MNI ASIA OPEN: Risk-On Tone Ahead Thu CPI

EXECUTIVE SUMMARY

• MNI INTERVIEW-Fed Could Pause Hikes As Early As March–Sahm
• MNI FED: Collins Leans To 25bp Downshift In Feb For Flexibility Towards 5%
• MNI BRIEF: US CPI Calculation To Change For January Data
• MNI INTERVIEW: US Rent Inflation May Turn Negative - Apt List
• MNI SOURCES: ECB Doves Eye Smaller Hikes As Inflation Falls
• MNI: Italy Prepared To End ESM Treaty Stalemate-Officials

US

FED: The Federal Reserve is likely to further reduce its rate hike pace to a quarter point at its Feb. 1 decision and could be on track to pause rate increases altogether after that as inflation shows further signs of softening, former Fed board economist Claudia Sham told MNI.

• Sahm said the strength of the labor market means the Fed can still pull off a soft landing, but only if it backs off of the idea that it must significantly weaken employment conditions in order to reduce price pressures.
• “I think there’s a path towards a 25 basis point increase at the coming meeting. And if the good news keeps coming in, they could pause,” she said in an interview with MNI’s FedSpeak podcast.
  
• “In the press conference, Jay Powell laid the groundwork, he didn’t promise 25 but it did come out of his mouth and we’ve seen again Mary Daly recently. And Lael Brainard for months has been a voice saying ‘we shouldn’t go too fast.’”

FED: Boston Fed's Collins (non-voter) tells the NYT that she leans to a 25bp hike for the Feb 1 FOMC stage, as deliberation between a 25bp and 50bp hike seem "reasonable", "but it's very dependent".

• This is a step further from various FOMC member commentary of openness to 25bp or 50bp hikes without committing one way or another at this stage. 31.5bp is currently priced in Fed Funds futures ahead of tomorrow's US CPI release.
  
• "Adjusting slowly gives more time to assess the incoming data before we make each decision, as we get close to where we're going to hold. Smaller changes give us more flexibility. If we've gone to slower, more judicious rate increases, it could take us three rate increases to get there [just above 5%] - and then holding through the end of 2023, that still seems like a reasonable outlook to me."

US: Rent inflation is likely to ease in the December CPI report due Thursday and potentially turn negative by the second quarter of this year, online rental marketplace Apartment List's senior housing economist Chris Salviati told MNI.

• Apartment List's national rent index has been declining for the past four months and is expected to slide further before turning higher again later in the spring. The index fell 0.8% in October, over 1% in November, and 0.8% in December, the three sharpest month-over-month declines in the history of the index going back to 2017, and is down 3% since its August peak.
• "We're now starting to turn a corner after a period of really rapid rate growth where we're now starting to see a shift to a much cooler market," Salviati said in an interview. Rent in November and December rose by roughly 50bps less than in the same months in 2017 to 2019, according to Apartment List data. For more see MNI Policy main wire at 1326ET.

EUROPE

ECB: While 50-basis-point rate increases are set to be the starting point for discussion at the next two European Central Bank meetings at least, more dovish officials are prepared to seize on an expected slide in headline inflation from the spring to argue for a slowdown in the pace of tightening, Eurosystem officials told MNI.

• Base effects and easing energy prices could take harmonised consumer price inflation to as low as 2.7% by the end of the year, below the ECB’s current 3.6% projection, according to one source, while noting that core inflation is set to prove stickier, and that the Ukraine war and the effect of China’s reopening from Zero Covid policies could still provide upside shocks.
• Slowing headline price increases should take pressure off wage demands, though hawkish officials who insist that more significant tightening will be necessary to reduce inflation to the 2% target will be able to point to easing concerns over recession as energy prices fall back. For more see MNI Policy main wire at 1148ET.

ITALY: Italy has indicated it is prepared to push for its parliament to vote a long-delayed ratification of changes to the treaty governing the European Stability Mechanism, unblocking a major reform of the European Union’s financial architecture, sources told MNI after a meeting between Finance Minister Giancarlo Giorgetti and Eurogroup president Paschal Donohoe.

