MNI US MARKETS ANALYSIS - GBP Softer, But No Sea Change in BoE Expectations

Bull Steeper Off Tuesday’s Lows, Back Close To Initial Post-CPI Levels

• Cash Tsys trade 1-5bp richer, led by the front end for a bull steepening, as the move unwinds yesterday’s late extension of the CPI rally to leave levels back close to where they were shortly after CPI.
• The move is helped by sizeable rallies in Europe, especially Gilts on softer than expected CPI inflation.
• TYH4 at 109-26+ (+ 06+) sits close to the day’s highs established after UK CPI, on strong volumes of 455k with only very little impact from the still early days of the quarterly roll. It remains vulnerable, with support at 109-17 (50% of Oct 19 – Dec 27 bull phase) after which sits 109-05+ (Nov 28 low). Resistance meanwhile is seen at 110-16 (Feb 9 low).
• Fed Funds implied rates have pulled back off highs seen late in yesterday’s session, but still only price 3bp of cuts for March, a cumulative 26.5bp for May and 93bp in total for 2024.
• Today sees focus on PPI annual revisions before further Fedspeak to assess any post-CPI reactions. VC for Supervision Barr could be of note as he is also set to talk on mon pol rather than just banking supervision.
• Data: Weekly mortgage data (0700ET), PPI annual revisions
• Fedspeak: Goolsbee (’25 voter) in Q&A (0930ET), VC Supervision Barr (perm voter) on mon pol and bank regulation (1600ET, incl text).
• Bill issuance: US Tsy $60B 17W Bill auction (11130ET)

Analyst Single Line Takeaways From CPI

• The 20 analysts below had already jettisoned a March start to rate cuts a while ago. With some questioning January seasonality potentially at least partly behind the surprise strength, they mostly keep to their calls for a first cut in May or June, with a couple already looking for July.
• Nomura formally pushed their view for a first rate cut out from May to June with one less cut for the year with now a FOMC SEP consistent 75bps for 2024.
• The full MNI US Inflation Insight report will follow later on.

EUROPE ISSUANCE UPDATE:

Greek GGB Auction Results

• E200mln of the 3.875% Jun-28 GGB. Avg yield 2.85% (bid-to-cover 3.12x)
• E200mln of the 4.25% Jun-33 GGB. Avg yield 3.32% (bid-to-cover 3.56x).

• E1bln (E805mln allotted) of the 1.80% Aug-53 Bund. Avg yield 2.53% (bid-to-offer 2.27x; bid-to-cover 2.82x).
• E1bln (E852mln allotted) of the 2.50% Aug-54 Bund. Avg yield 2.53% (bid-to-offer 3.10x; bid-to-cover 3.64x).

Portuguese OT Auction Results

• E453mln of the 1.95% Jun-29 OT. Avg yield 2.656% (bid-to-cover 1.53x)
• E800mln of the 2.875% Oct-34 OT. Avg yield 3.149% (bid-to-cover 1.29x)
• E531mln of the 1.00% Apr-52 OT. Avg yield 3.568% (bid-to-cover 2.13x)

UK Gilt Auction Results

• Very healthy bid-to-cover of 3.09x - but more important is that 1.0bp tail with the LAP at 103.905 - lower than at any time in the last 28 minutes of the auction window. The price of the 4.625% Jan-34 gilt fell from 104.000 to a post-auction low of 103.874. Gilt futures fell 10 ticks on the results.
• GBP3.75bln of the 4.625% Jan-34 Gilt. Avg yield 4.132% (bid-to-cover 3.09x, tail 1bp).

Price Signal Summary - Gold Remains Softer Following Yesterday's Break Lower

• On the commodity front, Gold traded lower Tuesday and in the process, this resulted in a break of $2001.9, the Jan 17 low and a key short-term support. The break highlights a resumption of the bear leg that started Dec 28. A continuation lower would open $1973.2, the Dec 13 low and the next key support. On the upside, the yellow metal needs to clear resistance at $2065.5, the Feb 1 high to reinstate a bullish theme.
• In the oil space, the short-term bounce in WTI futures since Feb 5 remains in play but still appears to be a correction - for now. Key short-term resistance has been defined at $79.29, the Jan 29 high. Clearance of this level would be a bullish development. On the downside, support to watch lies at $71.41, the Feb 5 low. A break of this level would reinstate the recent bearish theme and pave the way for a move towards $69.56, the Jan 3 low.

FOREX: GBP Slides as CPI Undoes Wages-Inspired Strength

• Having traded firmer earlier this week, GBP is now the poorest performing currency across G10 after CPI data for January came in below expectations. Headline and core were softer by 0.1ppts relative to expectations, with the much-watched services CPI also erring to the low side of forecast.
• The data somewhat reversed the pullback in easing expectations that followed jobs numbers yesterday, tipping GBP/USD back below 1.2550 and within range of the next key support at 1.2519 - the Feb 5 low.
• The USD is more middling, with the USD Index close to flat, but just below yesterday's breakout high of 104.976 - which remains the bull trigger.
• NOK is the firmest performer in G10 on an intraday basis, aided by more strength in oil prices on top of firmer than expected mainland GDP data released at the open.
• Focus for the remainder of Wednesday trade turns to the central bank speaker calendar, with ECB's Cipollone & Nagel, Fed's Goolsbee & Barr and BoE's Bailey set to speak. Goolsbee and Barr's comments will be watched carefully - the first FOMC representatives to appear after yesterday's firmer-than-expected CPI.

