MNI US MARKETS ANALYSIS - Corrective USD/JPY Rally Fades Into NY

US TSYS: Holding On To Post-BoJ Bull Flattening Ahead Of Stacked Docket

• Fed rate expectations may have shrugged off the BoJ decision to push back against market pressure and maintain existing policy but cash Tsys have been left richer. No change in BoJ YCC has seen largest moves left in 10Y yields, currently down 7bps but still almost 6bps above post-CPI lows from last week.
• A stacked session ahead with multiple important monthly data releases, four Fed speakers, the Beige Book and 20Y supply.
• 2YY -3.0bp at 4.175%, 5YY -5.5bp at 3.566%, 10YY -7.0bp at 3.477%, 30YY -6.2bp at 3.599%.
• TYH3 trades 11+ ticks higher at 115-01, off Friday highs of 115-15+ but with the trend needle still pointing north. Support meanwhile is seen at 113-29 (20-day EMA)
• Fedspeak: Bostic (’24) 0900ET, Bullard (non-voter) 0930ET, Harker (’23, text) 1400ET at same time as Fed Beige Book before Logan (‘23, text) 1700ET.
• Data: Retail sales Dec (0830ET), PPI Dec (0830ET), NY Fed service business activity Jan (0830ET), IP Dec (0915ET), Inventories Nov (1000ET), NAHB index Jan (1000ET), TIC flows Nov (1600ET) plus usual weekly MBA data (0700ET).
• Bond issuance: US Tsy $12B 20Y reopen (912810TMO1) – 1300ET
• Bill issuance: US Tsy $36B 17W Bill Sale – 1130ET

STIR FUTURES: Fed Rate Pricing Shrugs Off BoJ, Data/Speak Next

• Fed Funds implied hikes little changed on the day post-BoJ, consolidating yesterday’s shift lower helped by the large Empire mfg miss.
• 27.5bp for Feb 1 (unch), cumulative 47.5bp Mar (unch), 58bp to 4.91% terminal (-0.5bp) before 49bp of cuts to 4.43% Dec (-1.5bp).
• Fedspeak: Bostic (’24) welcoming remarks 0900ET, Bullard (non-voter) with WSJ 0930ET, Harker (’23, text) on econ outlook at 1400ET at same time as Fed Beige Book before Logan (‘23, text) late at 1700ET.

EUROPE ISSUANCE UPDATE

GERMAN AUCTION RESULTS: 30y Bunds

• Given that this is the first dual-line 30y Bund auction those results look decent enough.
• For the 1.80% Aug-53 Bund there was a bigger tail than at the November auction and the bid-to-cover / bid-to-offer were both down - but remember that the November auction was a strong auction.
• Also, despite the tail the LAP was still above the prevailing mid-price so we have seen the price move higher after the auction.
• These results for the 1.80% Aug-53 Bund are not strong but they're not hugely disappointing either given the dual-line aspect of the auction and the LAP being in excess of the mid-price.
• For the 0% Aug-50 Bund the results were much more solid - the average price matched the LAP so there was no tail.
• If the 0% Aug-50 Bund was auctioned on its own it would look relatively strong. The 1.80% Aug-53 Bund auction was decent.
• So all in all for the first dual-line 30y auction, Finanzagentur should be satisfied with how today's auction has gone.

• E1bln (E805mln allotted) of the 0% Aug-50 Bund. Avg yield 1.97% (bid-to-cover 1.36x)
• E1.5bln (E1.206bln allotted) of the 1.80% Aug-53 Bund. Avg yield 2.05% (bid-to-cover 1.22x).

