MNI US MARKETS ANALYSIS - GBP Firmer as CPI Tops Expectations

US TSYS: Twist Flatter Ahead Of Stacked Docket Headlined By Retail Sales

• Cash Tsys trade between 7bp cheaper and 1bp richer for a large twist flattening which has seen 2s10s fall to -22.5bps after yesterday’s high of -15bps marked fresh highs since late October.
• The flattening started in Asia hours before continuing with stronger than expected UK CPI adding to yesterday’s surprise Canadian strength along with relatively hawkish ECB rhetoric vs market pricing.
• TYH4 at 111-24 holds off earlier and yesterday’s lows of 111-22+ on solid cumulative volumes already clearing 400k. Support remains intact, seen at 111-06+ (Jan 5 low).
• Today sees a plethora of economic releases, with retail sales to be watched closely for any downside surprises considering the sensitivity seen to last week’s softer PPI data. Attention should then turn to 20Y Tsy supply later in the session before the Fed’s Beige Book likely highlights today’s Fedspeak but with appearances worth being aware of in case of any surprises.
• Data: Weekly MBA data (0700ET), Retail sales Dec (0830ET), ToT Dec (0830ET), NY Fed Services Jan (0830ET), IP & Cap Util Dec (0915ET), NAHB index Jan (1000ET) Business inventories Nov (1000ET)
• Fedspeak: Gov Bowman (0900ET), VC Supervision Barr (0930ET), Fed Beige Book (1400ET), NY Fed’s Williams (1500ET)
• Note/bond issuance: US Tsy $13.B 20Y Bond re-open (912810TW8) (1300ET)
• Bills issuance: US Tsy $58M 17W bill auction (1130ET)

STIR: Fed Rate Path Pushes Higher With UK CPI Also Surprising Higher

• Fed Funds implied rates have extended yesterday’s Waller-inspired push higher, aided by stronger than expected UK CPI adding to yesterday’s surprise Canadian strength plus relatively hawkish ECB rhetoric vs market pricing.
• Cumulative cuts: 16bp for March (19bp pre Waller), 67bp for June (79bp) and 151bp for Dec (166bp). March cut pricing is now lower than it was before last week's US CPI.
• Today’s scheduled Fedspeak seems unlikely to have the same impact as Waller but shouldn’t be completely discounted. The Fed’s Beige Book at 1400ET probably highlights Fed communications although Bowman’s Q&A could throw some surprises:
• 0900ET Gov Bowman (permanent voter) speaks on bank capital reform (text, Q&A)
• 0900ET VC Supervision Barr (permanent voter) speaks on cyber risk (Q&A)
• 1500ET NY Fed’s Williams (permanent voter) opening remarks on equitable growth

EUROPE ISSUANCE UPDATE: 

• E250mln of the 3.875% Jun-28 GGB. Avg yield 2.72% (bid-to-cover 4.34x).

Italy Exchange Auction - MEF sells:

• E4.0bln of the 4.20% Mar-34 BTP at 102.938. Pre-auction mid-price at 103.291.
• MEF buys:
• E637.7mln of the 1.75% Jul-24 BTP at 99.115.
• E719.7mln of the 3.75% Sep-24 BTP at 100.105.
• E543.7mln of the Oct-24 CCTeu at 100.925.
• E1.296bln of the 1.45% Nov-24 BTP at 98.410
• E948.3mln of the 2.50% Dec-24 BTP at 99.215.

• E1bln (E747mln allotted) of the 0% Aug-52 Bund. Avg yield 2.42%.
• E1bln (E862mln allotted) of the 1.80% Aug-53 Bund. Avg yield 2.45%.

• E3bln of the new 30-year Apr-55 RFGB. Spread set at MS+56bps. Books in excess of E13.5bln.

• GBP3.75bln of the 4.625% Jan-34 Gilt. Avg yield 3.973% (bid-to-cover 3.1x, tail 0.6bp).

FOREX: GBP on Top on Hot CPI, AUD Downtrend Resumes

• GBP is seeing support across European hours on the back of the higher-than-expected CPI print – which unexpectedly ticked up to 4.0% from 3.9% - above all submitted analyst expectations. Perhaps more notably, both the core CPI print and services inflation metric were ahead of forecast, forcing markets to partially unwind some of the rate cut pricing bedded in since the beginning of the year.
• Resultingly, the market pricing of May rate cut has faded. Having been fully priced at the beginning of the week, just 17bps is now priced for that meeting. GBP/USD has bounced off weekly lows of 1.2597, to narrow in on 1.2700. A recovery above 1.2727 would reverse the entirety of the Tuesday sell-off.
• President Lagarde declined to comment directly on ECB rate cut pricing in an early appearance, however hinted heavily toward policy easing in the Summer. The comments were broadly infitting with GC speeches earlier this week, but EUR/USD remains in a downtrend key support at the Jan 5 low was breached, opening the 50% retracement of the Oct-Dec ’24 rally at 1.0793.
• Antipodean currencies are underperforming as the risk backdrop remains fragile. AUD and NZD hold among the session’s poorest performers, extending the AUD/USD losing streak and resuming the downtrend through support at the 200-dma of 0.6583 – which broke across the opening hours of the Wednesday session.
• The World Economic Forum in Davos continues, with appearances from several political leaders scheduled, including the French President and the Iranian foreign minister. Pre-media blackout appearances from ECB’s Vujcic, Knot and Lagarde are due as well as Fed’s Barr, Bowman and Williams.