• Giorgetti told Donohoe during the meeting on Monday that Rome is prepared to end the stalemate, with Italy the only eurozone country still to ratify the treaty changes, though he highlighted the political challenges to doing so, two sources close to the officials told MNI.
• While as recently as last month Giorgetti had insisted that he wanted to talk to ESM director Pierre Gramegna about overhauling an institution which Italy regards as imposing excessively harsh conditions on creditors, he is now prepared to seek its approval first and push for further reform later, an Italian source said. For more see MNI Policy main wire at 1310ET.

US TSYS: Curves Bull Flatten, Inflation Expectations Cool

Tsys futures near session highs after the bell, 30YY currently 3.6782% (-.0758), yield curves unwinding Tue's steepening (2s10s -4.602 at -68.070).

• Bonds bid with EGBs, underscored by MNI exclusive story: ECB Doves Eye Smaller Hikes As Inflation Falls: "more dovish officials are prepared to seize on an expected slide in headline inflation from the spring to argue for a slowdown in the pace of tightening, Eurosystem officials told MNI."
• Limited economic data on day (MTG REFIS +5% SA; PURCH INDEX -1%). Focus on Thu's CPI read: MoM (0.1%, -0.1%); YoY (7.1%, 6.5%). Post data Fed speak Thu w/ StL Fed Bullard, on eco/mon-pol, Q&A at 1130ET, Richmond Fed Barkin at 1240ET.
• Carry-over corporate debt issuance and pre-auction short selling ahead $32B 10Y note auction re-open helping keep prices contained. Tsy futures bounce higher after $32B 10Y note auction re-open (91282CFV8) stops through w/ 3.575% high yield vs. 3.580% WI; 2.53x bid-to-cover vs. 2.31x prior.
• Indirect take-up 67.02% vs. 59.45% prior; direct bidder take-up 17.92% from 18.70% prio, primary dealer take-up 15.06% vs. 21.86%.

OVERNIGHT DATA

• US MBA: REFIS +5% SA; PURCH INDEX -1% SA THRU JAN 6 WK
  
• US MBA: UNADJ PURCHASE INDEX -44% VS YEAR-EARLIER LEVEL
• US MBA: 30-YR CONFORMING MORTGAGE RATE 6.42% VS 6.58% PREV

• The recent decline helped lift refis 5% on the week but continued weakness in purchase mortgages (-1%) meant just a 1% increase in composite applications around the turn of the year.
  
• The latest decline pushed purchase applications to new lows for the cycle, just off 2015 lows and then levels not seen since the late 1990s.

MARKETS SNAPSHOT

Key late session market levels:

• DJIA up 201.82 points (0.6%) at 33905.7
• S&P E-Mini Future up 37.75 points (0.96%) at 3978.5
• Nasdaq up 138.8 points (1.3%) at 10881.64
• US 10-Yr yield is down 6.1 bps at 3.5576%
• US Mar 10-Yr futures are up 12.5/32 at 114-12.5
• EURUSD up 0.0025 (0.23%) at 1.0758
• USDJPY up 0.23 (0.17%) at 132.49
• WTI Crude Oil (front-month) up $2.44 (3.25%) at $77.57
• Gold is down $0.89 (-0.05%) at $1876.33

US TSY FUTURES CLOSE

• 3M10Y -10.99, -113.001 (L: -116.074 / H: -106.683)
• 2Y10Y -4.233, -67.701 (L: -69.36 / H: -63.305)
• 2Y30Y -5.105, -55.062 (L: -57.948 / H: -49.977)
• 5Y30Y -1.278, 0.88 (L: -1.728 / H: 2.534)
• Current futures levels:
• Mar 2-Yr futures up 1.375/32 at 102-28.625 (L: 102-26.25 / H: 102-30.25)
• Mar 5-Yr futures up 8/32 at 109-6.5 (L: 108-30.5 / H: 109-08)
• Mar 10-Yr futures up 13/32 at 114-13 (L: 113-31.5 / H: 114-15)
• Mar 30-Yr futures up 25/32 at 129-0 (L: 128-04 / H: 129-08)
• Mar Ultra futures up 1-20/32 at 140-11 (L: 138-15 / H: 140-20)

