Highlights:
- Tariff headline risk escalating into the weekend
- CNH downside risk looks limited given strength of the PBOC toolkit
- MNI Chicago Business Barometer to provide insight into next week's US data run
US TSYS: Losses Paired With EGB Spillover, Notable Data Ahead
- Treasuries are back little changed on the day as soft regional German CPI saw a paring of earlier losses that had been seen in Asia hours in an extension of moves seen on Trump’s reiteration of tariffs going ahead on Canada and Mexico.
- Unsurprisingly against that backdrop, Treasuries see sizeable underperformance to EGBs.
- Cash yields are 1bp lower (2s) to 1bp higher (30s), pivoting from 5s onwards.
- The twist steepening sees 2s10s at 32.3bp (+1.4bps), a little further off last week’s recent lows of 28bps but still on the side compared to the past month.
- TYH5 trades at 109-05 as it pushes back closer to an earlier high of 109-06 seen after the German data, amidst reasonable cumulative volumes of 335k. It remains firmly within the week’s range.
- Resistance at 109-11 (50-day EMA) remains exposed after which closely lies 109-13 (Jan 30 high). A clear break here would strengthen what’s currently seen as a bullish corrective cycle away from a medium-term bearish trend condition.
- Data: ECI Q4 (0830ET), Monthly PCE report (0830ET), MNI Chicago PMI (0945ET)
- Fedspeak: Bowman (0830ET), Goolsbee on CNBC (~1000ET)
STIR: Two Fed Speakers Lined Up Straight Out Of Blackout
- Fed Funds implied rates have rolled over in spillover from soft regional German CPI inflation, reversing a push higher following President Trump yesterday reiterating the intention to put 25% tariffs on Canada and Mexico tomorrow.
- Cumulative cuts from 4.33% effective: 4.5bp Mar, 12.5bp May, 24.5bp Jun, 30bp Jul and 47bp Dec.
- The Q4 ECI and monthly PCE report headlines data but we also see two FOMC members lined up on the first day with the FOMC blackout lifted, with Bowman (permanent voter) before Goolsbee (’25 voter) on CNBC.
- 0830ET – Bowman will provide text but not Q&A and only gives brief remarks on the economy and her perspective on mutual and community banks, which could limit scope. Typically one of the most hawkish FOMC members, she said Jan 9 that she prefers a cautious and gradual approach to adjusting rates, thought policy may not be as restrictive as other think and saw greater risks to price stability than the labor market.
- ~1000ET – Goolsbee is set to speak on CNBC a little after 1000ET. He’s at the other end of the spectrum to Bowman, being the preeminent dove on the committee. He said Jan 15 that “the trend continues to be improvement in inflation…I’m still optimistic for 2025 that we can continue growing and have a soft landing”. He was also wary of the seasonal pattern of inflation.
US TSY FUTURES: CORRECT: Net Long Setting Dominates On Thursday
Net long setting was seen in all contracts outside of TU on Thursday, as Tsy futures settled higher.
- Long setting in TY futures continued to dominate, with ~$3.5mln of fresh net longs added in that contract.
- ~$8.6mln DV01 equivalent of fresh net longsset across the curve.
| 30-Jan-25 | 29-Jan-25 | Daily OI Change | OI DV01 Equivalent Change ($) |
TU | 4,202,042 | 4,209,983 | -7,941 | -296,755 |
FV | 6,363,149 | 6,343,097 | +20,052 | +832,158 |
TY | 4,970,127 | 4,914,984 | +55,143 | +3,536,321 |
UXY | 2,294,908 | 2,277,884 | +17,024 | +1,489,770 |
US | 1,953,699 | 1,940,752 | +12,947 | +1,625,366 |
WN | 1,788,455 | 1,780,761 | +7,694 | +1,455,782 |
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| Total | +104,919 | +8,642,642 |
STIR: Fresh Positioning Set In Front end Of SOFR Strip On Thursday
A mix of net short (SFRZ4 & SFRH5) and long (SFRM5 & SFRU5) setting was seen in the front 4 SOFR futures on Thursday.
- Net short cover was then seen in SFRZ5.
