Highlights:
- GBP underperformance stands out after weaker-than-expected UK retail sales. USD firmer on the session.
- The Chinese economy grew by 5.4% in Q4, driving 2024 growth to the government's 5% annual target.
- US Building Permits and industrial production data highlight a less busy economic calendar to finish the week.
US TSYS: Modestly Extending The Week’s Rally, Trump Inauguration Looms
- Treasuries trade bull flatter as US desks filter in, broadly consolidating yesterday’s dovish Waller-induced rally.
- There's possibly some mild spillover from weaker-than-expected UK retail sales today, with Gilts and EGBs outperforming Treasuries.
- Today’s docket is on the lighter side, with housing data leading second tier US data releases and no scheduled Fedspeak before the FOMC blackout. Attention is instead further ahead with President-elect Trump’s inauguration on Jan 20.
- Cash yields are 0-2.8bp lower, with the front end little changed after large adjustments yesterday and the longer end leading declines but close to yesterday’s low for yields.
- 2s10s trades at 36.5bps (-2bp) for close to the week's lows.
- TYH5 has lifted to 108-23 (+03+) to come close to yesterday’s high of 108-24, amidst modest cumulative volumes of 290k.
- A corrective cycle is in play around the bearish condition, with resistance seen at 108-24 (Jan 16 high) before 109-06 (Dec 31 high) whilst support is seen at the bear trigger of 107-06 (Jan 13 low).
- Data: Housing starts/building permits Dec (0830ET), IP/Cap Util Dec (0915ET), TIC flows Nov (1600ET)
US TSY FUTURES: Long Setting Dominated on Thursday
OI data suggests that net long setting dominated in curve-wide DV01 terms on Thursday, with meaningful net long setting seen in FV, TY & UXY futures. Over $10mn of net DV01 equivalent was added across the curve.
- Non-negligible net short cover in TU and US futures lessened the net curve-wide DV01 impact a little.
| 16-Jan-25 | 15-Jan-25 | Daily OI Change | OI DV01 Equivalent Change ($) |
TU | 4,209,549 | 4,266,889 | -57,340 | -2,132,256 |
FV | 6,177,474 | 6,117,176 | +60,298 | +2,513,569 |
TY | 4,877,556 | 4,733,981 | +143,575 | +9,207,904 |
UXY | 2,256,845 | 2,234,423 | +22,422 | +1,956,138 |
US | 1,906,833 | 1,916,736 | -9,903 | -1,228,812 |
WN | 1,796,507 | 1,796,301 | +206 | +38,542 |
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| Total | +159,258 | +10,355,085 |
STIR: Fed Rates Consolidating Dovish Waller Impact
- Fed Funds implied rates continue to be weighed by yesterday’s dovish musings of Governor Waller (permanent voter) which included that three or four cuts this year could be possible.
- The 41.5bp of cuts priced for the year is below lows seen after Wednesday’s CPI and has fully reversed the boost from Friday’s strong payrolls report.
- With no scheduled Fedspeak today, Waller remains the last speaker heading into the media blackout that starts tonight at midnight before the FOMC 28-29 meeeting.
- Published 0530ET, Cleveland Fed’s Hammack (non-voter) hawkish comments to WSJ haven’t had a discernible impact, not helped by being taken on Tuesday prior to CPI and already known to be hawkish after her surprise dissent to a 25bp cut last month.
- Cumulative cuts from 4.33% effective: 0.5bp Jan, 8.5bp Mar, 14bp May, 24.5bp Jun, 28.5bp Jul and 41.5bp Dec.
STIR: Short cover in the SOFR Whites Dominated After Waller's Dovish Comments
OI data suggests that net short cover in SFRH5 & SFRM5 dominated on the SOFR strip on Thursday, as dovish Fedspeak from Fed Governor Waller allowed this week’s dovish repricing to extend a little further.
