MNI US MARKETS ANALYSIS - Houthis Trade Threats With US/UK as Oil Prices Rise

Cheaper Amidst Bank Earnings, PPI & Kashkari Still To Come

• Cash Tsys trade 2-3bps cheaper, with the front-end consolidating yesterday’s ultimately sizeable rally after a hawkish reaction to the US CPI report had subsided, but the long-end pushing back more firmly back into yesterday’s range.
• The long-end has caught up after initially outperforming, pushing 2s10s back towards yesterday’s large steepening drove a high of -27bps.
• TYH4 at 112-07+ trades close to the day’s low of 112-05+ as it pulls back from an overnight 112-14+. Treasuries are seen in a short-term bearish corrective cycle, despite the most recent recovery, with support seen at 111-06+ (Jan 5 low).
• Bank earnings dominate the early session, with JPM and Citi still to report after numerous banks already today. After that the docket is quite clear cut with PPI inflation in focus for its usual clues to core PCE inflation, the last data for the week.
• Data: PPI Inflation Dec (0830ET)
• Fedspeak: Kashkari (non-voter) in fireside chat at 1000ET with no text

Fed Implied Rates Consolidate Post-CPI Slide

• Fed Funds implied rates have lifted slightly from yesterday’s lows but hold a sizeable decline seen since US CPI having quickly more than reversed the initial hawkish reaction.
• Cumulative cuts: 19bp for March, 71bp for June and 153bp for Dec. The Dec’24 implied effective rate of 3.8% is 10bps lower since CPI and 18bps lower since last week’s payrolls – see table for broader comparison.
• Chicago Fed’s Goolsbee (’25 voter) late yesterday still sees the economy on a “golden path” to lower inflation but needs to see more data before rate cuts.
• Ahead, Minneapolis Fed’s Kashkari (non-voter) speaks for the first time in two months, in a fireside chat with no published text.

Analyst Reviews of December 2023 CPI Report

The 24 analysts below for the most part see Fed rate cuts starting later than the March (~70% priced) and less so May (fully priced) implied by Fed Funds futures.

PM-Aim Of Strikes To De-Escalate Red Sea Tensions

Speaking on a visit to the Ukrainian capital, Kyiv, UK Prime Minister Rishi Sunak states that the gov't "believes strikes with the US on Yemen will degrade and disrupt Houthi capabilities in the Red Sea", adding that, "Our aim is to de-escalate the tensions and restore stability." Sunak asserts that the UK needs to send a "strong signal" that Houthi rebels cannot act with "impunity" in launching attacks on shipping in and around the Red Sea.

• Earlier, the PM's spox confirmed that Sunak can be expected to deliver a statement on the military action to the House of Commons on Monday 15 Jan, but that there are no plans to hold a vote on striking Houthi targets. Spox claims that there are no further airstrikes planned, but that the gov't would "keep security plans under review."
• Despite opposition leader Sir Keir Starmer backing the airstrikes, gov't likely keen to avoid any Commons vote that could expose divisions within the Conservative party. Memories remain of thesurprise defeat suffered by then PM, now Foreign Secretary, Lord Cameron's gov't in 2013 on a vote regarding taking military action against Syria's Bashar al-Assad for the use of chemical weapons.

Topical Highlights in Today's Bank Earnings

On commercial real estate:

• Wells Fargo : Rise in commercial net loan charge-offs driven by commercial real estate (and office space specifically), up $284mln on the quarter
• Bank of America : NPLs of $5.5bln rose by $652mln, driven primarily by commercial real estate

On Average Deposits:

• Wells Fargo : 3% Y/Y decline in average deposits driven by customer migration to higher yielding alternatives, and higher consumer spending.
• Bank of America : Average deposits up $29bln, or 2% on the quarter, while average loans “modestly” higher.
• BNY Mellon : Average total deposits down 4%, but up 4% on the quarter to $273bln.

• Wells Fargo : Markets revenue higher by 33% Y/Y, driven by structured products, equities, credit and commodities. Offset by lower trading revs in rates.
• JP Morgan : Markets revenue up 2%, with Fixed Income revenue up 8%, driven by Securitized Products, but partially offset by lower revenue in Rates. Equities down 8%, driven by lower revenue in Derivatives and Cash.
• Bank of America : Sales, trading rev up 3%, led by equities revenue (up 13%), but offset by softer FICC (down 4%) – driven by weaker trading in rates and credit, but offset by improved trading mortgages and municipals.

