Highlights:
- Markets remain on headline watch as China tariffs still in the offing
- Treasury curve sits bear steeper ahead of JOLTS, Fed's Jefferson
- Tariff talk prompts options volumes near best of the year
US TSYS: Bear Steeper, JOLTS and Jefferson Watched Amidst Headlines
- Treasuries have bear steepened today, with the front-end somewhat pinned by Fed rate expectations ahead of today’s data including the JOLTS report for December but with the longer end extending a sell-off seen after the US delayed tariffs on Canada following similar developments for Mexico earlier in the day.
- The deadline for setting 10% tariffs on China has passed and China has since announced targeted retaliatory measures of its own due to be effective Feb 10, leaving scope for negotiations.
- Cash yields are 0.6-2.7bp higher, with 20s leading the increase.
- 2s10s has pushed to 32.4bps (+1.4bp) but remains below Friday’s 35bps prior to the original Feb 1 tariff deadline.
- TYH5 sits at 108-25 off earlier lows of 108-23. Cumulative volumes of 375k are reasonable but far from yesterday’s outsized 770k at the same time of day.
- A corrective cycle remains in play and the contract is holding on to the bulk of its recent gains. Key resistance at 109-10 (50-day EMA) has been pierced. A clear break would strengthen a bullish theme and open 109-31 (Dec 18 high). The medium-term trend condition remains bearish, with initial firm support seen at 108-06 (Jan 23 low).
- Data: JOLTS Dec (1000ET), Factory orders Dec (1000ET)
- Fedspeak: Bostic (1100ET), Daly (1400ET) and Vice Chair Jefferson on the economic outlook and mon pol (1930ET, incl text). An addendum for Jefferson who we missed in the earlier STIR comment, his prepared remarks are worth watching having last spoken on Oct 9. We’ve previously seen him as on the dovish side of the spectrum but a lot has changed since then.
- Bill issuance: US Tsy $85B 42D CMB auction (1130ET)
- See our take on yesterday’s borrowing estimates, including how requirements were at the low end of expectations (here) and cash level assumptions are subject to downside risk (here).
STIR: Fed Rate Path Consolidates Modest Softening On Tariff Delays
- Fed Funds implied rates hold yesterday’s modest paring of previous climbs, following a one-month delay of 25% tariffs on Canada and Mexico. The deadline for setting 10% tariffs on China has passed and China has since announced targeted retaliatory measures of its own due to be effective Feb 10.
- Cumulative cuts from 4.33% effective: 4bp Mar, 10bp May, 20.5bp Jun, 25bp Jul and 42bp Dec.
- The 42bp of cuts for 2025 is up from 38bp at yesterday’s peak when the US was still set to push ahead of 25% tariffs on Canada and Mexico. The recent range includes last week’s 54bp on US tech-led risk-off and 24bps after last month’s strong payrolls report.
- Trump administration policy-related headlines are likely to remain the main driving force in the immediate future but today’s JOLTS report for December can also have an impact.
- Bostic (non-voter) speaks for a second day running in a moderated discussion on housing at 1100ET. He didn’t move the needle yesterday, suggested in a Q&A that the Fed may be "waiting for a while" before easing rates further. "I want to see what the 100 bps we did last year translates to in terms of the economy. Depending on what the data are, it might mean that we are waiting for a while."
- Daly (non-voter) also speaks in a moderated panel at 1400ET. She last spoke Jan 4, saying inflation remains uncomfortably above the 2% target and that the labor market is roughly in balance with no desire to see any further slowing. The Fed is now facing more of a trade-off between inflation and the jobs market.
US TSY FUTURES: Cover Slightly More Prominent On Monday
Long cover (TU), short cover (TY & UXY) and long setting (US & WN) were seen during Monday’s twist flattening of the curve, as tariff headlines drove intraday swings and curve flattening.
- Cover of existing positions outweighed the setting of fresh positions in curve-wide DV01 equivalent terms.
| 03-Feb-25 | 31-Jan-25 | Daily OI Change | OI DV01 Equivalent Change ($) |
TU | 4,104,127 | 4,185,411 | -81,284 | -3,025,390 |
FV | 6,394,999 | 6,382,175 | +12,824 | +530,272 |
TY | 4,860,584 | 4,877,945 | -17,361 | -1,108,673 |
UXY | 2,314,292 | 2,319,757 | -5,465 | -476,165 |
US | 1,966,377 | 1,957,509 | +8,868 | +1,106,726 |
WN | 1,796,133 | 1,791,969 | +4,164 | +781,250 |
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| Total | -78,254 | -2,191,981 |
STIR: Mix Of Positioning Swings In SOFR Futures On Monday
Short setting dominated in SFRH5-U5 on Monday, before a mix of net long cover (most contracts between SFRZ5-Z6) and net short cover (SFRH7 through SFRM8) then came to the fore further out the strip.
