MNI ASIA OPEN: Repricing Rate Hike Expectations Post-CPI

EXECUTIVE SUMMARY

• MNI: US December CPI Cools For 6th Straight Month
• MNI: Fed's Harker Endorses 'A Few More' 25bp Rate Hikes
• MNI BRIEF: Bullard Favors Getting To Low-5% Fed Rate Quickly
• MNI BRIEF: BOE Mann Sees Strong Underlying Inflation Dynamics
• MNI POLICY: BOJ Eyes Maturities As Yield Pressure Persists

NY Fed Underlying Inflation Gauge (UIG) Gradual Decline

According to the NY Fed, the latest UIG "full data set" measure for December is currently estimated at 5.4% -0.3% from November.

• The "prices-only" measure for December is currently estimated at 4.5%, a 0.5 percentage point decrease from the current estimate of the previous month.
• The twelve-month change in the December CPI was +6.5%, a 0.6 percentage point decrease from the previous month.
• For December 2022, trend CPI inflation is estimated to be in the 4.5% to 5.4% range, a slightly wider range than November, because of a larger decrease in its lower bound than in its upper bound.

US

FED: A few more quarter-point increases this year should bring the Federal Reserve's benchmark overnight interest rate to a sufficiently high level to slow the economy and inflation, Philadelphia Fed President Patrick Harker said Thursday.

• He continues to expect a soft landing for the U.S. economy, with unemployment topping out at 4.5% this year without a recession.
• "I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed. In my view, hikes of 25 basis points will be appropriate going forward," he said in remarks prepared for the Main Line Chamber of Commerce meeting in Malvern, Penn. Harker is a voter on rates policy this year. For more see MNI Policy main wire at 0845ET.

FED: MNI BRIEF: Bullard Favors Getting To Low-5% Fed Rate Quickly. St. Louis Fed President James Bullard said Thursday he favors raising interest rates faster than some of his colleagues who want a stepdown in the pace to a quarter point.

• “I’ve liked the frontloading policy, I think if we want to move to the low 5% level we should go ahead and get to that level so we get the disinflationary impact of that now,” he said. Bullard didn't refer to a specific size for the Feb. 1 rate hike.
• “We should just follow through and get to the right level of the policy rate. I don’t really see any purpose in dragging things out through 2023,” Bullard said.

UK

BOE: Underlying inflation pressures in the UK look pretty strong with inflation expectations elevated and the service sector's contribution to headline inflation increasing, Bank of England Monetary Policy Committee member Catherine Mann warned Thursday.

• "The underlying inflation dynamics look pretty robust right now," she said in a presentation at the Alliance Manchester Business School, adding that there was evidence of inflation expectations drifting away from target. She said that preventing that drift in inflation expectations was key to policy setting. In December Mann voted for a 75 basis point hike while the majority backed a 50 bps increase.
• Mann also noted that market expectations for rate increases has moderated with the peak now around 4.6% compared to over 5% at the time of the December meeting, noting that that meant the MPC had got its message across that previous market rate expectations had been too aggressive, although more tightening may well still be needed.

JAPAN

BOJ: The Bank of Japan is likely to examine policy options including shortening the maturity of its yield curve controls, which currently target 10-year bonds, as investors continue to push yields to the 0.5% upper limit despite a widening of the tolerated range late last year, MNI understands.

• The BOJ, which next meets from Jan. 17-18, would be keen to present any such move as aimed to reduce distortions in financial markets prompted by prolonged easy policy, and to avoid any suggestion that it would represent a reduction of its easing stance. (See MNI POLICY: BOJ To Raise FY23 CPI, Stick With Base 2% View)
• But the BOJ feels it cannot rule out policy options to address what it sees as financial market distortions at a time when it still lacks confidence in being able to achieve its 2% inflation target.

US TSYS: CPI Continues to Moderate

Tsys futures firmer across the board, trading sideways after extending session highs following decent 30Y Bond auction re-open: 2.2bp tail: 3.585% high yield vs. 3.607% WI; 2.45x bid-to-cover vs. 2.25x prior month.

• Post CPI-data volatility saw futures initially gap lower (30YY tapped 3.7201% high), reversing move nearly as quickly on in-line CPI read. U.S. price pressures continued to moderate in December as CPI fell 0.1% in the month and core CPI rose 0.3%, bringing the year-over-year rates to 6.5% and 5.7%, respectively, and matching market expectations.
• Headline CPI hit its lowest since October 2021 and should keep the Federal Reserve on track to end rate hikes early this year.
• Yield curves see-sawed off early lows but finished flatter. Fed speak: Philly Fed President Patrick Harker said Thursday that few more quarter-point increases this year should bring the Federal Reserve's benchmark overnight interest rate to a sufficiently high level to slow the economy and inflation.
• Discounting Fed Bullard: favors getting to above 5% rates as soon as possible but it may not be critical how the Fed gets rates to destination. Will need to keep rates high enough to cool prices. Fed Barkin reiterated Fed still has work to do to contain high inflation.

