MNI US MARKETS ANALYSIS - Fedspeak on Tap, With Greenback Just Off Highs

US TSYS: Modestly Bear Steeper, 10Y Supply And Fedspeak In Focus

• Cash Tsys trade 0.5-2bp cheaper, modestly bear steepening with 2s10s at -29bps, with Tsys lifting off overnight best levels that had continued after further NYCB pressures and a well-received 3Y Tsy auction. The cheapening pressure broadly mirrors that seen in EGBs/Gilts.
• TYH4 has pulled back to 111-04 (-05) from yesterday’s high of 111-12+, on lower volumes of 290k compared to prior elevated overnight sessions. It sits close to resistance at 111-20 (20-day EMA) but a bearish threat is still present with focus on the bear trigger at 110-22+ (Feb 5 low).
• Today sees a lighter data docket with focus instead on Fedspeak and 10Y supply. Fedspeak, at least from those that haven’t spoke for a while, could be on the dovish side of the FOMC spectrum – see STIR bullet.
• Data: MBA mortgage data (0700ET), Trade bal Dec (0830ET), Consumer credit Dec (1500ET)
• Fedspeak: Kugler (1100ET, incl text), Collins (1130ET, incl text), Barkin (1230ET), Bowman (1400ET, incl text), NY Fed SOMA Dep SOMA Manager Remache (1515ET), NY Fed’s Nordstrom (1630ET)
• Note/bond issuance: US Tsy $42B 10Y Note auction - 91282CJZ5 (1300ET)
• Bill issuance: US Tsy $60B 17W Bill auction (1130ET)

Fed Rate Path Consolidates Decline, Possibly Dovish Fedspeak Ahead

• Fed Funds implied rates are near unchanged overnight having unwound Monday’s post-payrolls extension yesterday.
• Cumulative cuts: 6.5bp for Mar, 21bp for May, 44bp for June and 122bp for Dec.
• Fedspeak: Harker (non-voter) provided the last commentary late yesterday with the data point to continued disinflation and labor rebalancing.
• Ahead sees a particularly stacked Fedspeak schedule, with our focus on Governor Kugler (permanent voter) and Boston Fed’s Collins (’25 voter) considering their lack of prior appearances – both with text and Q&A. Collins last spoke in mid-Nov and we haven't heard anything from Kugler since being sworn in apart from Reuters in Nov citing a letter that she was one of three Governors seeing room to run down the balance sheet.
• There’s a chance one of them was the lowest 2024 dot at the Dec SEP with Goolsbee saying he wasn’t most dovish (one dot eyed 6 cuts, four dots eyed 4 cuts).

OI Suggests Net Short Cover Was Seen Across Most Of Curve On Tuesday

The combination of yesterday’s rally in Tsy futures and preliminary OI data points to net short cover across most of the curve, with well-received 3-Year Tsy supply, Fedspeak & NYC Bancorp worry filtering into the rally at different stages on Tuesday.

• Apparent, modest net long setting in TU futures provided the only exception to the wider theme, allowing the apparent net short cover seen elsewhere to dominate in net curve terms, although contract-specific DV01 equivalent net OI swings were contained.

OI Points To Mix Of Long Setting & Short Cover In SOFR Futures On Tuesday

The combination of yesterday’s uptick across the SOFR futures strip and preliminary OI data points to the following positioning swings on Tuesday:

• Whites: Net short cover was seemingly seen in all contracts.
• Reds through blues: Apparent net long setting dominated all 3 packs, with only modest rounds of net short cover (SFRU5, U6 & M7) breaking the wider trend.
• Fedspeak & NYC Bancorp worry filtered into the SOFR futures rally at different stages on Tuesday, with the strip flattening.

EUROPE ISSUANCE UPDATE

Gilt auction results:

• The 3-year gilt auction (3.75% Mar-27 gilt) wasn't quite as strong as the launch 4 weeks ago, but still showed a strong bid-to-cover in excess of 3x (3.04x) while the tail was 0.5bp - not the tightest but also not too bad.
• GBP4bln of the 3.75% Mar-27 Gilt. Avg yield 4.131% (bid-to-cover 3.04x, tail 0.5bp).

Bund auction results:

• E3bln (E2.476bln allotted) of the 2.40% Nov-30 Bund. Avg yield 2.22% (bid-to-cover 2.15x)

Belgium syndication:

• E5bln of the new Jun-55 OLO (MNI had expected E5-7bln). Book in excess of E61bln. Spread set at 3.30% Jun-54 OLO +4bps (guidance was +7bps area).

