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MNI US MARKETS ANALYSIS - Markets in Positioning Mode as CBs Inside Quiet Periods

Highlights:

  • With both ECB and Fed inside pre-decision quiet periods, central bank speak expected light
  • Front-end JPY vols suitably bid ahead of Tuesday BoJ rate decision
  • March Fed meeting pricing remains a coin toss on first rate cut

US TSYS: Bull Flattening With Headlines/Flow Likely To Dictate Session

  • Cash Tsys trade unchanged to 3bp richer, lagging a bid in European FI. There appears little by way of new drivers, with continued focus on Chinese equity weakness and geopolitical worry centred on the Middle East already established during the Asia-Pac session.
  • The bull flattening sees 2s10s at -29bps (-3bp from Friday’s close), pulling further back from last week’s high of -15bps.
  • TYH4 has pushed to session highs of 111-15 (+10) for a continuation of a lift from Friday’s low of 110-26. That bear threat remains present and marks initial support, whilst resistance is seen at 111-26 (20-day EMA) after which lies 112-26+ (Jan 12 high).
  • Late on Friday, both JPM and MS recommended longs in 5Y Tsys. Flow and broader headlines are likely to continue dictate today, with a particularly light docket consisting of the Conf. Board Leading Index and bill issuance. The FOMC is now in media blackout, whilst supply comes more into focus later this week with 3, 5 and 7-year Tsy auctions.
  • Data: Conf Board Leading Index, Dec (1000ET).
  • Bill issuance: US Tsy $77B 13W, $70B 26W Bill auctions (1130ET).

STIR: FOMC Blackout Period Starts With 50% Probability Of Cut With March

  • Fed Funds implied rates have unwound overnight increases for meetings later in the year, back to little changed since Friday’s close after its sizeable push higher.
  • Cumulative cuts: 12.5bp for March (unch from Fri), 31.5bp for March (from 32.5bp), 56bp for June and 135bp for Dec.
  • SF Fed’s Daly (’24 voter) had the last say on Friday before the FOMC’s media blackout, noting it’s “really premature” to think rate cuts “are around the corner”. Policy and the economy are in a good place, allowing the Fed to be patient, with a risk that easing two quickly would be scarring if the Fed doesn’t then reach its 2% inflation goal.

US TSYS: OI Suggests Modest Net Short Setting Seen On Friday

The combination of Friday's general downtick in Tsy futures and preliminary OI data points to the following net positioning swings ahead of the weekend:

  • Short setting: FV, UXY & US futures.
  • Long cover: TY & WN futures.
  • It is hard to be sure when it comes to TU futures given the unchanged price status on the day come settlement.
  • Net positioning swings across the curve were seemingly titled to net short setting, although the apparent net long cover in TY futures provided the largest DV01 equivalent OI swing on the day.
19-Jan-2418-Jan-24Daily OI ChangeOI DV01 Equivalent Change ($)
TU3,921,8863,912,520+9,366+353,888
FV5,909,8265,903,218+6,608+283,256
TY4,632,4754,649,058-16,583-1,062,075
UXY2,101,4812,092,692+8,789+801,858
US1,451,1331,444,560+6,573+887,067
WN1,673,5231,673,943-420-88,488
Total+14,333+1,175,507

STIR: OI Points to Mix Of SOFR Short Setting & Long Cover On Friday

The combination of Friday's move lower in SOFR futures and preliminary OI data point to the following net positioning swings:

  • Whites: Apparent net short setting seen across the pack.
  • Reds: Apparent rounds of net long cover (SFRZ4 & M5) outweigh apparent rounds of net short setting (SFRH5 & U5) in net pack terms.
  • Greens: Net short setting was seemingly seen across all contracts.
  • Blues: Modest net long cover was seemingly seen across the board.
  • The apparent net short setting seen in the whites and greens provided the dominant net curve positioning impulse, with the apparent net long cover in the reds and blues far more modest in OI terms.
19-Jan-2418-Jan-24Daily OI ChangeDaily OI Change In Packs
SFRZ31,196,3341,195,142+1,192Whites+38,934
SFRH41,194,2431,165,604+28,639Reds-8,766
SFRM41,096,8681,094,675+2,193Greens+19,815
SFRU4981,600974,690+6,910Blues-1,796
SFRZ41,016,5281,031,648-15,120
SFRH5546,917545,812+1,105
SFRM5639,669640,587-918
SFRU5573,732567,565+6,167
SFRZ5611,921597,198+14,723
SFRH6424,304421,350+2,954
SFRM6423,636421,833+1,803
SFRU6300,153299,818+335
SFRZ6256,479256,823-344
SFRH7137,645138,443-798
SFRM7145,090145,404-314
SFRU7151,832152,172-340