- Mixed rounds of net long setting and short cover were then seen throughout the remainder of the strip.
| 30-Jan-25 | 29-Jan-25 | Daily OI Change |
| Daily OI Change In Packs |
SFRZ4 | 1,085,831 | 1,072,505 | +13,326 | Whites | +40,370 |
SFRH5 | 1,218,582 | 1,218,046 | +536 | Reds | -17,617 |
SFRM5 | 1,059,103 | 1,035,830 | +23,273 | Greens | -4,676 |
SFRU5 | 770,346 | 767,111 | +3,235 | Blues | +12,706 |
SFRZ5 | 958,122 | 975,159 | -17,037 |
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SFRH6 | 690,313 | 684,014 | +6,299 |
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SFRM6 | 638,020 | 639,222 | -1,202 |
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SFRU6 | 597,283 | 602,960 | -5,677 |
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SFRZ6 | 701,591 | 708,350 | -6,759 |
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SFRH7 | 481,032 | 483,309 | -2,277 |
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SFRM7 | 406,601 | 403,999 | +2,602 |
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SFRU7 | 287,574 | 285,816 | +1,758 |
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SFRZ7 | 278,797 | 270,320 | +8,477 |
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SFRH8 | 219,929 | 214,235 | +5,694 |
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SFRM8 | 183,297 | 183,997 | -700 |
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SFRU8 | 120,643 | 121,408 | -765 |
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CHINA: Tariff Concerns Building, But CNH Downside Could be Limited
- While the February 1st tariffs nominally target Canada and Mexico, CNH's weakness this week serves as another reminder that markets see China levies as following closely behind those set against USMCA. This leaves USD/CNH holding the entirety of the late Thursday rally, putting prices back through the 50-dma. A close above would be the first since October last year, again opening the cycle highs posted on Dec31 at 7.3695.
- The reaction function of the Chinese authorities is key here. We 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.
- How would the Chinese authorities work against CNY weakness? USD liquidity and use of the counter-cyclical factor is likely the first line of defence, but tweaks to both the FX RRR (last used in 2023) and deposit requirements for FX forwards remain tools to be used should markets become disorderly. Markets will be on watch for these headlines should the tariff spat escalate in the coming weeks.
- Any agreements made between China and the US will be taken in the context of the 'Phase One' agreement signed in Jan'20 which allowed for FX rate flexibility as a release valve for internal/external economic imbalances - and could limit criticism of fluctuation in FX rates over the medium-term.
- 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.
CANADA: Only 1 of 3 Trump Aggrievances Holds For Canada, But It’s Significant
- Tariff fears received another boost yesterday with Trump reiterating that he’ll put 25% tariffs on Canada and Mexico tomorrow (sticking to the previously announced Feb 1 deadline).
- He went on to add that the 25% rate could be a floor, as levels “may or may not rise with time”.
- Trump continues to cite three factors at play: immigration, drug flow with a particular focus on fentanyl and trade deficits from the US perspective.
- Recall that from a Canadian angle, it has an absolutely marginal role in the first two factors: encounters on the Canadian border are almost one tenth the size of those on the Mexico border and only 8% of nationwide encounters, whilst fentanyl seizures on the Canadian border are almost too small to count.
- Canada does of course have a more structural issue from a trade angle though, with a merchandise trade surplus to the US worth 3.3% of Canadian GDP in the twelve months to November. Whilst down from the 4.5% GDP peak seen in mid-2022, it’s still above the ~2% GDP averaged throughout the first Trump administration. There is clearly nothing concrete here but the >1% GDP difference could be indicative of the trade drag ahead.
- Whilst these structural issues are obviously unchanged in recent weeks, Trump’s latest pledge to push ahead with penal tariffs saw USDCAD hit fresh highs since Mar 2020 and before that 2016 yesterday. USDCAD hit 1.4595 before quickly falling 100 pips where it continues to hold a little below 1.4500.
EUROPEAN INFLATION: MNI Projects 2.3% Y/Y German National CPI, Core 3.0%
From state-level data that equates around 89% weighting of the national December flash German CPI print (due at 13:00 GMT / 14:00 CET), MNI estimates that national CPI (non-HICP print) fell by around 0.1-0.2% M/M (Dec +0.5%) and rose 2.3% Y/Y (Dec 2.6%). See the tables below for full calculations.
- Analyst consensus stands at 2.6% Y/Y and 0.1% M/M, so there should be downside risks to headline inflation.
- Current tracking of Core CPI (ex-energy and food, based on 50% of the national index) implies around 3.0% (3.3% in Dec) and -0.3% M/M (+0.5% Nov).
- We will provide a follow-up bullet looking at underlying drivers in due course.
