MNI US MARKETS ANALYSIS - RRR Cut Earlier Than Expected, Triggers Fresh Equity Bid

US TSYS: Late NY Rally Extends With Flash PMIs, BoC and 5Y Supply Ahead

• Cash Tsys trade 0.5-2.5bp richer, underperforming EGBs after yesterday’s outperformance. Early London flow was dominated by a TY block buyer (DV01 ~$700K), while flash European PMI data and digestion of the latest PBoC RRR cut provided a fundamental tilt to the bid.
• TYH4 is off earlier highs of 111-17+ (latest 111-14+, + 07+) on decent volumes of 330k. The increase is a step closer to resistance at 111-23+ (20-day EMA) although the bear threat remains present with support at 110-26 (Jan 19 low).
• Flash January PMIs land along with the BoC decision at 0945ET, before attention turns to supply including the 5Y auction after yesterday’s 2Y saw a lower bid-to-cover but a strong increase in indirect take.
• Data: Weekly MBA data (0700ET), S&P Global US PMIs Jan prelim (0945ET)
• Note/bond issuance: US Tsy $28B 2Y FRN (1130ET), $61B 5Y Note auction (91282CJW2, 1300ET)
• Bill issuance: US Tsy $60B 17W bill auctions (1130ET)

STIR: March and May FOMC Implied Rates Extend Post Bullard Nudge Lower

• Fed Funds implied rates are mixed overnight, extending a little lower for March and May meetings but marginally higher for late 2024.
• Cumulative cuts are seen at 13.5bp for March and 33bp for May, with impetus coming from former St Louis Fed’s Bullard (who led the FOMC in the call for higher rates in the hiking cycle) yesterday touting cutting before inflation returns to 2%, opening the way for a 1H24 cut.
• Further out, there is a cumulative 57bp of cuts to June and 136bp to Dec.
• The BoC decision lands at 0945ET today. Unanimously expected to keep rates on hold at 5% but with focus on implications for a cutting cycle that is currently only fully priced to start in June.

TSYS: OI Points To Short Setting & Long Cover On Tuesday

The mix of Tuesday's move lower across the Tsy futures curve and preliminary OI data points to the following positioning swings:

• Net short setting: TU, FV & UXY futures.
• Net long cover: TY, US & WN futures.
• The apparent short setting noted above outweighed the pockets of apparent long cover in net curve OI DV01 equivalent terms.
• The largest net OI DV01 equivalent swing in single contract terms was seen in FV futures.
• A reminder that yesterday's post-BoJ meeting press conference was a major factor when it came to pressuring the core global FI space. 2-Year Tsy auction results, an apparent dovish turn from ex-St. Louis Fed President Bullard and late NY block flow provided some counter to that move. Soft regional Fed actitvty metrics had little tangible impact.

SOFR: OI Suggests Long & Short Setting Dominated In Different Areas Of SOFR Strip On Tuesday

The combination of yesterday’s twist steepening of the SOFR strip and preliminary OI data points to the following positioning swings on Tuesday:

• Whites: Net long setting was seemingly seen across all contracts outside of SFRU4. It is hard to be definitive when it comes to SFRU4 given its unchanged price status on the day.
• Reds: Net short setting was seemingly seen in all contracts in the pack.
• Greens: An apparent mix of net short setting (SFRZ5 & U6) and net long cover (SFRH6 & M6), with the former comfortably dominating in net pack OI terms.
• Blues: An apparent mix of net short setting (SFRZ6 & H7) and net long cover (SFRM7 & U7), with the former comfortably dominating in net pack OI terms.

EUROPE ISSUANCE UPDATE:

German Auction Results: 1.00% May-38 Bund / 2.50% Aug-46 Bund

• E1.25bln (E1.001bln allotted) of the 1.00% May-38 Bund. Avg yield 2.51% (bid-to-cover 1.9x)
• E750mln (E603mln allotted) of the 2.50% Aug-46 Bund. Avg yield 2.53% (bid-to-cover 3.3x).
• Note there was very strong demand for the off-the-run 22-year 2.50% Aug-46 Bund at today's auction. The intended increase in issue size was E500mln including allotment, but the DFA increased that to E750mln with E602.88mln allotted after receiving E2.473bln of bids for the issue.
• This saw a corresponding decrease in the issue size of the on-the-run 15-year 1.00% May-38 Bund (E1.25bln rather than E1.50bln sold) with E1.001bln allotted. However, there was still a respectable E2.379bln of bids for this issue - so the bid-to-offer/cover were still higher than at the November auction even though today's auction was larger (despite being downsized).
• Both Bunds are trading below their lowest accepted auction price at writing - there has been no bounce higher despite the strong auction, with no notable movement in Bund futures either.