- A mix of net long setting and short cover was generally seen elsewhere on the strip (SFRZ4 was the exception, with modest net short setting seen there).
| 16-Jan-25 | 15-Jan-25 | Daily OI Change |
| Daily OI Change In Packs |
SFRZ4 | 1,082,733 | 1,079,794 | +2,939 | Whites | -73,655 |
SFRH5 | 1,157,555 | 1,188,990 | -31,435 | Reds | +5,868 |
SFRM5 | 990,744 | 1,033,877 | -43,133 | Greens | -13,254 |
SFRU5 | 820,954 | 822,980 | -2,026 | Blues | -6,495 |
SFRZ5 | 996,592 | 1,007,129 | -10,537 |
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SFRH6 | 653,868 | 647,667 | +6,201 |
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SFRM6 | 661,712 | 645,264 | +16,448 |
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SFRU6 | 611,461 | 617,705 | -6,244 |
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SFRZ6 | 705,705 | 716,378 | -10,673 |
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SFRH7 | 495,024 | 495,302 | -278 |
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SFRM7 | 400,543 | 403,284 | -2,741 |
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SFRU7 | 293,094 | 292,656 | +438 |
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SFRZ7 | 267,531 | 269,673 | -2,142 |
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SFRH8 | 216,772 | 214,793 | +1,979 |
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SFRM8 | 170,900 | 176,666 | -5,766 |
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SFRU8 | 110,937 | 111,503 | -566 |
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FED: Cleveland's Hammack Tells WSJ Fed Can Be "Very Patient" on Cuts
Cleveland Fed Pres Hammack (not a 2025 voter) continues to sound hawkish in a WSJ interview, following her surprise dissent in December to the 25bp rate cut. She emphasizes patience in considering future cuts, describing current policy as only moderately restrictive, but also noting that the rise in longer-end yields represents a tightening of financial conditions that will help dampen inflation. Overall she doesn't sound opposed to further cuts per se, but would require significant convincing from the data. A couple of key quotes:
- On her December dissent: "For me, that December conversation was really about, did you need to do it now, or could you be more patient and wait and see."
- On further rate cuts: "We can be very patient...we still have an inflation problem. We still have a rate-of-change problem that we need to address... we've made amazing progress on it, but we need to continue to finish the job."
ECB: Nagel Continues to Argue for Gradual Policy Normalisation
Nothing too surprising in the latest comments from Bundesbank President Nagel, speaking to Platow. Nagel has consistently advocated for a gradual approach to ECB policy normalisation, given sticky services inflation.
- He notes that discussions of larger cuts are “only natural”, but gives no hints that he would support such a step at this stage (in line with his hawkish leanings).
- Euribor futures little changed following the speech, while ECB-dated OIS continue to price 100bps of easing through the course of this year.
Select excerpts:
- "“We shouldn’t be too hasty in our efforts to normalize monetary policy,”...“A careful approach is appropriate given high uncertainty. Inflation is currently still elevated. Services prices in particular continue to rise dynamically.”
- "I don’t think it’s a bad thing that we are also discussing 0.5 percentage point”...“That’s only natural.”
ISRAEL: Security Cabinet Starts Meeting on Gaza Ceasefire Deal
The Security Cabinet is meeting to sign off on the Gaza ceasefire-for-hostages deal after PM Benjamin Netanyahu confirmed that his negotiating team in Doha had approved a final agreement. After the Security Cabinet approves the deal it will then move to the full Cabinet on the evening of 18 Jan. So far the two ultranationalist parties in gov't, Security Minister Itamar Ben-Gvir's Otzma Yehudit (OY) and Finance Minister Bezalel Smotrich's Religious Zionism (RZ) have both raised objections.
- Ben-Gvir has said that if the deal is approved he and his party will quit the gov't, but that they would not seek to remove Netanyahu as PM. The loss of OY's six Knesset members (MKs) would see Netanyahu's coalition lose its majority. Ben-Gvir said his party would return to gov't if the war in Gaza is resumed.