- Note: These estimates are in relation to the national CPI print, not the HICP print which feeds into the Eurozone HICP print that the ECB targets. The magnitude of surprises to consensus can sometimes be different due to the different methodologies and weights used in national CPI vs HICP - but the direction of the surprise is normally the same.
| Y/Y | January (Reported) | December (Reported) | Difference |
| North Rhine Westphalia | 2.0 | 2.5 | -0.5 |
| Hesse | 2.5 | 2.4 | 0.1 |
| Bavaria | 2.5 | 3.0 | -0.5 |
| Brandenburg | 2.3 | 2.4 | -0.1 |
| Baden Wuert. | 2.3 | 2.6 | -0.3 |
| Berlin | 2.1 | 2.1 | 0.0 |
| Saxony | 2.4 | 3.2 | -0.8 |
| Rhineland-Palatinate | 2.7 | 3.0 | -0.3 |
| Lower Saxony | 2.5 | 2.6 | -0.1 |
| Saarland | 2.6 | 3.1 | -0.5 |
| Saxony-Anhalt | 2.9 | 3.1 | -0.2 |
| Weighted average: | 2.31% | for | 89.1% |
FOREX: Tariff Talk Raises Headline Risk Into Weekend
- Trump's re-raising of a flat 25% import tariff on Canada and Mexico unnerved markets late yesterday and that remains a key driving force across G10 FX early Friday. This leaves the USD as the main beneficiary while CAD and MXN understandably trade poorly - but it's the next 24 hours that should prove key. Reports suggest that Trump's advisors are preparing diplomatic 'offramps', through which the 25% tariffs can still be avoided.
- This leaves currencies highly sensitive to headline risk - particularly across US hours today - evident in the tick higher for overnight G10 FX vol we've seen this morning.
- Meanwhile, USD/CNH is holding the entirety of the late Thursday rally, pressing the rate through the 50-dma to the upside. A close above would be the first since October last year, again opening the cycle highs posted on Dec31 at 7.3695.
- German regional inflation stats pose downside risks to the national print later today, and have led the single currency lower. Euro rates markets have rushed to price in easier ECB policy in response, as the flattening of the ERH5/M5 spread points to more aggressive easing through the midpoint of 2025. EUR/USD looks to have consolidated back below the 50-dma - reorienting downside focus on mid-January lows.
- Outside of Trump tariff headlines, the MNI Chicago Business Barometer is the data highlight Friday - which should take focus ahead of the ISM manufacturing and services indices next week - and the nonfarm payrolls release in a week's time.
COMMODITIES: Gold Records Fresh All-Time High, Attention on $2800
- This week’s move down in WTI futures marks 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 $72.25. 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. This week’s extension higher has resulted in a print above $2790.1, to record a fresh all-time high. The climb confirms a resumption of the primary uptrend and maintains the bullish price sequence of higher highs and higher lows. Attention is on $2800.0 and $2817.6, a Fibonacci projection. The first key support to watch is $2683.0, the 50-day EMA. The 20-day EMA is at $2720.7.
EQUITIES: Eurostoxx 50 Futures Trading Near Cycle Highs
- A bull cycle in the Eurostoxx 50 futures contract remains intact. Yesterday’s gains delivered a print above 5726.00, the Jan 24 high. The clear break of this level has confirmed a resumption of the uptrend and paved the way for 5327.90, a Fibonacci projection. The first important support to watch is 5121.39, the 20-day EMA. Clearance of the average would signal the start of a correction.
- The S&P E-Minis contract is firmer today and continues to trade above Monday’s low. Key short-term support to watch lies at 5961.75, the Jan 16 low (pierced). For now, the recent sharp pullback appears corrective, however, a clear breach of 5961.75 would strengthen a bearish threat and signal scope for a deeper retracement, towards 5943.94, a Fibonacci retracement. Key resistance is 6178.75, the Dec 6 high.
| Date | GMT/Local | Impact | Country | Event |
| 31/01/2025 | 1300/1400 | *** |  DE | HICP (p) |
| 31/01/2025 | 1330/0830 | *** |  CA | Gross Domestic Product by Industry |
| 31/01/2025 | 1330/0830 | *** |  US | Personal Income and Consumption |
| 31/01/2025 | 1330/0830 | *** | US | Employment Cost Index |
| 31/01/2025 | 1330/0830 | *** | CA | Gross Domestic Product by Industry |
| 31/01/2025 | 1330/0830 | US | Fed Governor Michelle Bowman | |
| 31/01/2025 | 1445/0945 | *** | US | MNI Chicago PMI |
| 31/01/2025 | 1600/1100 | CA | Finance Dept monthly Fiscal Monitor (expected) | |
| 31/01/2025 | 1800/1300 | ** | US | Baker Hughes Rig Count Overview - Weekly |
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