MNI US MARKETS ANALYSIS - Awaiting the US Inflation Report

US CPI PREVIEW: Used Cars Drag Seen Clashing With Firmer Non-Housing Services

• Released at 0830ET, consensus puts core CPI inflation at 0.3% M/M in January with mild risk seen to the downside, for a very similar reading to December after Friday’s annual revisions.
• Those revised seasonal factors plus new weights aren’t seen having a large impact in January but nevertheless add to some uncertainty.
• A broad theme is that service inflation could have strengthened with an offset from a large drag from used cars.
• There is a very wide range to analyst views for CPI supercore (from an admittedly small sample), but even the softest sees the three-month accelerate to 4.5% annualized.
• Fedspeak and strong data has near enough taken a March cut off the table and a first cut isn’t fully priced until June. A print consistent with another month of core PCE at target could take the wind out of this recent ramp higher in implied rates although we suspect softer labor data are really needed for markedly greater consideration of a nearer-term rate cut.
• Click here to see the full preview.

US TSYS: Mildly Richer Awaiting US CPI

• Cash Tsys trade mildly richer, 0.5-1.5bp across the curve with the front end underperforming, as they await US CPI which dominates today’s session. There is no Fedspeak scheduled nor any coupon-bearing issuance.
• They sit between a slightly larger rally in EGBs and a sell-off for Gilts with the latter stemming from stronger UK wage growth.
• TYH4 at 110-23+ trades towards the high of the day’s narrow ranges, with volumes on the light side as they approach 250k. It remains both within yesterday’s and Friday’s wider ranges, the latter after gyrations following annual CPI revisions. A bear threat is seen as still present with support at 110-16 (Dec 13/Feb 9 lows) whilst to the upside sits resistance at the 20-day EMA of 111-11.
• Data: CPI Jan (0830ET) - preview here, Real average earnings Jan (0830ET)
• Bill issuance: US Tsy $80B 42D CMB bill auction (1130ET)

US DATA: Fewer Firms Increased Prices in Jan, But More Plan to Increase Ahead - NFIB

• Within the myriad of figures in the NFIB small business barometer in January, the net share of owners raising average selling prices fell 3pts to 22% for the lowest since Jan’21.
• It was helped by 15% reporting lower selling prices, the highest since Aug’20.
• However, a net 33% planned price hikes in the next three months vs 32% in Dec, unchanged from the 33% averaged through 4Q23 after pushing higher since bottoming out at 21% in Apr’23.
• Having averaged 22% through 2017-19, this >30% level continues to imply difficulty in keeping inflation at levels consistent with the 2% PCE target.

STIR: Euribor Strip Recovers From UK-Data Lows

The Euribor strip is -1.0 to +0.5 ticks through the Blues - outperforming the SONIA strip - as core EGBs recover from UK-data inspired lows.

• UK wage data came in firmer than expected and has weighed on STIR/global FI markets.
• However, ECB-dated OIS contracts have not seen meaningful pay-side flows following the data, with 118bps of cuts currently priced through 2024 (broadly in line with yesterday afternoon's levels).

FOREX: GBP/CHF Surges on Diverging Price Pressures

• GBP is comfortably the strongest performer in G10, rising against all others on the back of the better-than-expected wages data from the UK this morning. Average weekly earnings rose at a clip of 5.8% for the 3m into December vs. Exp. 5.6%.
• The release boosted Gilt yields across the curve, trimming the implied pricing for the BoE this year to ~73bps, from close to 79bps ahead of the release. Resultingly, GBP/USD has been bid up to 1.2676 and just below the 50-dma which cuts across as first resistance at 1.2677. This is the best levels since the bumper nonfarm payrolls release at the beginning of the month.
• CHF is the poorest performer so far, slipping against all others as CPI came in soft relative to expectations (+1.3% Y/Y vs Exp. +1.7%). The release prompted an extension of recent EUR/CHF gains, putting the cross well through the mid-January highs and within range of key resistance at the 100-dma of 0.9496.
• USD price action is generally muted ahead of the US inflation release. As such, directional parameters for the USD Index are unchanged: 104.251 is the first upside intraday level ahead of 104.604, while 103.895 should act as first support.
• Focus going forward is on the US CPI release for January, at which markets expect headline Y/Y CPI to slip to 2.9% from 3.4% previously, and to 3.7% from 3.9% for the core metric.

FX OPTIONS: Expiries of Note

• EURUSD 1.02bn at 1.0800.
• USDJPY 1.49bn at 150.00.
• USDJPY 1.75bn at 150.00 (Wed).
• EURUSD 3.29bn at 1.0800 (Fri).
• GBPUSD 1.87bn at 1.2650/1.2660 (Fri).
• USDJPY 1.17bn at 150.00 (Fri)
• AUDUSD 1.05bn at 0.6600 (Fri)

EGBS/GILTS: Recover Following UK Data; US CPI Next

Core/semi EGBs have recovered from intraday lows, with Bunds +2 ticks at 133.47 and OAT futures flat at 128.11. Gilts remain lower on the day (-15 ticks at 97.53), some 10 ticks above the day's worst levels.

