MNI US MARKETS ANALYSIS - CPI In Focus As Markets Eye Just Under 150bps Cuts

Richer Ahead of US CPI and Solid Docket

• Cash Tsys trade 2-4.5bp richer, bull flattening, as they feed off expectations surrounding European issuance (good demand at the Irish syndication foreseen and a step down in the pace of wider IG supply vs. the last couple of days).
• TYH4 trades at or close to session highs of 112-05+, just about within yesterday’s 112-07 and with resistance at 112-19 (Jan 4 high) and a bull trigger at 113-12 (Dec 27 high).
• Focus is firmly on US CPI (MNI Preview here) with weekly jobless claims adding to the data docket. We then see post-CPI reactions from ’24 voters Mester and Barkin, Barkin repeating a speech and so likely only of note for the subsequent Q&A. 30Y supply rounds out the session after yesterday's modest 10Y tail.
• Data: CPI Dec (0830ET), Weekly jobless claims (0830ET), Real avg earnings Dec (0830ET), Monthly budget statement (1400ET).
• Fedspeak: Mester (’24) on Bloomberg TV (1140ET), Barkin (’24) repeats soft landing speech before Q&A (1240ET)
• Note/bond issuance: US Tsy $21B 30Y Bond re-open auction (1300ET)
• Bill issuance: US Tsy $80B each 4W, 8W bill auctions (1130ET)

STIR: Fed End-2024 Rates Dip Further With CPI In Focus

• Ahead of CPI at 0830ET, Fed Funds implied rates are near unchanged on the day for most 2024 meetings although slip a little lower at end-2024 as the latter extend recent declines.
• Cumulative cuts: 17bp for March, 64bp for June, 126bp For Nov and 143bp For Dec.
• We have two scheduled Fed speakers after today’s CPI: Mester (’24 voter but retiring June) speaking for the first time since Dec 18 when she offered pushback to market rate cut expectations and Barkin (’24 voter) who has spoken a few times recently including after payrolls noting he sees the labor market moving in a very steady, softening pattern.
• NY Fed’s Williams (permanent voter) yesterday: "My base case is that the current restrictive stance of monetary policy will continue to restore balance and bring inflation back to our 2% longer-run goal. I expect that we will need to maintain a restrictive stance of policy for some time to fully achieve our goals, and it will only be appropriate to dial back the degree of policy restraint when we are confident that inflation is moving toward 2% on a sustained basis."

OI Points To Mix Of Positioning Swings On Wednesday

The combination of yesterday's twist steepening of the curve and preliminary OI data points to the following positioning swings on Wednesday:

• Long setting: TU futures
• Short setting: FV & TY futures
• Long cover: UXY., US & WN futures
• The above presents a fairly well-defined round of positioning movement across different areas of the curve.
• Still, net DV01 equivalent OI swings across the curve were relatively contained, with the most sizeable move coming via the apparent short setting seen in the TY contract.

OI Points To Mix Of SOFR Positioning Swings On Wednesday

The combination of yesterday's twisting of the SOFR strip and preliminary OI data points to the following position swings on Wednesday:

• Whites: Apparent long setting seen across most of the pack, with the only exception seemingly coming via very modest short cover in SFRZ3.
• Reds: A mix of long setting (SFRZ4 & H5) and long cover (SFRU5). It is hard to be definitive when it comes to positioning movement in SFRM5 given the unchanged price status come settlement.
• Greens: An apparent mix of short setting (SFRZ5 & SFRM6) and long cover (SFRH6 & SFRU6). Short setting provided more influence in net pack terms.
• Blues: An apparent mix of long cover (SFRZ6, SFRM7 & SFRU7) and modest short setting (SFRH7), with the former dominating in net pack terms.

EUROPE ISSUANCE UPDATE

• E4bln of the 2.95% Feb-27 BTP. Avg yield 3.03% (bid-to-cover 1.48x).

Ireland Syndication Update:

• E3bln of the new 10-year Oct-34 IGB. Spread set at MS+1bps. Books closed in excess of E44bln.

FOREX: EUR Strength Falters, Markets Pre-Position for CPI

• EUR has been unable to maintain the strength seen through the Wednesday close, with EUR/USD fading off the early Asia-Pac session high at 1.0989. This has seen prices fade through the morning to dip back below 1.0975 and ease off the sharp rally through yesterday's WMR fix.
• Resultingly, EUR is the poorest performer in G10 ahead of the NY crossover, with the much-watched strength in EUR/JPY fading after a print at 160.01. Data and newsflow has been light and/or ineffective, leaving markets to pre-position ahead of the CPI print later today.
• NZD trades to the better, but the daily gains have made little dent in the broader NZD/USD chart. The subsequent retracement in EUR/NZD tips prices off the YTD high posted yesterday at 1.7639, and the sharply negative trend in the 50-dma points to near-term downward momentum. Cross has so far stopped dead on 1.7541, the 38.2% retracement for the Dec - Jan upleg, opening 1.7511 intraday, ahead of 1.7443 and the bear trigger of 1.7383.
• US CPI data takes focus going forward, with markets expecting headline Y/Y to tick higher to 3.2%, while Core Y/Y slows to 3.8% from 4.0%. Supercore trend rates are likely to remain very strong at 4% annualized handles, but the data may be treated with caution as differences in methodology have seen core PCE at notably weaker rates in recent months.
• Outside of CPI, ECB's Vujcic takes part in an MNI videoconference at 1400GMT/0900ET, with Fed's Mester & Barkin and ECB's Lagarde also set to make appearances.