OVERNIGHT DATA

• US DEC CPI -0.1%, CORE 0.3%; CPI Y/Y 6.5%, CORE Y/Y 5.7%
• US DEC ENERGY PRICES -4.5%
• US DEC OWNERS' EQUIVALENT RENT PRICES 0.8%
• Unrounded % M/M (SA): Headline -0.079%; Core: 0.303% (from 0.199%)
• Unrounded % Y/Y (NSA): Headline 6.454%; Core: 5.708% (from 5.958%)

• Philadelphia Fed President Patrick Harker said Thursday that few more quarter-point increases this year should bring the Federal Reserve's benchmark overnight interest rate to a sufficiently high level to slow the economy and inflation.
• Energy prices decreased 4.5% over the month and food increased 0.3%. Core CPI excluding shelter fell 0.1%, same as in November and October, but the shelter index showed surprising strength. Both owners' equivalent rent and tenants' rent adding 0.8% in the month, a tenth or two higher than analyst estimates. OER rose 0.7% in November and tenants' rent has hovered around 0.8% for a few months.

• US JOBLESS CLAIMS -1K TO 205K IN JAN 07 WK
• US PREV JOBLESS CLAIMS REVISED TO 206K IN DEC 31 WK
• US CONTINUING CLAIMS -0.063M to 1.634M IN DEC 31 WK

MARKETS SNAPSHOT

Key late session market levels:

• DJIA up 198.68 points (0.58%) at 34172.77
• S&P E-Mini Future up 9.75 points (0.24%) at 4000.25
• Nasdaq up 45 points (0.4%) at 10977.41
• US 10-Yr yield is down 8.8 bps at 3.451%
• US Mar 10-Yr futures are up 24/32 at 115-6
• EURUSD up 0.0088 (0.82%) at 1.0845
• USDJPY down 3.04 (-2.3%) at 129.4
• WTI Crude Oil (front-month) up $0.98 (1.27%) at $78.39
• Gold is up $19.12 (1.02%) at $1894.90

US TSY FUTURES CLOSE

• 3M10Y -2.019, -116.345 (L: -126.323 / H: -109.099)
• 2Y10Y -0.896, -69.187 (L: -73.82 / H: -61.973)
• 2Y30Y -1.808, -56.7 (L: -63.767 / H: -46.646)
• 5Y30Y +1.302, 2.651 (L: -4.875 / H: 8.516)
• Current futures levels:
• Mar 2-Yr futures up 4.75/32 at 103-1.75 (L: 102-21 / H: 103-04.25)
• Mar 5-Yr futures up 16.75/32 at 109-24 (L: 108-27 / H: 109-28.5)
• Mar 10-Yr futures up 24/32 at 115-6 (L: 114-00 / H: 115-11.5)
• Mar 30-Yr futures up 1-18/32 at 130-21 (L: 127-30 / H: 130-28)
• Mar Ultra futures up 2-18/32 at 143-02 (L: 139-16 / H: 143-07)

U‌‌S 10YR FUTURE TECHs: (H3)‌‌ Just Shy of Bull Trigger

• RES 4: 116-00 Round number resistance
• RES 3: 115-26 2.00 proj of the Oct 21 - 27 - Nov 3 low
• RES 2: 115-11+/18+ High Dec13, bull trigger / 2.0% 10-dma env
• RES 1: 115-07+ High Jan 12
• PRICE: 114-26+ @ 11:21 GMT Jan 12
• SUP 1: 113-13 50-day EMA
• SUP 2: 112-18+/111-28 Low Jan 5 / Low Dec 30 and the bear trigger
• SUP 3: 111-27+ 61.8% retracement of the Nov 3 - Dec 13 rally
• SUP 4: 111-01 76.4% retracement of the Nov 3 - Dec 13 rally

Treasury futures firmed Thursday through volatile trade, with the high print at 115-07+ just shy of the bull trigger. Markets still appear bullish and the contract is holding on to the bulk of its recent gains. Price has cleared the 100-dma to strengthen the short-term bullish condition. The focus is on 115-11+, the Dec 13 high and a bull trigger. On the downside, initial support lies at 113-13, the 50-day EMA. A move below this average would be bearish and expose support at 112-18+, Jan 5 low, and the bear trigger at 111-28, the Dec 30 low.