FOREX: Flurry of Short-Covering Sees USD/JPY Undergo Corrective Bounce

• JPY is sliding against all others in G10 as the BoJ worked against market pressure to abandon their flagship yield curve control policy. Implied vols were well bid into the event, pricing in a near 300 pip response in USD/JPY. This came to fruition, with a flurry of short-covering driving USD/JPY north of 131.50 - a move that's in the process of being faded as markets head through to the NY crossover.
• The USD/JPY rally stopped short of the 20-day EMA, which provided effective resistance and suggests the over-arching downtrend remains intact for now.
• USD strength followed the BoJ decision initially, but this has similarly reversed in favour of the EUR. Upside was bolstered by an appearance from ECB's Villeroy, who talked against recent sources reports that suggested the bank will imminently step down the pace of tightening. EUR/USD remains bid, showing above yesterday's highs to print at 1.0869 in recent trade.
• CHF also trades well, and is firmer against the EUR for a fourth consecutive session. Price has now dipped back below parity, making for a 150 pip fade off last week's best levels.
• US PPI data should be the focus for the Wednesday session, with markets expecting PPI to slip to 6.8% on the year, down from 7.4% on a final demand basis. Industrial production and the NAHB Housing Markets Index also cross. The speakers slate could also provide some interest, as Fed's Bostic, Harker and Logan appear. The Fed also release their latest Beige Book assessment.

FX OPTIONS: Expiries for Jan18 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0595-05(E558mln), $1.0746-60(E674mln), $1.0815(E575mln), $1.0850-60(E657mln)
• USD/JPY: Y130.70($510mln)
• GBP/USD: $1.1800(Gbp810mln), $1.2440-50(Gbp907mln)
• EUR/GBP: Gbp0.8740-50(E497mln)

BONDS: Curves Flatter With Drivers At Both Ends

Global cash curves are flatter in early Wednesday trade, with dovish short-term rate expectations being reconsidered, and the BoJ keeping a lid on long-end yields.

• While the BoJ's decision to maintain the status quo on monetary policy - including maintaining the current yield curve control regime - was widely anticipated by analysts, the lack of a hawkish surprise saw a strong rally across global core FI.
• 10Y JGB yields fell as much as 14bp and Tsys 9bp.
• In Europe, stronger-than-expected UK CPI data and pushback by the ECB's Villeroy on yesterday's dovish Bloomberg sources piece saw near-term BoE and ECB hike pricing firming.
• The Tsy curve has bull flattened, with Germany's twist flattening and the UK's modestly bear flattening. EGB periphery spreads are mixed.
• Attention turns to US data (PPI, retail sales, industrial production) and Fed communications (Beige Book, Atlanta's Bostic, Dallas' Logan, St Louis' Bullard, Philly's Harker). We also get a $12B 20Y Tsy auction.

EQUITIES: Eurostoxx Futures, E-Mini S&P Holds on to Recent Gains

EUROSTOXX 50 futures bullish conditions remain intact and the contract is trading holding on to its recent gains. Futures have recently cleared resistance at 4043.00, the Dec 13 high and a bull trigger. The break marks a key short-term positive development and paves the way for gains towards 4215.00 next, a Fibonacci projection. Moving average studies are in a bull-mode condition, reinforcing the bull theme. Initial firm support is 4015.70. S&P E-Minis are trading at their recent highs and conditions remain bullish. The contract has cleared resistance at the 50-day EMA and this has strengthened the short-term bullish condition. Price has also traded above the 4000.00 handle to open 4043.00 next, the Dec 15 high. Key support and the bear trigger has been defined at 3788.50, the Dec 22 low. A reversal lower and a break of this support would resume bearish activity.

COMMODITIES: WTI Futures Target 81.50 Bull Trigger

WTI futures traded higher last week and the bull theme remains intact as the contract extends its climb. The move higher has exposed resistance at $81.50, the Jan 3 high and a bull trigger. Clearance of this hurdle is required to strengthen a bullish theme and open $83.27, the Dec1 high. The broader trend outlook still appears bearish. A reversal lower would expose the bear trigger that has been defined at $70.31, the Dec 9 low. Trend conditions in Gold remain bullish and the yellow metal traded to a fresh trend high earlier this week. This confirms an extension on the current uptrend and maintains the positive price sequence of higher highs and higher lows. Note that moving average studies are in a bull mode position - reflecting the uptrend. The focus is on $1934.4 next, the Apr 25, 2022 high. Support to watch lies at $1855.9, the 20-day EMA.