Expiries for Jan17 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0735-40(E1.1bln), $1.0850(E897mln), $1.0890-00(E1.0bln), $1.0972-75(E1.3bln), $1.1000-20(E936mln), $1.1040-50(E1.0bln), $1.1060-75(E2.2bln)
• USD/JPY: Y144.00($910mln), Y145.75($1.1bln), Y147.35-50($1.1bln)
• GBP/USD: $1.2795(Gbp503mln)
• AUD/USD: $0.6735-50(A$1.3bln)
• USD/CAD: C$1.3235-40($2.2bln), C$1.3375-80($1.3bln)
• USD/CNY: Cny7.2000($1.3bln)

HKD, JPY Hedges in Vogue Amid Busy Options Trade

• The Tuesday session saw the highest daily DTCC-tracked options notional traded since Dec14 (day following the December Fed decision), and the second highest options volumes in over 3 months. Trade was dominated by outsized interest in CNY and TWD hedges relative to recent norms, however all major pairs saw higher-than-average activity across the session. Today’s session so far looks no different, with Asia-Pac hours seeing solid demand for USD/JPY and USD/HKD options.
• One-week USD/JPY vols stepped up yesterday as the contract captured the Jan23 BoJ rate decision. Implied vols are now clear of 10.5 points and, while lower than the vol premium added for the December and October meetings, still signal elevated risk headed into the event.
• Markets have been favouring USD/JPY topside exposure overnight, with over $2 in calls trading for every $1 in puts, reflecting the greenback rally and fresh YTD highs in the USD Index overnight. Call strikes north of Y150.00 have drawn focus (over $1bln notional traded with strikes Y150.00-50 across Asia hours), with not insignificant demand for OTM longer-dated strikes as high as Y161.00.
• Elsewhere, trade across USD/HKD options picked up well during the local session, with downside hedges the dominant theme. 7.79 and 7.76 put strikes traded well, but the most eye-catching structure were trades consistent with a large 7.80/7.85 call spread rolling off in mid-March of this year. The trade breaks-even with spot above ~7.8195 and positions for the pair to re-test the upper-end of the 7.75-7.85 trading band in the coming months, or for a material pick-up in implied vol.

GILTS: Off CPI-Induced Lows

Gilt futures have started to pare losses, aided by feedthrough from the hold of technical support levels in both TY & Bund futures, with a downtick in crude oil prices also aiding the stabilisation.

• A reminder that the firmer-than-expected domestic CPI data provided the early cheapening impetus, although the readings were softer than BoE projections in the most recent MPR.
• That leaves gilt futures -60 or so around 99.30. The contract is still ~40 ticks away from closing the opening gap lower and sits a handful of ticks shy of the peak of its 56-tick session range.
• Cash gilt yields are 5-11bp higher on the day, bear flattening. 2s10s and 5s30s tick away from YtD highs in the process, while most outright benchmark yields have registered fresh YtD highs.
• SONIA futures are flat to 14.5bp lower, stabilising away from lows alongside gilts.
• BoE-dated OIS prices ~117bp of cuts through ’24 (vs. ~130bp at yesterday’s close), also unwinding from extremes seen post-CPI as gilts stabilise.
• Outside of the previously flagged political news and CPI readings, UK house price data saw the most pronounced Y/Y fall since ’11 in November.
• GBP3.75bn of 4.625% Jan-34 gilt supply is due in just under an hour.

EQUITIES: E-Mini S&P Trades Lower Again, But Above Jan 05 Lows

• Eurostoxx 50 futures have traded lower this week and in the process breached support at the Jan 5 low of 4444.0. The primary trend direction is up and the recent move lower is considered corrective. However, the break below 4444.00 and 4450.70, the 50-day EMA, suggests scope for an extension of the bear cycle. This has opened 4370.00, the Nov 28 low. Initial resistance is 4536.00, the Jan 11 high.
• S&P E-Minis are trading lower today but - for now - 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 4773.54 has recently been pierced. A clear break of this average would strengthen a short-term bearish threat and open the 50-day EMA, at 4684.17.

COMMODITIES: Gold Trades Near Support at 50-Day EMA

• Trend signals in WTI futures remain bearish and the pullback from last Friday’s high reinforces this theme. Resistance to watch is $74.36, the 50-day EMA. It has recently 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 has pulled back from its most recent highs. Attention is on support at $2017.3, the 50-day EMA and last week’s low of $2013.4 (Jan 11). A breach of both support points would strengthen a bearish threat and 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. Initial resistance is at $2062.3, the Jan 12 high.