US EURODOLLAR FUTURES CLOSE

• Mar 23 +0.045 at 94.965
• Jun 23 +0.035 at 94.90
• Sep 23 +0.035 at 95.050
• Dec 23 +0.050 at 95.445
• Red Pack (Mar 24-Dec 24) +0.080 to +0.095
• Green Pack (Mar 25-Dec 25) +0.10 to +0.120
• Blue Pack (Mar 26-Dec 26) +0.120 to +0.130
• Gold Pack (Mar 27-Dec 27) +0.105 to +0.125

SHORT TERM RATES

US DOLLAR LIBOR: Latest settlements:

• O/N -0.00015 to 4.31314% (-0.00029/wk)
• 1M +0.03557 to 4.45900% (+0.05743/wk)
• 3M +0.01471 to 4.82971% (+0.01985/wk)*/**
• 6M +0.00171 to 5.12971% (-0.06729/wk)
• 12M -0.00843 to 5.40914% (-0.14983/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: $110B
• Daily Overnight Bank Funding Rate: 4.32% volume: $291B

• Secured Overnight Financing Rate (SOFR): 4.30%, $1.142T
• Broad General Collateral Rate (BGCR): 4.27%, $448B
• Tri-Party General Collateral Rate (TGCR): 4.27%, $413B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

NY Fed reverse repo usage climbs to $2,202.989B w/ 101 counterparties vs. prior session's $2.199.170B. Compares to Friday, Dec 30 record/year-end high of $2,553.716B (prior record high was $2,425.910B on Friday, September 30.

EGBs-GILTS CASH CLOSE: Post-US CPI Gains Fade

Bunds and Gilts pared gains made immediately after the highly-anticipated US CPI report came exactly in line with expectations, though finished stronger on the session, with curve bellies outperforming.

• After the CPI release, 10Y Bund yields dipped below 2.10% with Gilts dropping below 3.30%, both reaching those levels for the first time since mid Dec.
• 10Y BTP spreads hit the tightest vs Bunds (177.3bp) since April 2022, 5+bp narrower at one point, before reversing course and finishing slightly wider.
• While US rate hike expectations faded, ECB pricing remained resilient and even ticked higher post-CPI, with some attributing the move to a media report citing sources saying growth resilience favours hawkish policy.
• Conversely, Gilts outperformed as under 100bp of further BoE hikes are now expected over the course of the cycle - no particular catalyst Thursday.
• Friday morning begins with UK GDP data.

ECB Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 2.9bps at 2.559%, 5-Yr is down 4.3bps at 2.179%, 10-Yr is down 4.5bps at 2.159%, and 30-Yr is down 3bps at 2.109%.
• UK: The 2-Yr yield is down 9.2bps at 3.438%, 5-Yr is down 9.6bps at 3.239%, 10-Yr is down 7.5bps at 3.334%, and 30-Yr is down 6.2bps at 3.694%.
• Italian BTP spread up 1bps at 184.1bps / Spanish up 0.2bps at 98.6bps

FOREX: Greenback Resumes Downtrend Post CPI, JPY Surges

• US inflation data came alongside expectations and despite a predictably volatile trading session the USD index is ending with 0.85% losses for the day as the confirmation of disinflation on the month has given USD bears the green light to resume selling pressure.
• Gains across the rest of G10 have been broad based but the focus has been on the significant strength for the Japanese Yen. Hawkish rhetoric had prompted a substantial move lower for USDJPY (-2.40%) before the US data release, however, the pair then resumed its sharp downward trajectory, breaking multiple support levels through Thursday’s trading session.
  • Price has now traded through the bear trigger at 129.52 and printed a fresh low of 128.87 in late US hours. Markets will be paying close attention for a daily close below the bear trigger to confirm a possible head and shoulders pattern drawn from early June 2022.
  • Additionally, moving average patterns could add further weight, with the 50- and 200-dmas on the cusp of forming a bearish death cross. Support seen scant until 128.44, the 1.236 proj of the Oct 31 - Nov 15 - 21 price swing.
• Elsewhere, both EUR and AUD are showing gains of around 1%, with the single currency continuing to trade in buoyant fashion, extending trend highs above key short-term resistance and the 1.08 mark in tandem. The break higher reinforces the bull trend condition and next targets 1.0913, the 2.764 projection of the Sep 28 - Oct 4 - Oct 13 price swing.
• A much quieter docket on Friday with UK growth data, Eurozone IP and US Uni of Michigan sentiment figures the main highlights approaching the week’s close.

Friday Data Calendar

Date	GMT/Local	Impact	Flag	Country	Event
13/01/2023	0700/0700	**		UK	UK Monthly GDP
13/01/2023	0700/0700	**		UK	Index of Services
13/01/2023	0700/0700	***		UK	Index of Production
13/01/2023	0700/0700	**		UK	Output in the Construction Industry
13/01/2023	0700/0700	**		UK	Trade Balance
13/01/2023	0700/0800	***		SE	Inflation report
13/01/2023	0745/0845	***		FR	HICP (f)
13/01/2023	0800/0900	***		ES	HICP (f)
13/01/2023	0900/1000	*		IT	Industrial Production
13/01/2023	0900/1000			DE	GDP 2022
13/01/2023	1000/1100	**		EU	Industrial Production
13/01/2023	1000/1100	*		EU	Trade Balance
13/01/2023	-	***		CN	Trade
13/01/2023	1330/0830	**		US	Import/Export Price Index
13/01/2023	1500/1000	***		US	University of Michigan Sentiment Index (p)
13/01/2023	1500/1000			US	Minneapolis Fed's Neel Kashkari
13/01/2023	1520/1020			US	Philadelphia Fed's Patrick Harker