- Tariff headlines resulted in twist flattening of the SOFR futures strip come settlement time.
| 03-Feb-25 | 31-Jan-25 | Daily OI Change |
| Daily OI Change In Packs |
SFRZ4 | 1,082,060 | 1,089,556 | -7,496 | Whites | +18,110 |
SFRH5 | 1,216,183 | 1,213,351 | +2,832 | Reds | -23,395 |
SFRM5 | 1,093,294 | 1,071,741 | +21,553 | Greens | -47,809 |
SFRU5 | 775,631 | 774,410 | +1,221 | Blues | -12,399 |
SFRZ5 | 943,764 | 957,524 | -13,760 |
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SFRH6 | 671,255 | 682,072 | -10,817 |
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SFRM6 | 640,640 | 635,578 | +5,062 |
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SFRU6 | 590,528 | 594,408 | -3,880 |
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SFRZ6 | 666,655 | 692,356 | -25,701 |
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SFRH7 | 472,402 | 484,831 | -12,429 |
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SFRM7 | 406,431 | 412,852 | -6,421 |
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SFRU7 | 287,142 | 290,400 | -3,258 |
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SFRZ7 | 267,479 | 275,858 | -8,379 |
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SFRH8 | 216,892 | 218,970 | -2,078 |
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SFRM8 | 179,036 | 180,985 | -1,949 |
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SFRU8 | 120,107 | 120,100 | +7 |
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EUROPEAN FISCAL: France 2024 Budget Deficit Less Than Forecast
The French general government budget deficit ended 2024 at E156.3bn, smaller than the E163.2bn the Finance Ministry forecast in its draft finance bill back in November. It also compares favorably to the E173.3bn in 2023.
- We calculate this as being worth 5.4% GDP for 2024. Whilst there can be differences compared to what the Ministry of Finance formally forecasts, it's an improvement from the 6.1% forecast for 2024 in its November update but is still firmly above the initial target of 4.4% (around a budget deficit of E146.9bln).
- The data come after PM Bayrou forcefully pushed the 2025 budget through parliament without a vote on Monday, targeting a deficit of 5.4% GDP for 2025.
- The French Ministry of Budget and Public Accounts has published an updated timeline of key milestones for the 2025 budget:
- 3 February: Discussions began on the report of the joint committee (CMP) of the 2025 Finance Bill at the National Assembly.
- 6 February: Discussion on the 2025 Finance Bill in the Senate will take place.
- 17 February: New reading of the PLFSS 2025 (social security financing bill) expected in the Senate.
- In terms of the latest monthly data, the narrowing in the ytd deficit from E172.5bn as of November to E156.3bn looks in keeping with the typical seasonal pattern.
- We will follow up with an breakdown of the components driving the narrowing in the budget deficit in 2024.
BONDS: Treasury/Bund Widening Reasserts Itself, Risk Of More To Come
Treasury/Bund widening has reasserted itself since the middle of last week, with the 10-Year spread ~20bp wider over that horizon:
- Headline drivers of the widening move are the ECB decision and the impact of U.S. President Trump’s tariff choices:
- The latest ECB decision suggested neutral rate discussions are still premature whilst policy is deemed “restrictive". Note that an ECB study on neutral rates is due to be released Friday.
- Tariff readthrough: generally inflationary for the U.S. and growth-negative for much of the rest of the world. President Trump continues to point to the potential for tariffs on the EU.
- Citi eye further spread widening, noting that “that 10-Year Tsy/Bunds looks tight relative to front-end OIS differentials. The last few sessions have seen sharp re-widening, but the move may have legs, with the spread still around 50bp below the peak seen during Trump 1.0.”
- Slowing of EGB supply may also start to factor in after the usual frontloading was seen in January.
FOREX: CAD, MXN Gain Tariff Reprieve, But CNH Still in Crosshairs
- JPY is slipping against most others in G10, pressed by a modest recovery in core European equities on the back of the Canadian/Mexican tariff reprieves. CHF, however, is firmer - showing that haven flows remain inconsistent. This keeps USD/JPY just above the 50-dma, however recoveries are capped by the 156.29 mark - the 50% retracement of the downleg off the YTD high.
