MNI US MARKETS ANALYSIS - Focus Shifts to Dollar & Waller

Tsys Defrosting, 10Y Yield Back Over 4%

• Cash Tsys running weaker as US markets return from Martin Luther King holiday, curves mildly steeper (2Y10Y +.292 at -20.430, hovering near post-PPI high and steepest level since October). Tsy 10Y yield back above 4% at 4.0087% (+.0697).
• March'24 10Y futures just off recent overnight low of 112-05 at 112-06.5 (-12.5), putting the contract back at Friday's pre-PPI levels and still well above initial technical support of 111-06+ (Low Jan 05) followed by key pivot support at 111-01+, the 50-day EMA.
• Projected rate cuts cool slightly but markets still targeting May as first rate cut.
• US Treasury supply resumes with $75B 13W and $68B 26W bill auctions at 1130ET, followed by $70B 42D CMB bill auction at 1300ET. Scheduled Fed speaker on tap: Fed Gov Chris Waller moderated discussion Brookings Inst, live-streamed.
• Economic data limited to Empire Manufacturing at 0830ET.
• Markets will be keeping eye on headlines from the World Economic Forum in Davos, resumption of corporate earnings with GS, MS and PNC today.

Focus On Waller’s Speech

• There’s some attention on Waller’s (permanent voter) Brookings speech today, with prepared remarks at 1100ET before Q&A, a speech that could well provide the highlight of the week’s Fedspeak before the FOMC blackout begins Friday night.
• His last two main topics have been "Something's Got to Give” (Oct 18) before "Something Appears to Be Giving" (Nov 28).
• From the latter: "I am encouraged by what we have learned in the past few weeks—something appears to be giving, and it's the pace of the economy. [...] While I am encouraged by the early signs of moderating economic activity in the fourth quarter based on the data in hand, inflation is still too high, and it is too early to say whether the slowing we are seeing will be sustained. But I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent. That said, there is still significant uncertainty about the pace of future activity, and so I cannot say for sure whether the FOMC has done enough to achieve price stability. Hopefully, the data we receive over the next couple of months will help answer that question."
• It's quite possible he leans on the 'still waiting to see inflation on a sustainable 2% trajectory' card, something a few FOMC speakers have used, including Bostic over the weekend, to help push back on rate cut expectations (the latter something a typically dovish Goolsbee also did explicitly late Friday).
• However, we suspect the main focus will be whether he offers a renewed timeline for the potential start to rate cuts. Recall from the Q&A of his Nov 28 appearance: “If you see this [lower] inflation continuing for several more months, I don't know how long that might be—3 months? 4 months? 5 months?—you could then start lowering the policy rate because inflation's lower."

EUROPE ISSUANCE UPDATE: 

Gilt auction results

• Another strong linker auction with a bid-to-cover in excess of 3x and an average price higher than we have traded in the secondary market all day.
• Not really much price action in either linkers or gilt futures overall.
• GBP1.5bln of the 0.75% Nov-33 linker. Avg yield 0.423% (bid-to-cover 3.04x).

• E4bln (E3.223bln allotted) of the 2.10% Apr-29 Bobl. Avg yield 2.12% (bid-to-cover 1.71x).

• E8bln of the new 25-year Jun-49 Green OAT. Books closed over E98bln with spread set at 0.50% Jun-44 Green OAT +8bps. Record book for a French syndication. Continuing the trend of seeing huge books for EGB syndications (and larger sizes than expected).
• Highest previous book on a French syndication was E75bln for the launch of the 50-year 0.50% May-72 OAT in January 2021.

• Finland has announced a mandate for a new 30-year Apr-55 RFGB for E3bln WNB to take place in the "near future."
• MNI expects the transaction to take place tomorrow.

FOREX: Dollar Dominant as Equity Spillover Undermines Risk

• The dollar is dominant ahead of the NY crossover, rising against all others in G10. Moves were initially triggered by a range breakout for European equities, as the cash open saw the Eurostoxx future break below the YTD low - triggering a flight from risk across cross-asset markets. This put the USD Index at new multi-month highs to narrow in on the 50-dma resistance at 103.231.
• Moves here triggered by a shift in risk sentiment, specifically the break lower for European stocks, rather than a specific headline or datapoint. USD/CNH made for a standout chart, with USD/CNH breaking higher to print new multi-month highs on both greenback strength, as reports that China are considering fresh stimulus spending failed to prop the currency.
• Volumes are healthy across the board given the return of US investors after the partial market closure on Monday, aiding EUR futures volumes to now sit close to double the average level you'd expect to see at this point of the session.
• EURUSD remains under some pressure after breaking the 50 day MA that was at 1.0907, which had held since November. Next immediate support undercuts at the 1.0877 Jan 5 low.
• Looking forward, an appearance from Fed's Waller should prove key, with markets very aware of the notable market impact he had when speaking on Fed policy back in December. Waller speaks on the economic outlook and Fed policy at 1600GMT/1100ET at the Brookings Institute. Data of note includes Canadian CPI, expected to show the Y/Y rate tick up to 3.4% from 3.1% prior.

Expiries for Jan16 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0800(E1.5bln), $1.0922-25(E1.1bln), $1.0965-75(E968mln), $1.1015-25(E863mln), $1.1075-85(E1.5bln)
• USD/JPY: Y144.00($585mln), Y144.25-50($759mln), Y146.80-00($1.5bln), Y147.50($629mln)
• AUD/USD: $0.6455(A$1.0bln), $0.6840-45(A$2.0bln)
• USD/CNY: Cny7.1700($530mln)

EQUITIES: Recent Move Lower in Eurostoxx 50 Futures Considered Technically Corrective

• Eurostoxx 50 futures are trading just below the Jan 5 low of 4444.0. The primary trend direction is up and the recent move lower is considered corrective. MA studies are in a bull-mode position, signalling a rising trend cycle. However, a break of 4444.00 and 4450.00, the 50-day EMA, would undermine a bullish theme. This would open 4370.00, the Nov 28 low. For bulls, the trigger for a resumption of the uptrend is 4634.00, the Dec 14 high.
• S&P E-Minis continue to trade above the Jan 5 low. Key resistance and the bull trigger is unchanged at 4841.50, the Dec 28 high. A break of this level would resume the uptrend and open 4854.75, a Fibonacci projection. Support at the 20-day EMA of 4770.92 has recently been pierced. A clear break of this average would strengthen a short-term bearish threat and open the 50-day EMA, at 4679.50.

COMMODITIES: Trend Signals in WTI Futures Remain Bearish

• Trend signals in WTI futures remain bearish and the pullback from Friday’s high reinforces this theme. Resistance to watch is $74.44, the 50-day EMA. It has been pierced, a clear break would strengthen a bullish theme and expose $76.18, the Dec 26 high. Moving average studies remain in a bear-mode position, highlighting a downtrend. The trigger for a resumption of the downtrend is $67.98, Dec 13 low.
• Gold continues to trade above last week’s low of $2013.4 (Jan 11). Price is also trading ahead of key support at $2016.8 the 50-day EMA. A breach of both support points, would expose a key level 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.