FX OPTIONS: Vol Markets Identify EUR, AUD, NZD as Carrying Largest Risk Premium into US CPI

• Overnight G10 FX vols are well bid ahead of the US CPI release later today, with a solid risk premium added to USD pairs, tipping most overnight implied vols measures to the highest levels since Dec13 and the last Fed rate decision.
• Vol markets have identified EUR, AUD and NZD as carrying the most sizeable CPI-based vol premium, blowing out the break-evens and implied pricing for a post-data swing against the USD.
• An overnight straddle on AUD/USD implies a 50 pip swing in spot for a Friday expiry, over double the implied break-even using prevailing vol at the beginning of the week. This puts this month’s CPI release on comparative footing to the December CPI/Fed meetings, and above the equivalent releases on Nov14, Oct12 and Sep13 and Aug10 of last year.
• In the event of a stronger-than-expected CPI read and a backtrack on Fed rate cut pricing, a 50 pip swing in AUD/USD would bring ’24 lows of 0.6641 into play ahead of notable support at the 0.6629 50-dma.

FX OPTIONS: Expiries for Jan11 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1000-20(E1.2bln), $1.1050(E1.5bln)
• USD/JPY: Y144.00($1.1bln), Y145.40-50($652mln)
• AUD/USD: $0.6675(A$730mln), $0.6690(A$517mln)
• NZD/USD: $0.6175-95(N$1.2bln)
• USD/CNY: Cny7.1685-00($1.1bln)

EGBS: Firmer Following a Smaller Issuance Slate vs Last Few Days; US CPI Eyed

Core/semi-core EGBs have firmed through the European morning as markets await today's US CPI release at 1330 GMT / 1430 CET.

• Thursday's sovereign/IG issuance slate is substantially smaller than the past few sessions, which has which has helped relieve pressure on the space.
• Additionally, today's Irish 10Y syndication has shown strong demand indications, following on from similar dynamics in Italy and Spain's recent syndications.
• Bunds are currently up 36 ticks at 135.52 but remain within yesterday's range. German and French cash curves have bull flattened.
• Peripheries are once again tighter to Bunds, with the 10Y BTP/Bund spread now below 160bps for the first time since before Christmas. Short-end BTP gains were capped in the lead-up to this morning's new 3Y BTP supply.
• Aside from the aforementioned US CPI release, European markets look to ECB-speak from President Lagarde and the usually hawkish Vujcic (the latter will speak at an MNI event at 1400 GMT).

EQUITIES: E-Mini S&P Extends Recovery from Last Friday's Lows

• The primary trend direction in Eurostoxx 50 futures remains up and the recent move lower is considered corrective. Moving studies are in a bull-mode position, signalling a rising trend cycle. Key short-term support to watch is 4445.90, the 50-day EMA. A break of this average would signal scope for a deeper retracement and open 4370.00, the Nov 28 low. For bulls, a reversal higher would refocus attention on 4634.00, the Dec 14 high and bull trigger.
• S&P E-Minis have recovered from last Friday’s low and the contract is again trading higher. Key resistance and the bull trigger is at 4841.50, the Dec 28 high. Clearance of this level would resume the uptrend and open 4854.75, a Fibonacci projection. Support at the 20-day EMA of 4760.92 has recently been pierced. A clear break of this average would strengthen a short-term bearish threat and open the 50-day EMA, at 4668.13.

COMMODITIES: WTI Future Moving Average Studies Remain in a Bear-Mode Position

• Trend conditions in WTI futures are unchanged and the signals remain bearish. Resistance to watch is $74.62, the 50-day EMA. The average was briefly pierced late December. A clear break of it would strengthen a bullish theme and highlight a stronger reversal. Moving average studies remain in a bear-mode position, highlighting a downtrend. The trigger for a resumption of the downtrend is $67.98, the Dec 13 low.
• Gold is trading closer to its recent lows following the pullback from $2088.5, the Dec 28 high. Price is trading ahead of the next key support at $2013.2 the 50-day EMA. A break of this level, if seen, would expose key support at $1973.2, the Dec 13 low. For bulls, clearance of $2088.5 would reinstate the bull cycle that started Dec 13. This would open $2097.1, 76.4% of the Dec 4 - 13 bear leg, ahead of key resistance and the Dec 4 all-time high of $2135.4.