• The initial weakness came as UK wages data printed firmer than expected, with a lower-than-expected unemployment rate also adding to the pressure. A reminder that January CPI is due tomorrow at 0700GMT/0800CET.
• The moves away from intraday lows came in spite of a heavy EGB supply slate from Italy and Germany and an uptick in Brent crude futures this morning. One explanation may be the weakness in European equities, with participants taking profit after a strong run higher in recent weeks and putting money to work elsewhere.
• The German ZEW saw mixed results, with the current situation component weaker than expected and the expectations component stronger. Bunds have drifted a few ticks lower on the latter's outperformance.
• The German and French cash curves have twist flattened, while UK yields are 3.0 - 4.0bps higher, with 5Y tenors under the most pressure.
• Periphery spreads are generally tighter to Bunds. The 10-year BTP/Bund spread is 0.9bps tighter at 153.8bps in spite of the equity market weakness, though the removal of hedging-related pressure will have promoted some compression in recent trade.
• The remainder of today's regional docket is light, with cross-market focus squarely on the US CPI print at 1330GMT/1430CET.

EUROPEAN ISSUANCE UPDATE

0.75% Nov-33 UK linker

• A strong auction for the 10-year gilt linker (the 0.75% Nov-33 linker).
• The bid-to-cover was broadly in line with last month's auction but we also note that the price of 101.097 is higher than the intraday high by quite some way. The intraday high ahead of the auction had been 101.014 acheived just before the auction cut-off.
• There was no real knock-on effect to conventional (non-linker) gilt prices.
  • GBP1.5bln of the 0.75% Nov-33 linker. Avg yield 0.634% (bid-to-cover 2.97x).

3/7/20-year BTPs

• A decent 3/7/20-year BTP auction overall. Acceptable bid-to-covers (a little lower for the 3-year) and harder to compare for the two off-the-run 7-year BTPs given the smaller sizes.
• Prices at auction all slightly above the secondary mid-prices in the market.
  • E3.5bln of the 2.95% Feb-27 BTP. Avg yield 3.15% (bid-to-cover 1.39x).
  • E1.5bln of the 3.7% Jun-30 BTP. Avg yield 3.48% (bid-to-cover 1.71x).
  • E2bln of the 4.00% Nov-30 BTP. Avg yield 3.53% (bid-to-cover 1.55x).
  • E1.5bln of the 4.45% Sep-43 BTP. Avg yield 4.38% (bid-to-cover 1.51x).

2.10% Apr-29 Bobl

• The price of the 2.10% Apr-29 Bobl had fallen in the auction. The results were overall decent - but with a better bid-to-cover and bid-to-offer than previously seen.
• Immediately as the results were published the price of the 2.10% Apr-29 Bobl moved from 99.03 (the auction price) to 99.058. We are now back to trading where we were ahead of the auction concession being priced in (and before the ZEW survey was released).
• Only marginal impact on the Bund future from the auction.
  • E4bln (E3.293bln allotted) of the 2.10% Apr-29 Bobl. Avg yield 2.3% (bid-to-offer 1.93x; bid-to-cover 2.35x).

EQUITIES: Fresh Cycle Highs in Eurostoxx 50 Confirm Extension of Uptrend

• Eurostoxx 50 futures traded higher again Monday delivering another fresh cycle high that confirms an extension of the current uptrend. This reinforces bullish conditions and the importance of the recent break of a key resistance at the Dec 14 high of 4634.00. The clear breach of the 4700.00 handle paves the way for a climb towards 4788.10, a Fibonacci projection. Initial firm support lies at 4641.70, the 20-day EMA.
• The trend condition in S&P E-Minis is unchanged and remains bullish - recent gains reinforce current conditions. The contract traded to a fresh cycle high again on Monday, confirming a resumption of the uptrend. Recent corrections have been shallow and this continues to highlight a strong uptrend. The focus is on the 5100.00 handle. On the downside, initial key short-term support has been defined at 4866.00, the Jan 31 low.

COMMODITIES: Corrective Recovery in WTI Futures Still in Play

• The recent recovery in WTI futures while still in play, appears to be a correction - for now. Key short-term resistance has been defined at $79.29, the Jan 29 high. Clearance of this level would be a bullish development. On the downside, support to watch lies at $71.41, the Feb 5 low. A break of this level would reinstate the recent bearish theme and pave the way for a move towards $69.56, the Jan 3 low.
• Gold is unchanged and continues to trade above the Jan 17 low of $2001.9. Recent short-term gains improved a bullish condition and a resumption of the bull cycle would signal scope for a climb towards $2088.5, the Dec 28 high and a key resistance. For bears, a stronger reversal lower would instead refocus attention on $2001.9, where a break is required to reinstate a bearish theme.