down 10.8bps at 3.45%, 10-Yr is down 8.1bps at 3.472%, and 30-Yr is down 3.7bps at 3.871%.
• Italian BTP spread down 0.3bps at 201.5bps / Spanish unch at 105.8bps

STIR: ECB/BoE Hike Pricing Set To Close Sharply Lower On The Week/Year

ECB and BoE terminal rates are set to close sharply lower on the week, with Eurozone pricing paring 17bp and UK 15bp since the Dec 30 close.

• There's currently 112bp of BoE hikes priced in this cycle through Sep 2023, to a Bank Rate of 4.62% (vs 126bo at end-2022); there are 144bp of ECB hikes priced through a Sep 2023 peak Depo rate of 3.44% (vs 161bp at end-2022).
• The lower tightening expectations are on the back of both softer-than-forecast Eurozone CPI data and poor US data to end the week (including a recessionary ISM Services report).

COMMODITIES: Gold Surges Whilst Oil Ultimately Little Changed On US Data

• Crude oil has seen a mixed day and is ending it broadly flat having reversed initial gains following weaker wage growth in the US payrolls report. It leaves 5+% declines for the week, the largest weekly loss in a month with weaker demand concerns winning out over the week as a whole.
• WTI is +0.3% at $73.89, still sitting close to support at $72.46 (Jan 5 low) but not troubling it having previously cleared the key short-term support at $76.79 (Dec 29 low). The day's most active strikes in the CLG3 are once again for $70/bbl puts.
• Brent is -0.1% at $78.61, also hovering above support at $77.61 (Jan 5 low).
• Gold is +2% at $1868.96, an outright winner with the USD sliding and yields tumbling. It pushes through resistance at $1865.1 (Jan 4 high) to open $1876.0 (3.0% 10-dma envelope).
• Gas: TTF ended the week down almost 10% wk/wk with warm weather extending through the two-week forecast. The front month contract has now fallen 57% since high in early December.
• Weekly moves: WTI -5.9%, Brent -4.5%, Gold +2.5%, US Nat Gas -18.6%, EU TTF Nat Gas -9%

US OPTIONS: Mostly Eyeing Higher Rates

Friday's U.S. rates / bond options flow included:

• SFRZ3 95.0625/94.9375/94.8125/94.6875 put condor bought 1.5 in 5k. Adding to position, also traded Wednesday for 1.25
• SFRZ3 9537/9512/9500p fly, bought for 7 in 20k
  
• SFRF3 96.12/96.25cs traded 1.5 and 1.25 in 4k
• SFRF3 95.12c traded 1 in 4k
• SFRG3 95.00/94.87ps traded 4.75 in 4k
• SFRZ3 95.06/94.93/94.81/94.68p condor traded 1.5 in 5k (block)
• SFRU3 95.00/94.87/94.75p fly, bought for 1.25 in 20k (block)
  
• 0QH3 95.75/95.50/95.25p ladder traded 4 in 1.5k
• 0QJ3 95.00/94.75ps 1x2 traded flat in 4.5k
• 0QM3 96.37/95.75ps 1x2 traded 7 in 11.25k

EU OPTIONS: Mixed Schatz Trade And Euribor Strangle Selling In Size

Friday's Europe rates / bond options flow included:

• DUG3 105.70/105.80/106.00/106.10c condor bought for 2.5 in 5k
• DUG3 105.50/30/10 put fly sold at 1.5 in 5k. Hearing closing
• RXG3 133 put bought for 24 in 3k
• ERU3 96.50/97.00^^ sold at 46 in 38.8k