MNI US CLOSING MARKETS ANALYSIS - Stocks Bounce as Michigan Inflation Expectations Recede

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US TSYS: Cash Treasuries Close Early With Further Sizeable Cheapening

• Cash Tsys hold onto further cheapening today at the early close, with yields 5-8.5bps higher on the day but just remaining off pre-U.Mich session highs across 2-10Y tenors.
• Those session highs were also month to date highs from 5Y tenors onwards, with the 2Y at highs since the Nov CPI miss on Dec 13 and the subsequent fall in terminal Fed pricing from close to 5% to ~4.9% currently.
• 2YY +5.0bps at 4.321%, 5YY +5.4bps at 3.857%, 10YY +6.9bps at 3.747% and 30YY +8.5bps at 3.823%.
• The first wave of US data were broadly as expected with core PCE inflation moderating and a small beat for income growth, before more mixed 1000ET data with new home sales surprisingly bouncing but importantly U.Mich inflation expectations being revised lower.
• Treasury futures are still set for a full session, with TYH3 currently trading 15 ticks lower at 113-02+ having earlier touched 112-31. In the process it cleared support at 113-09+ (Dec 21 low) to open the key short-term 112-11+ (Nov 21 low).

Source: Bloomberg. Yields shown as mid and not ask per text.

US DATA: Final Michigan Sentiment Sees Notable Downtick in Inflation Expectations

University of Michigan Sentiment (Dec F) M/M 59.7 vs. Exp. 59.1 (Prev. 59.1)

• Current Conditions 59.4 vs. Exp. 60.3
• Expectations 59.9 vs. Exp. 58.5
• 1-Year Inflation 4.4% vs. Exp. 4.6%
• 5-10 Year Inflation 2.9% vs. Exp. 3.0%

Highlights:

• Consumers’ extremely negative attitudes have softened this month on the basis of easing pressures from inflation.
• Year-ahead inflation expectations improved considerably but remained elevated, falling from 4.9% in November to 4.4% in December, the lowest reading in 18 months but still well above two years ago.
• Declines in short-run inflation expectations were visible across the distribution of age, income, education, as well as political party identification

US DATA: Core PCE Inflation Broadly As Expected

• Core PCE inflation was on balance broadly in line with expectations in November, rising a ‘small’ 0.2% M/M (unrounded 0.168%, cons 0.2) but after an upward revised 0.262% M/M in Oct (initial 0.219%).
• Further, the bulk of the very small upward revision in yesterday’s Q3 data turned out to land in July and August, not having much impact on more recent momentum.
• Taken together, the latest pace of moderation is very slightly faster than first thought and it leaves a core PCE print in line with the monthly rate consistent with the 2% inflation target. Aside from July, this is the first time this has been the case since Feb’21 and FOMC members will now want to see sustained prints at this level.

US DATA: Income Growth Helps Consumption Trend Resilience

• Personal income and spending growth was broadly as expected in November, with incomes slightly stronger (+0.4% vs cons 0.3) and a small miss for nominal spending (0.1 vs cons 0.2) offset by an upward revised Oct.
• The combination saw real spending flat in Nov but with prior momentum holding the 3m/3m run rate at a solid ~3.5% annualized, relative resilience compared to the rolling over in nominal retail sales.
• On the flip side, real disposable income growth held at 0.3% M/M, helping the trend rate continue to accelerate to almost 2.5% annualized.
• This has come about as the (nominal) savings ratio has levelled off in the past couple months, increasing two tenths off historical lows to 2.4% but still quickly running down ‘excess savings’ drawn from pre-pandemic trends.

US DATA: New Home Sales Buck The Downtrend Once Again

• New home sales surprisingly increased 5.8% M/M in November to 640k (cons -5.1%, 600k).
• There was wildly different performance across the main regions, capped at either end by Northeast (smallest region) falling -8.5% and West (second largest) surging +27.6%.
• The aggregate decline is notably different to the renewed acceleration in the decline in both existing home sales and building permits.

US: Biden Hails PCE Report, 'Incomes Up, Inflation Coming Down'

The White House has released a short statement from President Biden following the publication of personal income and consumption expenditures data earlier today.

• Statement reads: "Once again, we are seeing signs of our economy recovering and remaining resilient. Today’s report shows that incomes are up and inflation is coming down – while our job market remains strong."
• "Coming the day after we saw unemployment claims remain low and estimates of economic growth revised upward, it is a winning streak for America’s families, businesses, and farmers."