- Reports suggest that Smotrich's RZ will vote against the deal, but will not quit the gov't yet. N12 reports Smotrich saying that "without a full return to war - we will resign," indicating that if the IDF does not resume its offensive against Hamas at the end of the six-week first phase RZ will pull out of gov't. Such a move, combined with OY's withdrawal, would see the Netanyahu gov't lose its majority in the Knesset.
- With Diaspora Affairs Minister Amichai Chikl from Netanyahu's Likud also threatening to resign over the deal there remain sizeable risks to the stability of Netanyahu's gov't as the extremely precarious ceasefire deal comes into force from 1600 local time on Sunday 19 Jan.
GERMANY: Major Poll Sees CDU-SPD Or CDU-Green Coalitions Possible, AfD Second
The first 'multilevel regression and post-stratification poll' (MRP) from YouGov of the federal election campaign shows the main opposition centre-right Christian Democratic Union (CDU) on course to emerge as the largest party, with 222 of the 630 seats in the Bundestag. If this poll is reflected in the final results, the CDU (and its Bavarian sister party the Christian Social Union) would be able to form a two-party gov't with either Chancellor Olaf Scholz's centre-left Social Democrats (SPD) or Economy Minister Robert Habeck's environmentalist Greens.
- According to the poll of over 10k respondents, the right-wing/far-right Alternative for Germany (AfD) will come in second place with 146 seats, its best-ever return in a federal election. As such, a CDU/CSU-AfD coalition would hold a substantial majority but CDU chancellor candidate Friedrich Merz has ruled out such a gov't.
- In the MRP the SPD records significant losses, down from 207 presently to 115 seats. The Greens see a small decline from 117 to 101 seats. Meanwhile, former finance minister Christian Lindner's pro-business liberal Free Democrats, with their vote share projection of 4.5% falling under the 5% threshold, would lose all 90 seats.
- The MRP also indicates a re-alignment on the left. The progressive leftist Die Linke would lose two of its three single-member constituencies. If a party falls below 5% it can still gain representation if it wins three constituencies, but the poll only shows it holding onto one. Instead, the economically left, socially conservative Sahra Wagenknecht Alliance (BSW) would take 45 seats on 6% of the vote.
Chart 1. Low, central and high seat estimates projected by MRP for the 2025 German election
Source: YouGov. Lower range vote share estimate for the BSW, FDP and Die Linke has them winning less than 5% of the vote, which disqualifies them from holding any seats under Germany's electoral system. The same is true for the FDP and Die Linke under central vote share estimate. 3 December 2024 - 15 January 2025, 10,411 respondents.
CHINA DATA: China's Q4 GDP Grow by 5.4%, Meeting 2024 Target
The Chinese economy grew by 5.4% in Q4, rising 0.8 percentage points from Q3 and driving 2024's growth to the government's 5% annual target, beating market expectations of 5.0% and 4.9%, data released by the National Bureau of Statistics on Friday showed.
- Retail sales rose 3.7% y/y in December, rising from November's 3.0% gain and outpacing the 3.5% forecast. Retail sales grew 3.5% y/y in 2024, unchanged from the Jan-Nov reading of 3.5%.
- Industrial production increased 6.2% y/y in December, hitting an eight-month high, up from November’s 5.4% growth and outperforming the expected 5.4%. Industrial output grew 5.8% in 2024, unchanged from the 5.8% growth in the first eleven months.
- Fixed-asset investment slowed for the second month to 3.2% y/y in 2024, lower than Jan-Nov’s 3.3% read and the 3.3% consensus. Property investment fell by 10.6% to hit the lowest since February 2020, dipping further from the previous 10.4% decline. Infrastructure investment and manufacturing investment grew by 4.4% and 9.2%, compared with the previous 4.2% and 9.3%.