FOREX: GBP/USD Corrective Bounce Extends Into Second Session

• The recovery off breakout lows for GBP/USD has extended into a second session, coinciding with some very moderate slippage in the greenback. GBP/USD's two-day rally puts spot back toward the Monday high of 1.2640 as price re-enter the early 2024 range and erase the range breakout posted earlier in the week. We noted yesterday that FX options markets had been generally quiet, however GBP hedging was an exception - upside demand was evident via decent sized calls trading with 1.2565, 1.2660 and 1.2850 strikes. Nonetheless, GBPUSD bearish conditions remain intact, with the current recovery deemed corrective.
• BoE MPC members Breeden spoke earlier to confirm her tightening bias has shifted since December, with her focus - along with many other on the MPC - shifting to how long rates should be held at current levels.
• This sees GBP the firmest currency in G10 alongside SEK, while JPY and CHF are the poorest performers. A phase of CHF weakness followed the publication of FX reserves data for January, which ticked up to 662.4bln from 653.7bln. Revaluation factors are likely at play, however EUR/CHF remains on track to test the downtrending 50-dma of 0.9404.
• Trade balance data marks the calendar highlight Wednesday, with Canadian and US numbers for December due. Central bank speakers are set to include Fed's Kugler, Collins, Barkin and Bowman of the FOMC, while some attention may also be paid to appearances from Fed's Remache and Nordstrom who, while not monetary policymakers, oversee the Fed's SOMA and international markets functions at the NY Fed.

FX OPTIONS: Expiries for Feb07 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0725(E1.1bln), $1.0745-55(E772mln), $1.0800(E965mln), $1.0950(E2.9bln)
• USD/JPY: Y146.40-55($2.0bln), Y147.00($1.5bln), Y147.45-60($889mln), Y148.00($710mln)
• AUD/USD: $0.6450(A$624mln), $0.6600(A$735mln)
• USD/CAD: C$1.3500($696mln)
• USD/CNY: Cny7.2000($1.5bln)

EGBS: Little Changed Wednesday Following Schnabel FT Interview

Core/semi-core EGB futures are a touch firmer Wednesday morning, though remain off intraday highs following ECB Schnabel's interview with the FT published this morning.

• Schnabel reiterated that the "last-mile" of bringing inflation to target "remains a concern", and emphasised the Eurozone's "worrying" recent decline in productivity, which has pushed up labour costs.
• In an interview recently published by MNI's Policy Team, ECB's Simkus noted that the central bank could begin easing in April or June.
• Bunds are +10 at 134.34 at typing, around 25 ticks shy of pre-Schnabel highs but comfortably within yesterday's range. Initial resistance is at 134.90, the 20-day EMA. German 7-year supply is due at 1030GMT.
• OAT and BTP futures are also a touch higher today, while yields are little changed.
• Peripheries have broadly tracked Bunds, leaving 10Y spreads flat to 0.5bp narrower.
• This morning's data docket was highlighted by German industrial production, which came in below consensus but also saw upward revisions to last-month’s data.
• The remainder of today's docket is quiet, with a slate of afternoon Fed-speak potentially garnering cross-border interest.

EQUITIES: Fresh Cycle Highs in Eurostoxx 50 Futures Confirm Resumption of Uptrend

• Eurostoxx 50 futures remain firm and the contract traded higher Tuesday and has delivered fresh cycle highs, confirming a resumption of the current uptrend. This reinforces the bullish 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 4725.50, a Fibonacci projection. Initial firm support lies at 4598.30, the 20-day EMA.
• The trend condition in S&P E-Minis is unchanged and remains bullish with the contract holding on to the bulk of its recent gains. The price has recently traded to fresh cycle highs, confirming a resumption of the uptrend. Recent corrections have been shallow - this also highlights a strong uptrend. The focus is on the psychological 5000.00 handle. On the downside, initial key short-term support has been defined at 4866.00, the Jan 31 low.

COMMODITIES: Short-Term Gains Improve Bullish Conditions in Gold

• WTI futures remain soft following last week’s steep sell-off. The move lower undermines the recent bullish theme and a continuation would expose support at $70.62, the Jan 17 low, and $69.56, the Jan 3 low. For bulls, a reversal higher is required to refocus attention on the key short-term resistance at $79.29, the Jan 29 high. Clearance of this level would reinstate a bullish theme. Initial resistance is at $76.95, the Feb 1 high.
• Gold continues to trade above the Jan 17 low of $2001.9. Recent short-term gains improved a bullish condition and a resumption of bullish activity 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 the recent bearish theme.