US 10YR FUTURE TECHS: (H3)‌‌ Bullish Theme

• RES 4: 116-00 Round number resistance
• RES 3: 115-11+ 2.00 proj of the Oct 21 - 27 - Nov 3 low
• RES 2: 115-11+ High Dec13, bull trigger / 2.0% 10-dma envelope
• RES 1: 114-23+ High Jan 9
• PRICE: 114-13 @ 1500ET Jan 11
• SUP 1: 113-12 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 remain firm 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. Potential is seen for a climb towards 115-11+, the Dec 13 high and a bull trigger. On the downside, initial support lies at 113-12, 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 steady at 94.920
• Jun 23 -0.005 at 94.860
• Sep 23 +0.005 at 95.005
• Dec 23 +0.020 at 95.380
• Red Pack (Mar 24-Dec 24) +0.050 to +0.075
• Green Pack (Mar 25-Dec 25) +0.055 to +0.065
• Blue Pack (Mar 26-Dec 26) +0.050 to +0.055
• Gold Pack (Mar 27-Dec 27) +0.045 to +0.045

SHORT TERM RATES

US DOLLAR LIBOR: Latest settlements:

• O/N +0.00458 to 4.31329% (-0.00014/wk)
• 1M -0.00643 to 4.42343% (+0.02186/wk)
• 3M +0.00914 to 4.81500% (+0.00514/wk)*/**
• 6M -0.01386 to 5.12800% (-0.06900/wk)
• 12M -0.01614 to 5.41757% (-0.14140/wk)
• * Record Low 0.11413% on 9/12/21; ** New 14Y high: 4.81500% on 1/11/23

• Daily Effective Fed Funds Rate: 4.33% volume: $109B
• Daily Overnight Bank Funding Rate: 4.32% volume: $293B

• Secured Overnight Financing Rate (SOFR): 4.31%, $1.124T
• Broad General Collateral Rate (BGCR): 4.27%, $437B
• Tri-Party General Collateral Rate (TGCR): 4.27%, $407B
• (rate, volume levels reflect prior session)

FED Reverse Repo Oparation

NY Fed reverse repo usage rebounds to $2,199.170B w/ 99 counterparties vs. prior session's $2.192.942B. 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: Need Yield? Turkey 10Y Launched

• Date $MM Issuer (Priced *, Launch #)
• 01/11 $2.75B #Turkey 10Y 9.75%
• 01/11 $1.8B #Daimler Trucks $650M 2Y +103, $650M 3Y +123, $500M 5Y +148
• 01/11 $1B *OKB 3Y SOFR+35
• 01/11 $1B #KBC Group 6NC5 +210
• 01/11 $1B *Kommunalbanken 5Y SOFR+57
• 01/11 $1B *CDC (Caisse des Depots) 3Y SOFR+44
• 01/11 $600M #ICBC (Industrial/Commercial Bank of China) Dubai 3Y SOFR+93
• 01/11 $500M #Bank Leumi 10.5NC5.5 +345

EGBs-GILTS CASH CLOSE: Broad Rally As Doves Have Their Day

EGB and Gilt yields fell sharply Wednesday amid largely dovish ECB revelations.