• E345mln of the 2.125% Oct-28 OT. Avg yield 2.471% (bid-to-cover 2.76x)
• E675mln of the 1.15% Apr-42 OT. Avg yield 3.462% (bid-to-cover 1.42x)
• E679mln of the 4.10% Feb-45 OT. Avg yield 3.527% (bid-to-cover 1.4x)

• The weakest gilt auction of 2024 so far - with a tail of 1.2bp, but a still respectable bid-to-cover of 2.86x (all other conventional gilts have seen a 3x bid-to-cover or better in 2024, though).
• The LAP was below the pre-auction mid-price - and was very close to the intraday low of the day - even taking into account the discount going into the auction.
• Gilt futures also hit their lows of the day post-auction, from around 98.22 pre-results to a low of 98.06 at writing.

PBoC Delivers RRR Cut, USD A Touch Softer, Equities Bid

The PBoC has deployed a 50bp RRR cut, effective 5 February, which will release CNY1tn of liquidity into the Chinese economy (as well as a 25bp cut to relending and rediscount raters for the rural sector and small firms, effective 25 Jan). Rhetoric also pointed lower LPRs moving forwards.

• A potential pre-LNY RRR cut was widely touted, although today’s announcement probably comes ahead of schedule vs. most expectations. Global equity index futures and the Hang Seng are bid on the news, while the broader USD ticks lower vs. feedthrough into expectations surrounding the rest of the world (excluding-U.S.) growth channel. USD/CNH saw a very limited uptick, but that move has faded.

FOREX: USD Backtracks as PMIs Prompt EUR, GBP Recovery

• The USD is backtracking, making the the greenback weaker against all others in G10. Better European data helped aid the move among major pairs, with German and French manufacturing data faring well, despite services remaining weak. UK data was more well-grounded, helping the composite PMI edge to 52.5 vs. Exp. 52.1.
• Stronger PMI data across Europe and the UK has contributed to the recovery in EUR/USD and GBP/USD, but GBP has outperformed, resulting in fresh YTD lows for EUR/GBP. The price action makes for five negative sessions in the past six and 0.8524 as the next downside target.
• This drags spot away from the most sizeable strike in the cross for today's NY cut: E459mln rolling off at GBP0.8545. BoE pricing firmed slightly on the PMI print, with May meeting rate cut pricing pared back to ~12bps and reducing the odds of a 25bps cut to below 50%.
• SEK and EUR proxies more broadly are faring well, keeping SEK toward the top end of the G10 pile. In a partial reversal of yesterday's price action, the USD is the weakest headed through to the NY crossover.
• The Bank of Canada rate decision takes focus going forward. While markets expect little change in headline policy (rates seen unchanged at 5.00%) with greater focus on the statement’s tone and macro forecasts before Macklem’s press conference. Prelim US PMI stats is sole US release of note, with speech schedules remaining quiet as the ECB and Fed remain inside the pre-rate decision media quiet period.

FX OPTIONS: Expiries for Jan24 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0900(E2.2bln)
• USD/JPY: Y150.00($600mln)
• AUD/USD: $0.6565-80(A$4.1bln), $0.6610-30(A$2.6bln)

EQUITIES: Eurostoxx 50 Futures Extend Bounce From Last Week's Lows

• Eurostoxx 50 futures have recovered from last week’s low of 4402.00 (the Jan 17 low) and the contract is holding on to its most recent gains. 4402.00 represents a key short-term support. A break of it would resume recent bearish pressure and open 4370.00, the Nov 28 low. On the upside, initial resistance to watch is 4536.00, the Jan 11 high. Clearance of this level would highlight a potential S/T reversal and a resumption of the primary uptrend.
• The uptrend in S&P E-Minis remains intact and this week’s move higher reinforces current conditions. Resistance at 4841.50, the Dec 28 high has been cleared, confirming an extension of the price sequence of higher highs and higher lows. Moving average studies remain in a bull-mode condition, highlighting positive market sentiment. Sights are on 4915.11 next, a Fibonacci projection. Key support lies at 4713.85, the 50-day EMA.

COMMODITIES: Trend Conditions in WTI Futures Remain Bearish, Latest Recovery Deemed Corrective

• Trend signals in WTI futures remain bearish and the latest recovery appears to be a correction - for now. The contract has pierced the 50-day EMA at $74.25. A clear break of it would strengthen a bullish theme and expose $76.31, the Dec 26 high and a near-term bull trigger. 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 is unchanged and trades 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.