EUROZONE DATA: EZ Final HICP Broadly In-Line With Flash; Sticky Services
Eurozone December Final HICP was unrevised from the flash reading on a rounded basis at 2.4% Y/Y (from 2.2% in Nov) and 0.4% M/M (-0.3% in Nov). Unrounded Y/Y was revised down 0.01% to 2.43% Y/Y (2.44% flash, 2.24% prior). On a M/M basis it was unrevised from flash at 0.36% ( -0.32% prior) non-seasonally adjusted.
- Core inflation (ex energy, food, alcohol & tobacco) was unrevised versus flash at 2.71% Y/Y (2.72% in Nov), remaining around the 2.7% Y/Y level for the fourth consecutive month. On a monthly basis it was also unrevised at 0.45% (-0.57% in Nov).
- The final reading emphasises the stickiness of services seen in the flash print, with services' contribution to headline HICP rising 0.04ppts to 1.78ppts - the highest contribution since August. The Y/Y figure rose to 3.97% Y/Y (vs 3.92% in Nov), reaffirming the flash estimate.
- Energy was unrevised from flash at 0.1% Y/Y (vs -2.0% in Nov), moving into positive territory on a Y/Y basis for the first time since July. The contribution to headline HICP was 0.01ppts (vs -0.19ppts prior).
- "Non-energy industrial goods'" (i.e. core goods') contribution fell to 0.13ppts (from 0.17ppts in Nov). Y/Y print again was unrevised from flash at 0.51% ( 0.65% prior), with M/M at -0.10% (vs -0.11% flash, 0.00% prior).
- "Unprocessed foods'" contribution fell to 0.07ppts (from 0.10ppts), and "Processed foods, alcohol and tobacco" contribution was broadly unchanged at 0.44pts (vs 0.43ppts prior).
FOREX: GBP Underperforms Following Data Miss, USDMXN New Cycle Highs
- GBPUSD underperformance stands out on Friday, printing a daily low of 1.2161 on the back of weaker-than-expected UK retail sales. These followed yesterday's disappointing activity data and should, on the margin, underpin ongoing UK growth / fiscal concerns. However, we've noted that retail sales data are volatile and tough to read into too much - a factor potentially playing into the subsequent partial recovery for the pair back to 1.2200.
- Overall, the greenback is firmer on the session, assisted by a steady appreciation for USDJPY after the brief test below 155.00 overnight. Rising chances of a BOJ hike next week have weighed on the pair in recent sessions, and despite today’s 0.4% advance, spot remains down 1.25% on the week. Latest Nikkei sources reiterate that a majority of the BOJ policy board will favour a 25bp rate hike next week, though a final decision will be made following US President-elect Trump’s Inauguration on Monday.
- Elsewhere, EURUSD has continued to oscillate around 1.03 the figure, with a decent amount of option expiries helping to contain momentum in either direction. For reference, there is 3.98bn rolling off at today’s NY cut at 1.0300.
- Also standing out ahead of Trump’s inauguration is the strong rally for USDMXN, which remained well bid throughout the entirety of Thursday’s session and extended in early Friday trade. Spot printed a fresh cycle high in the process at 20.9382 as market participants await any details on bilateral relations, including tariffs, and mull the chances of Banxico accelerating the easing pace in early Feb.
- US Building Permits and industrial production data are the highlights of a less busy economic calendar to finish the week.
FX OPTION EXPIRY
Of note:
- EURUSD 8.22bn at 1.0275/1.0300 (could act as magnet).