• Early in the session, EGBs rallied as ECB hawk Holzmann signalled support for a cautious approach on QT. And just before the cash close, MNI published an ECB sources piece pointing to potential for smaller hikes later in the year as inflation fades.
• ECB terminal rate pricing fell 11bp on the session (below 140bp hikes by July) and combined with Holzmann's comments, periphery EGB spreads fell sharply. GGBs outperformed, while 10Y BTP/Bund spreads printed below 180bp for just the third time since April 2022.
• SONIA rallied as well, with the Gilt curve flattening, with multiple factors cited including follow-through from Tuesday's huge BOE Financial Stability Sales operation.
• Some of the rally was also attributed to position squaring ahead of US CPI, which is Thursday's (indeed the week's) focus; we also get an appearance by BoE's Mann and the ECB's economic bulletin.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 6.6bps at 2.588%, 5-Yr is down 12.2bps at 2.222%, 10-Yr is down 10.4bps at 2.204%, and 30-Yr is down 11bps at 2.139%.
• UK: The 2-Yr yield is up 5.2bps at 3.53%, 5-Yr is down 13bps at 3.335%, 10-Yr is down 14.8bps at 3.409%, and 30-Yr is down 15.1bps at 3.756%.
• Italian BTP spread down 8.3bps at 183.1bps / Greek down 12bps at 197bps

FOREX: EURCHF Back Above Parity Following Technical Breach

• While most major currencies traded with a subdued tone on Wednesday ahead of key US data on Thursday, the Swiss Franc has shown notable weakness following a key technical break higher for EURCHF.
• EURCHF is up 1.12% approaching the APAC close and is the standout mover in today’s session. Continued Euro resilience has bolstered the pair however the move certainly seems technical in nature, following the break of a confluence of resistance levels. First of all, the 0.9925 December highs which sparked topside momentum and has now seen us trade above the July/Oct highs as well as pivot resistance at the March 2023 lows of 0.9972.
• Decent follow through has seen the pair trade above parity for the first time since July 2022 with immediate resistance next seen at 1.0046, the July 04 high. Swiss weakness filtered through to USDCHF which reversed a solid portion of the losses incurred since last Friday’s US data.
• Elsewhere, currency markets have picked up where they left off Tuesday with risk proxies moderately outperforming and EUR/USD holding well above the 1.07 handle and extending to fresh trend highs above 1.0760 on the US cash equity open before consolidating around this level.
• AUD's 0.33% gains follow a modest beat on expectations for November CPI this morning, which edged higher to 7.3% Y/Y and 5.6% on a trimmed mean basis. This keeps a bullish theme intact, with the pair having cleared 0.6893, the Dec 13 high this week to confirm a resumption of the uptrend that started Oct 13. The focus is on 0.6976, a Fibonacci projection. Key support lies at 0.6688, the Jan 3 low.
• Chinese CPI/PPI data is due overnight, however, markets may remain in a holding pattern ahead of Thursday's key US CPI release.

Thursday Data Calendar

Date	GMT/Local	Impact	Flag	Country	Event
12/01/2023	0030/1130	**		AU	Trade Balance
12/01/2023	0130/0930	***		CN	Producer Price Index
12/01/2023	0130/0930	***		CN	CPI
12/01/2023	0700/0800	**		NO	Norway GDP
12/01/2023	1330/0830	**		US	Jobless Claims
12/01/2023	1330/0830	**		US	WASDE Weekly Import/Export
12/01/2023	1330/0830	***		US	CPI
12/01/2023	1345/0845			US	Philadelphia Fed's Patrick Harker
12/01/2023	1530/1030	**		US	Natural Gas Stocks
12/01/2023	1630/1130			US	St. Louis Fed's James Bullard
12/01/2023	1630/1130	*		US	US Bill 08 Week Treasury Auction Result
12/01/2023	1630/1130	**		US	US Bill 04 Week Treasury Auction Result
12/01/2023	1700/1200	***		US	USDA Crop Estimates - WASDE
12/01/2023	1700/1200	**		US	USDA GrainStock - NASS
12/01/2023	1700/1200	***		US	USDA Winter Wheat
12/01/2023	1700/1700			UK	BOE Mann Lecture at University of Manchester
12/01/2023	1740/1240			US	Richmond Fed President Tom Barkin
12/01/2023	1800/1300	***		US	US Treasury Auction Result for 30 Year Bond
12/01/2023	1800/1300	*		US	US Treasury Auction Result for Cash Management Bill
12/01/2023	1900/1400	**		US	Treasury Budget