Softer CPI Has Little Impact on Options-Implied Ranges

• While GBP/USD spot trades within range of next support at the Feb 5 low at 1.2519 after today's softer-than-expected CPI, options markets remain more subdued: GBP/USD put vol remains at cycle lows (7.17 points was printed for the 3m contract this week, the lowest since early 2022).
• Subdued vols persist despite the 3m contract capturing a series of 'live' risk events - namely the Spring budget (Mar6), BoE decisions (Mar21, May9 + MPR) - not to mention several further iterations of CPI/jobs data.
• This contains the options-implied range for GBP/USD over the next 3 months, assigning a 50% likelihood for the pair holding within 1.2283-1.2820 - a range that's persisted despite the downside surprise for UK, and upside surprise for US inflation this week. Consensus looks for 1.2600 over that time frame - little changed from current levels.

Expiries for Feb14 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0625(E520mln), $1.0700(E1.7bln), $1.0745-50(E698mln), $1.0766-70(E611mln), $1.0800(E723mln), $1.0825-40(E1.3bln)
• USD/JPY: Y149.00($965mln), Y150.00($2.2bln), Y151.00-05($1.0bln)
• GBP/USD: $1.2550(Gbp643mln)
• EUR/GBP: Gbp0.8600(E791mln)
• AUD/USD: $0.6463(A$634mln), $0.6835-55(A$2.0bln)
• USD/CAD: C$1.3100($1bln)
• USD/CNY: Cny7.2000($1.2bln)

BONDS: Gilts Outperform as UK CPI Feedthrough Continues to Dominate

Gilts outperform core/semi-core EGBs this morning following the lower than expected UK CPI print. Gilt futures are +67 ticks at 97.68, while Bunds are +27 at 133.38.

• This morning's UK print is not as soft as it appeared at first glance, with services CPI only just below the BoE's Feb MPR forecasts and driven largely by a downside surprise in the volatile air fares component. Gilts have nonetheless held onto the majority of their initial gains.
• Eurozone preliminary Q4 '23 GDP was in line with the advance reading, while industrial production was stronger than expected (even when excluding Ireland, which contributed +1.4pp to the total 2.6% M/M figure).
• Today's supply slate features EGB issuance from Greece, Germany and Portugal, while the DMO will re-open the Jan-34 Gilt later this morning.
• Cash curves have bull steepened, with Gilt yields unsurprisingly seeing the largest moves lower. 10-year periphery spreads to Bunds are tighter as European equities recover from yesterday's lows. GGB spreads are the exception, trading flat on the day, likely a function of this morning's supply.
• The remainder of today's docket is dominated by central bank speak: BoE Governor Bailey testifies to the House of Lords Economic Affairs Committee today at 1500GMT. For the ECB, Executive Board member Cipollone speaks on the digital Euro at 1400GMT/1500CET. The Bundesbank's Nagel rounds off the day at 1700GMT/1800CET joining a panel discussion on "How will financing work in the future?".

EQUITIES: Post-CPI Pullback in Eurostoxx 50 Futures Considered Technically Corrective

• Eurostoxx 50 futures remain in an uptrend and the move lower Tuesday is considered corrective. The contract traded higher Monday delivering another fresh cycle high, confirming an extension of the current uptrend. The move higher reinforces bullish conditions and the importance of the recent break of resistance at 4634.00, the Dec 14 high. This signals scope for 4788.10, a Fibonacci projection. Initial firm support lies at 4647.70, the 20-day EMA.
• The trend condition in S&P E-Minis is unchanged and remains bullish. The pullback from Monday’s 5066.50 high is - for now - considered corrective. Support to watch lies at 4940.49, the 20-day EMA. A clear break of this average would suggest potential for a deeper retracement, possibly towards the 4866.00 key support, the Jan 31 low. For bulls, the trigger for a resumption of gains is 5066.50, the Feb 12 high.

COMMODITIES: Short-Term Bounce in WTI Futures Remains in Play

• The short-term bounce in WTI futures since Feb 5 remains in play but still appears to be a correction - for now. Key short-term resistance has been defined at $79.29, the Jan 29 high. Clearance of this level would be a bullish development. On the downside, support to watch lies at $71.41, the Feb 5 low. A break of this level would reinstate the recent bearish theme and pave the way for a move towards $69.56, the Jan 3 low.
• Gold traded lower Tuesday and in the process, this resulted in a break of $2001.9, the Jan 17 low and a key short-term support. The break highlights a resumption of the bear leg that started Dec 28. A continuation lower would open $1973.2, the Dec 13 low and the next key support. On the upside, the yellow metal needs to clear resistance at $2065.5, the Feb 1 high to reinstate a bullish theme.