On the consumer in today's bank reports:

• Wells Fargo: On consumer lending, rise in charge-offs led by increase in credit card charge-offs, with consumer loans only a small contributor. Home lending unit higher by 7% on improved mortgage banking, however gains were offset by lower originations and lower loan balances. Mortgage originations the softest quarter of the year, at $4.5bln vs. $8.2bln in Q4’22.
• JP Morgan: US continues to be resilient, with consumers still spending, and markets currently expect a soft landing. Economy fueled by large amounts of government deficit spending and past stimulus. Inflation may be stickier and rates to be higher than markets expect.
• Bank of America : Consumer banking average deposits down 8%, but 33% above pre-pandemic levels. Consumer charge-offs driven by higher credit card losses, with a loss rate of 3.07%, up from 2.72% in prior quarter.

RATINGS: Initial ’24 Sovereign Updates Due After Hours

Potential rating reviews of note scheduled for after hours on Friday include:

• Fitch on the European Financial Stability Facility (EFSF) (current rating: AA-), the European Stability Mechanism (ESM) (current rating: AAA; Outlook Stable) & Latvia (current rating: A-; Outlook Positive)
• Moody’s on Turkey (current rating: B3; Outlook Stable)
• DBRS Morningstar on Austria (current rating: AAA, Stable Trend) & Sweden (current rating: AAA, Stable Trend)
• Scope Ratings on the European Financial Stability Facility (EFSF) (current rating: AA+; Outlook Stable), the European Stability Mechanism (ESM) (current rating: AAA; Outlook Stable) & Turkey (current rating: B-; Outlook Negative)

Click to access our sovereign rating review calendar for a comprehensive outline of the current ’24 rating update schedules across Fitch, Moody’s, S&P, DBRS Morningstar and Scope Ratings. Do note that the schedule is indicative only and ratings can be reviewed on an ad-hoc basis. Schedules may also be adjusted by the rating agencies during the year.

FOREX: Commodity-Tied Currencies Boosted by Oil Rally as Red Sea Tensions Escalate

• Commodity- and oil-tied currencies are trading well, with CAD and NOK on the front foot alongside the run higher in oil prices. WTI and Brent crude futures are seen supported on the back of the joint strikes on Houthi militants by US and UK air forces following a series of attacks on tankers and container ships in the Red Sea. The uptick in tensions across the region has raised a bidtone in crude, putting Brent futures within range of $80/bbl and the 200-dma at 79.81.
• EUR/NOK is resultingly lower for a second session, but the bear trigger in the cross remains in sight at the late Dec low of 11.1760.
• Despite post-CPI strength in the USD currency, the dollar sales through the WMR fix have held early Friday, keeping the USD Index within range of 102.158, the Thursday low.
• EUR/USD is off overnight highs, however, drifting lower on generally light volumes across the morning. 1.0963 intraday support has given way, with 1.0955 undercutting as the next level.
• PPI data rounds off the US data releases for the week, after yesterday's US CPI came in ahead of expectations. Fed's Kashkari is also set to speak, as well as ECB's Lane - who may be eyed for any comments on rate cuts of a larger magnitude than 25bps this year, after ECB's Vujcic floated that larger cuts would be possible should the data warrant such a move.

EQUITIES: E-Mini S&P Remains Close to Pre-CPI Highs

• Eurostoxx 50 futures are consolidating. The primary trend direction remains up and the recent move lower is considered corrective. MA studies are in a bull-mode position, signalling a rising trend cycle. Key short-term support is 4446.70, the 50-day EMA. A break of this average would signal scope for a deeper retracement and open 4370.00, the Nov 28 low. For bulls, a reversal higher would refocus attention on 4634.00, the Dec 14 high and bull trigger.
• S&P E-Minis remain above last Friday’s low and the contract has traded higher this week. Key resistance and the bull trigger is at 4841.50, the Dec 28 high. Clearance of this level would resume the uptrend and open 4854.75, a Fibonacci projection. Support at the 20-day EMA of 4766.12 has recently been pierced. A clear break of this average would strengthen a short-term bearish threat and open the 50-day EMA, at 4673.91.

COMMODITIES: WTI Futures Narrow Gap to Resistance at 50-Day EMA

• Trend conditions in WTI futures are unchanged and the directional signals remain bearish. Resistance to watch is $74.51, the 50-day EMA. The average was briefly pierced late December. A clear break of it would strengthen a bullish theme and highlight a stronger reversal. Moving average studies remain in a bear-mode position, highlighting a downtrend. The trigger for a resumption of the trend is $67.98, the Dec 13 low.
• Gold is trading closer to its recent lows following the pullback from $2088.5, the Dec 28 high. Price is also trading ahead of key support at $2013.2 the 50-day EMA. A break of this level, if seen, would expose key support 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.