McConnell-Trump Political Clout Diminished, Won't Approve Trump Picks In '24

Speaking to CNBC's Sahil Kapur, Senate minority leader Mitch McConnell (R-KY) states that in the wake of the House Jan 6. Committee's report he believes the political clout of former President Donald Trump is 'diminished', and states that he will be “actively look for quality candidates” for 2024 congressional races saying that he and his allies will be “less inclined to accept cards that may be dealt to us [by Trump]".

• McConnell on the impact of Trump-backed candidates winning nominations in key Senate races: “We lost support that we needed among independents and moderate Republicans, primarily related to the view they had of us as a party — largely made by the former president — that we were sort of nasty and tended toward chaos".
• These comments are the most overt McConnell has made in criticising Trump and his role in the Republican party. Tensions likely to remain high between the pro-Trump and the more moderate wings of the party over the next two years as 2024 election cycle approaches.
• The 800-page Jan 6report recommends that Trump never be allowed to hold public office again, that vice president's powers to reject state's electoral slates in the tallying of the electoral college are removed, and increase security around the Congressional tallying of electoral college votes to that of a presidential inauguration or State of the Union address (among many other recommendations).

FOREX: Dollar Bounce Stymied by Damp Michigan Inflation Expectations

• Markets were largely rangebound Friday, with early closes across Europe and the US sapping activity and volumes. The USD Index started the session in negative territory, before finding some support on a solid set of PCE inflation data. A minor rally of around 0.3% followed before downward revisions to Michigan survey inflation expectations worked against the rally and put the USD very modestly lower through the latter half of the US session.
• JPY continues to backtrack a small part of the recent strength, and is the weakest amid a quiet G10 backdrop. USD/JPY is edging back toward the Y133.00 handle, still well shy of the week's opening level either side of Y136.00.
• EURGBP pierced a bull trigger this week, edging higher yesterday and topping 0.8829, the Nov 9 high. The outlook remains positive and a clear break of 0.8829 would strengthen this condition. This would pave the way for a move towards 0.8858, the upper band of a MA envelope and 0.8907, a Fibonacci retracement.
• High beta and growth-sensitive currencies saw support throughout, with AUD, NZD and CAD among the strongest performers. An underlying oil rally boosted commodity-tied FX, with refinery capacity in Texas knocked offline by a cold snap - costing over 1.5mln bpd in output. As a result, WTI crude futures ended the pre-Christmas period nudging $80/bbl.

EQUITIES: Stocks Tick Higher on Buy Programmes, Lower Michigan Inflation Numbers

• E-mini S&P narrowed in on the earlier session highs at 3871.50 after the post-Michigan equity rally gathered some steam. The index has now added around 50 points off the earlier lows and further strength opens the 50-dma on the continuation contract at 3895.25. A clear break of this hurdle is required to suggest potential for a stronger recovery.
• Equity gains remain largely based off the downward revision to the Michigan inflation expectations, which not only saw a step lower near-term, but were also observed across all survey cohorts - which the market's clearly discounting against Fed rate hike expectations.
• Evidence of buy programmes also proving supportive shortly following the cash open, with NYSE tick data showing sizeable buy interest at 1017ET, 1019ET and 1038ET.
• Energy names leading the move higher, supported by solid oil prices today as the cold snap leads to a number of refineries being knocked offline - Bloomberg estimate 1.6mln bpd capacity has been knocked offline in Texas alone due to weather conditions.

COMMODITIES: WTI Clears 50-Day EMA Russia Production Cut Plans

• Crude oil has gained strongly today, building on earlier comments from Novak that Russian may cut production by 500-700k bpd early next year as a result of western sanctions blunting demand for its crude.
• Further, freezing weather has halted more than 1.6mbpd of Texas oil-refining capacity and forcing the two largest US refineries (Motiva Port Arthur and Marathon Galveston Bay) to stop producing until temperatures warm up. Separately, TC Energy has received regulatory approval to restart the segment of its Keystone pipeline through Cushing.
• WTI is +3.0% at $79.80, clearing resistance at the 50-day EMA and briefly $79.90 (Dec 22 high) to open key resistance at $83.27 (Dec 1 high).
• Brent is +3.4% at $83.69, having earlier tested resistance at $83.85 (Dec 22 high), after which sees the 50-day EMA of $85.19.
• Gold is +0.2% at $1795.78 with resistance remaining at the bull trigger of $1824.5 (Dec 13 high).
• Weekly moves: WTI +7.4%, Brent +5.9%, Gold +0.15%, US Nat Gas -21.6%, EU TTF Nat Gas -28%