- USDJPY 1.79bn at 155.00
- USDCAD 1.4bn at 1.4400/1.4415
- EURUSD 1.77bn at 1.0300 (Mon)
- AUDUSD 2.11bn at 0.6210 (Wed)
- EURUSD 3.1bn at 1.0295/1.0305 (Thu)
- USDJPY 1.47bn at 155.00 (Thu)
- AUDUSD 1.7bn at 0.6200/0.6205 (Thu)
RATINGS: A Busier Round of After Hours Updates Scheduled This Week
Rating reviews of note scheduled for after hours on Friday include:
- Fitch on Estonia (current rating: A+; Outlook Stable)
- Morningstar DBRS on the EFSF (current rating: AAA, Stable Trend), the ESM (current rating: AAA, Stable Trend), Portugal (current rating: A, Positive Trend) & Switzerland (current rating: AAA, Stable Trend)
- Scope Ratings on China (current rating: A; Outlook Stable), the EFSF (current rating: AA+; Outlook Stable), the ESM (current rating: AAA; Outlook Stable), Poland (current rating: A; Outlook Stable) & Slovakia (current rating: A; Outlook Stable)
- Please use this link to access the indicative sovereign rating review schedule covering the five most notable rating agencies for 2025.
- Note that this schedule is indicative only and ratings can be reviewed on an ad-hoc basis. Rating agencies may also adjust their schedules during the year.
ITALY AUCTION PREVIEW: Italy to Launch New Retail BTP Piu (New Type BTP Valore)
- The MEF has announced a new BTP Piu: "the first retail bond with an option for early redemption after 4 years" and with an "8-year maturity and quarterly coupons at pre-set increasing rates."
- This is a subset of the BTP Valore.
- "The Ministry of Economy and Finance announces the issuance of BTP Più, that will be held from Monday 17th February to Friday 21st February (until 1 p.m.), unless early closing."
- "The minimum guaranteed rates in the first four years and the next four years, together with the ISIN code identifying the bond, will be announced on Friday, February the 14th."
EQUITIES: Bull Cycle in Eurostoxx 50 Futures Intact Following This Week's Climb
- A bull cycle in the Eurostoxx 50 futures contract remains intact. This week’s climb resulted in a breach of 5054.00, the Jan 8 high, to confirm a resumption of the uptrend. The contract is holding on to its recent gains. The focus is on a climb towards 5142.00, a Fibonacci projection point. Key short-term support has been defined at 4931.00, the Jan 13 low. A break of this level would be bearish.
- A bear threat in the S&P E-Minis contract remains present. However, Wednesday’s gains resulted in a print above resistance at 5987.04, the 50-day EMA. The average marks an important pivot level and a clear break of it would signal a possible reversal. This would open 6107.50, the Dec 26 high. Key short-term support has been defined at 5809.00, the Jan 13 low. A breach of this level would confirm a resumption of the downtrend.
COMMODITIES: Recent Gains in Gold Still Deemed Corrective
- The trend structure in WTI futures remains bullish and Wednesday's rally reinforces current conditions. The recent strong impulsive rally has resulted in a breach of $76.41, the Oct 8 high. Note too that $80.14, the Apr 12 ‘24 high has been pierced, strengthening the bullish theme. Sights are on $81.69, a Fibonacci projection. On the downside, a reversal lower would expose the 20-day EMA, at $73.81, a key short-term support.
- Recent gains in Gold appear corrective - for now. However, the yellow metal continues to hold on to its latest gains and scope is seen for a continuation higher near-term. The stronger recovery exposes $2726.2, the Dec 12 high and an important resistance. Clearance of this level would be a bullish development. On the downside, a reversal lower would expose $2583.6, the Dec 19 low. Initial support is at $2649.0, the 50-day EMA.
| Date | GMT/Local | Impact | Country | Event |
| 17/01/2025 | 1330/0830 | * |  CA | International Canadian Transaction in Securities |
| 17/01/2025 | 1330/0830 | *** |  US | Housing Starts |
| 17/01/2025 | 1415/0915 | *** | US | Industrial Production |
| 17/01/2025 | 1600/1100 | CA | BOC releases review of pandemic policy actions. | |
| 17/01/2025 | 2100/1600 | ** | US | TICS |
| 17/01/2025 | 2100/2100 |  GB | BOE's Bailey Remarks at the Bretton Woods Institutions | |
| 20/01/2025 | 2350/0850 | * |  JP | Machinery orders |