- US JOLTS jobs data is set to cross later today, alongside the final durable goods report for December, but it's headline risk surrounding tariffs that will likely remain the key driver of sentiment. Both Mexico and Canada secured last minute reprieves on universal 25% import tariffs, allowing governments a month for negotiations to avoid full installation in March.
- China are yet to secure the same - and have announced plans for a 10% levy on US energy imports as a counteractive measure. It's these tariffs that will remain a focus for markets ahead. We wrote on Friday that CNH downside could be limited through this first phase of tariffs, as the reaction function of the Chinese authorities remains key. MNI wrote on January 17th that the PBOC will limit any sharp depreciation of the CNY in response to tariff uncertainties as sharp CNY depreciation will worsen capital outflows and impede monetary and fiscal policy coordination.
- As such, CNH downside could be limited over the short-term - price action that would work against options market pricing that increasingly favours USD/CNH calls. As such, collecting premiums via selling USD/CNH topside would stand to benefit.
OPTIONS: USD/CAD, USD/MXN Topside in Firm Demand
Trump's tariff deadline really helped support derivatives markets yesterday, with DTCC data showing over $140bln notional crossing FX options markets - among the busiest sessions of the year, but no surprise given the heavy intraday vol - particularly in CAD and MXN, but EUR/JPY, EUR and CNY also saw strong flows.
- Markets unsurprisingly favoured USD/CAD upside protection - evident in the put/call skew leaning in favour of calls. Calls with a strike at 1.50 and higher saw solid demand of $1.7bln, making up over 10% of all notional traded in the Monday session. While in outright terms that may not seem significant - the rate hasn't traded above that level since February 2003.
- This pattern was even more evident in USD/MXN, through which over $2 in calls traded for every $1 in puts. Markets identified 21.00 and 21.50 as points of topside weakness, although call demand was evident as high as 21.9650 - 22.7500.
- Today's trade has been far more contained - reflecting the turnaround in tariff sentiment this morning. This is typified by the reversal in yesterday's rally for front-end USD/CNH risk reversals, which corrects back to broadly flat.
OPTIONS: Expiries for Feb04 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.0250(E873mln), $1.0280(E910mln), $1.0300(E1.2bln), $1.0320(E1.0bln), $1.0375(E1.0bln), $1.0395-05(E1.4bln), $1.0425-35(E2.4bln)
- USD/JPY: Y152.00($500mln), Y154.00($663mln)
- AUD/USD: $0.6275(A$1.6bln), $0.6335-50(A$896mln), $0.6420(A$1.1bln), $0.6595-00(A$2.5bln)
EQUITIES: Recent Weakness in E-Mini S&P Strengthens a Bearish Threat
- A sharp reversal lower in the Eurostoxx 50 futures contract on Monday signals the end of the recent bull run - for now - and the start of a corrective cycle. Price gapped lower and traded through the 20-day EMA, at 5159.26. A continuation of the bear leg would pave the way for a move towards the 50-day EMA, at 5056.82. On the upside, key resistance and the bull trigger has been defined at 5327.00, the Jan 31 high.
- The S&P E-Minis contract started the week on a bearish note. The gap lower Monday and a breach of support at 5948.00, the Jan 27 low, strengthens a bearish threat and cancels - for now - a recent bullish theme. An extension down would open 5892.37, a Fibonacci retracement point. Initial resistance is at 6069.00, today’s intraday high. Gains are considered corrective, however, a stronger rally would expose key resistance at 6178.75, the Dec 6 high.
COMMODITIES: Gold Maintains Bullish Price Sequence, Sights on $2845.20 Next
- Last week’s move down in WTI futures marked an extension of the current corrective cycle. The 20-day EMA has been breached and attention is on support around the 50-day EMA, at $72.30. A clear break of the 50-day average would suggest scope for a deeper retracement. On the upside, a reversal higher would refocus attention on $79.48, the Apr 12 ‘24 high and a key resistance.