EUROPE ISSUANCE UPDATE

EU Syndication Mandate: 7/30-year taps:

  • EU has announced a mandate for a syndication (likely tomorrow) with taps of the 3.125% Dec-30 EU-bond and the 3.00% Mar-53 EU-bond.

UK: PM Confirms Chancellor To Remain In Place As Tax Cut Expectations Rise

Prime Minister Rishi Sunak has confirmed that Chancellor of the Exchequer Jeremy Hunt will still be in office at the time of the next general election amid increasing speculation that the gov't could announce sizeable personal tax cuts in the 6 March budget statement. This comes ahead of a general election that is widely expected to take place in Q424.

  • Speaking to Sky News, Sunak states that on tax cuts "we'd like to do more when it's responsible to do so". Since Sunak took office in late 2022, the gov't has not engaged in notable tax cuts, with the emphasis on 'steadying the ship' following the turbulent tenure of former PM Liz Truss.
  • However. writing in the Mail on Sunday, Hunt claimed that "My priority in the upcoming Spring Budget will be to build on our progress and go even further to drive economic growth. Because if we can sustainably grow the economy, we can relieve the pressure on families and generate the revenue necessary to invest in the public services we all rely on.", indicating that spurring growth through tax cuts will be a key election platform for the governing Conservatives.
  • The shift towards tax cuts comes as YouGov publishes an opinion poll for The Times showing that across all voter segments (see chart below), the electorate at present appears more in favour of greater public spending in lieu of tax cuts.
  • Also, cryptically, the No.10 Downing Street X/Twitter page has posted a comment stating 'Something exciting is coming'. No clear signals of what this might refer to year.
Chart 1. YouGov Opinion Poll, 'What Should Gov't Prioritise?, %

Source: The Times/Sunday Times, YouGov. Fieldwork 10-11 Jan

CFTC: AUD Positioning Fades as Spot Slide Continues

  • Friday's CFTC CoT update showed markets built the GBP, JPY and CHF net positions, while trimming AUD, CAD, NZD and EUR.
  • The AUD saw the most notable shift in positioning, with markets trimming a net 15,583 contracts, or 8.6% of open interest. With the filing date of Jan 16th, the shift coincides with the 2% sell-off in AUD/USD across the week prior, and reverses a large part of the build in the net position off the alltime largest net short posted in September last year.
  • GBP saw the net long position improve to 17.2% of open interest, the highest level since September last year. Nonetheless, the net long remains around half the size of the July position totalling a net ~60k contracts.
  • Full details here:

FOREX: Solid Equities Remain a Tailwind for Sentiment

  • The USD sits broadly unchanged, as early support from an incline in the US 10y yield faded through early European hours. This tempered a pullback in most major pairs, with EUR/USD and GBP/USD finding a base at earlier lows and looking more stable headed through to the US open.
  • Equity markets remain a source of sentiment strength, as the e-mini S&P holds the entirety of the Friday rally and keeps European cash markets afloat.
  • NOK is marginally the poorest performer in G10 so far Monday, but recent ranges are being largely respected. Moves come ahead of the Norges Bank rate decision on Thursday - although no change in policy is expected, and markets wait until March for the next policy path projection update.
  • With both the ECB and the Fed inside their pre-meeting media blackout periods, central bank is expected to be muted for the first half of the week, with data few and far between on Monday also. As such, markets will be positioning and preparing for the Tuesday BoJ rate decision. While no change in policy is foreseen, communications and messaging surrounding normalisation in April will be carefully watched.

JPY: Front-End Vols Bid as Markets Capture BoJ Event Risk

  • JPY vols suitably bid ahead of the Tuesday BoJ decision, with overnight implied marked higher to 17 points, nearing the best levels of 2024 and implying a ~105 pip swing over the decision – around double the swing implied average background vol this year.
  • The uptick in vols comes despite consensus looking for no change this week - our preview writes that while the BoJ are anticipated to normalise policy in 2024, such adjustments are not anticipated this week, and are more likely to tighten policy at the April meeting, coinciding with the release of the next Quarterly Outlook Report.
  • So what could move markets in the wake of the decision? Particular positivity surrounding the Shunto wage negotiations in April, or a particularly sharp uptick in core CPI estimates for 2024/25 would solidify expectations of Q2’24 tightening and could work in favour of JPY strength.
  • Nonetheless, this is not the base expectation, with the Noto Peninsula earthquake still under consideration, and lack of clarity on wages arguing in favour of no change. Particular pessimism on this front would prove JPY negative, and 148.80 will be eyed as the initial upside level – comfortably captured by the options-implied swing in spot.

FX OPTIONS: AUD/USD Spot Within Range of Series of Strikes

AUD/USD spot could come into focus headed through to Monday's NY cut, with a series of larger options rolling off close to the current spot range:
  • EUR/USD: $1.0800-01(E535mln), $1.1000(E660mln), $1.1080-90(E1.5bln)
  • USD/JPY: Y148.00($1.1bln), Y148.50($874mln)
  • AUD/USD: $0.6535(A$777mln), $0.6575-80(A$791mln), $0.6600-05(A$740mln)

EQUITIES: Friday's Gains in E-Mini S&P Confirm Resumption of Uptrend

  • Eurostoxx 50 futures last week breached support at the Jan 5 low of 4444.0, trading to a low of 4402.00, the Jan 17 low. The contract has since recovered and 4402.00 represents a key short-term support. A break of this level would resume bearish pressure and open 4370.00, the Nov 28 low. Initial resistance to watch is 4536.00, the Jan 11 high. Clearance of this level would highlight a potential reversal and a resumption of the primary uptrend.
  • The uptrend in S&P E-Minis remains intact and Friday’s gains confirmed a resumption of the trend. Resistance at 4841.50, the Dec 28 high has been cleared, marking an extension of the price sequence of higher highs and higher lows. Moving average studies remain in a bull-mode condition, reinforcing the current bullish condition. Sights are on 4900.00 next. Key support lies at 4699.31, the 50-day EMA.

COMMODITIES: Trend Signals in WTI Futures Remain Bearish

  • Trend signals in WTI futures remain bearish and recent short-term gains are considered corrective. Resistance to watch is $74.23, the 50-day EMA. It has been pierced, a clear break would strengthen a bullish theme and expose $76.31, the Dec 26 high. Moving average studies remain in a bear-mode position and continue to highlight a downtrend. The trigger for a resumption of the downtrend is $68.28, Dec 13 low.
  • Gold remains above the Jan 17 low of $2001.9. Last week’s print below the 50-day EMA and the break of support at $2013.4, the Jan 11 low, has strengthened a bearish threat and a resumption of weakness would open a key level at $1973.2, the Dec 13 low. For bulls, clearance of 2062.3, the Jan 12 high, is required to signal a reversal. This would expose $2088.5, the Dec 28 high.

DateGMT/LocalImpactFlagCountryEvent
22/01/20241630/1130*USUS Treasury Auction Result for 13 Week Bill
22/01/20241630/1130*USUS Treasury Auction Result for 26 Week Bill
23/01/20240300/1200***JPBOJ policy announcement
23/01/20240700/0700***UKPublic Sector Finances
23/01/20241330/0830**USPhiladelphia Fed Nonmanufacturing Index
23/01/20241355/0855**USRedbook Retail Sales Index
23/01/20241500/1600**EUConsumer Confidence Indicator (p)
23/01/20241500/1000**USRichmond Fed Survey
23/01/20241630/1130**USUS Treasury Auction Result for 52 Week Bill
23/01/20241630/1130*USUS Treasury Auction Result for Cash Management Bill
23/01/20241800/1300*USUS Treasury Auction Result for 2 Year Note
24/01/20242145/1045***NZCPI inflation quarterly
24/01/20242200/0900***AUJudo Bank Flash Australia PMI
24/01/20242350/0850**JPTrade

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