- A bull cycle in Gold remains in play. Last week’s extension higher and Monday’s gains confirm a resumption of the uptrend and maintain the bullish price sequence of higher highs and higher lows. Moving average studies are in a bull mode position too, highlighting a dominant uptrend. Sights are on $2845.2 next, a Fibonacci projection. The first key support to watch is $2692.6, the 50-day EMA. The 20-day EMA is at $2736.4.
| Date | GMT/Local | Impact | Country | Event |
| 04/02/2025 | 1355/0855 | ** |  US | Redbook Retail Sales Index |
| 04/02/2025 | 1500/1000 | ** | US | Factory New Orders |
| 04/02/2025 | 1500/1000 | *** | US | JOLTS jobs opening level |
| 04/02/2025 | 1500/1000 | *** | US | JOLTS quits Rate |
| 04/02/2025 | 1600/1100 | US | Atlanta Fed's Raphael Bostic | |
| 04/02/2025 | 1630/1130 | * | US | US Treasury Auction Result for Cash Management Bill |
| 04/02/2025 | 1900/1400 | US | San Francisco Fed's Mary Daly | |
| 05/02/2025 | 2200/0900 | * |  AU | S&P Global Final Australia Services PMI |
| 05/02/2025 | 2200/0900 | ** | AU | S&P Global Final Australia Composite PMI |
| 05/02/2025 | 2330/0830 | ** |  JP | average wages (p) |
| 05/02/2025 | 0030/0930 | ** | JP | S&P Global Final Japan Services PMI |
| 05/02/2025 | 0030/0930 | ** | JP | S&P Global Final Japan Composite PMI |
| 04/02/2025 | 0030/1930 | US | Fed Vice Chair Philip Jefferson | |
| 05/02/2025 | 0145/0945 | ** |  CN | S&P Global Final China Services PMI |
| 05/02/2025 | 0145/0945 | ** | CN | S&P Global Final China Composite PMI |
| 05/02/2025 | 0745/0845 | * |  FR | Industrial Production |
| 05/02/2025 | 0815/0915 | ** |  ES | S&P Global Services PMI (f) |
| 05/02/2025 | 0815/0915 | ** | ES | S&P Global Composite PMI (final) |
| 05/02/2025 | 0845/0945 | ** |  IT | S&P Global Services PMI (f) |
| 05/02/2025 | 0845/0945 | ** | IT | S&P Global Composite PMI (final) |
| 05/02/2025 | 0850/0950 | ** | FR | S&P Global Services PMI (f) |
| 05/02/2025 | 0850/0950 | ** | FR | S&P Global Composite PMI (final) |
| 05/02/2025 | 0855/0955 | ** |  DE | S&P Global Services PMI (f) |
| 05/02/2025 | 0855/0955 | ** | DE | S&P Global Composite PMI (final) |
| 05/02/2025 | 0900/1000 | * | IT | Retail Sales |
| 05/02/2025 | 0900/1000 | ** |  EU | S&P Global Services PMI (f) |
| 05/02/2025 | 0900/1000 | ** | EU | S&P Global Composite PMI (final) |
| 05/02/2025 | 0930/0930 | ** |  GB | S&P Global Services PMI (Final) |
| 05/02/2025 | 0930/0930 | *** | GB | S&P Global/ CIPS UK Final Composite PMI |
| 05/02/2025 | 1000/1100 | ** | EU | PPI |
| 05/02/2025 | 1200/0700 | ** | US | MBA Weekly Applications Index |
| 05/02/2025 | 1315/0815 | *** | US | ADP Employment Report |
| 05/02/2025 | 1330/0830 | ** |  CA | International Merchandise Trade (Trade Balance) |
| 05/02/2025 | 1330/0830 | ** | CA | International Merchandise Trade (Trade Balance) |
| 05/02/2025 | 1330/0830 | ** | US | Trade Balance |
| 05/02/2025 | 1330/0830 | *** | US | Treasury Quarterly Refunding |
| 05/02/2025 | 1400/1500 | EU | ECB's Lane at Euro area in 2025 event and Q&A | |
| 05/02/2025 | 1400/0900 | US | Richmond Fed's Tom Barkin | |
| 05/02/2025 | 1445/0945 | *** | US | S&P Global Services Index (final) |
| 05/02/2025 | 1445/0945 | *** | US | S&P Global US Final Composite PMI |
| 05/02/2025 | 1500/1000 | *** | US | ISM Non-Manufacturing Index |
| 05/02/2025 | 1500/1000 | ** | US | housing vacancies |
| 05/02/2025 | 1530/1030 | ** | US | DOE Weekly Crude Oil Stocks |
| 05/02/2025 | 1800/1300 | US | Chicago Fed's Austan Goolsbee | |
| 05/02/2025 | 2000/1500 | US | Fed Governor Michelle Bowman |
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