Highlights:
- Trump to further target chips headed to China, providing a risk-off backdrop
- UK to boost defence spending in latest acknowledgement that more needs to be done
- US consumer confidence, Fed, ECB, BoE speak the focus
US TSYS: Bunds Lend Added Support to Tsys, Trade Uncertainty Spreads
- Treasuries resume climb to highest levels since mid December overnight, gaining additional support in early London trade as Bunds rallied. Bunds reversed weakness to extending highs as Pres Trump trade policy continues to unsettle rates, weigh on equities.
- Currently, Mar'25 10Y futures trades +11.5 at 110-07.5 vs. 110-09 high, focus on initial technical resistance at 110-19 (76.4% retracement of the Dec 6 - Jan 13 bear leg) followed by 110-25 (High Dec 12 ‘24). Initial firm support to monitor is 109-09, the 50-day EMA. A move below this average is required to highlight a potential reversal.
- Tsy 10Y yield has slipped to 4.3328% low (-.0675), curves mixed: 2s10s -.581 at 21.769, 5s30s +1.618 at 43.424. Heavy futures volume (TUH5 1.5M already) tied to Mar/Jun roll with latter taking lead quarterly this Friday.
- Bbg US$ index inching lower (BBDXY -0.46 to 1286.81) paring overnight gains after Pres Trump mention of Canada & Mexico tariffs are "on time, moving forward" late Monday.
- Projected rate cuts through mid-2025 steady to firmer vs. lat eMonday levels (*) as follows: Mar'25 at -0.7bp (-0.5bp), May'25 at -8.2bp (-7.1bp), Jun'25 at -20.7bp (-18bp), Jul'25 at -28.6bp (-25.6bp).
- Focus on regional Fed data (Philly, Richmond, Dallas) & Fed speakers today, House price index at 0900ET, Consumer Confidence at 1000ET. US Treasury auctions $75B 6W Bills at 1130ET, $70B 5Y Notes (91282CMQ1) at 1300ET.
STIR: OI Signals Mix Of Positioning Swings In SOFR Futures On Monday
OI data points to a mix of net short (SFRZ4, H5 & M5) and long (SFRU5) setting through the SOFR whites on Monday, before net short cover became more prominent further out the strip.
| 24-Feb-25 | 21-Feb-25 | Daily OI Change |
| Daily OI Change In Packs |
SFRZ4 | 1,046,629 | 1,044,527 | +2,102 | Whites | +18,189 |
SFRH5 | 1,234,204 | 1,224,696 | +9,508 | Reds | -24,261 |
SFRM5 | 1,171,651 | 1,166,073 | +5,578 | Greens | -13,700 |
SFRU5 | 859,548 | 858,547 | +1,001 | Blues | -570 |
SFRZ5 | 1,001,960 | 997,323 | +4,637 |
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SFRH6 | 624,199 | 629,442 | -5,243 |
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SFRM6 | 658,230 | 674,050 | -15,820 |
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SFRU6 | 575,202 | 583,037 | -7,835 |
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SFRZ6 | 804,622 | 820,679 | -16,057 |
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SFRH7 | 445,635 | 449,943 | -4,308 |
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SFRM7 | 438,886 | 437,839 | +1,047 |
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SFRU7 | 306,010 | 300,392 | +5,618 |
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SFRZ7 | 347,648 | 350,498 | -2,850 |
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SFRH8 | 217,898 | 217,364 | +534 |
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SFRM8 | 188,505 | 190,399 | -1,894 |
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SFRU8 | 127,024 | 123,384 | +3,640 |
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CHINA: Could Expand Use of FX Tools as Part of Path to Negotiations
- Should current tight liquidity conditions persist, the Chinese authorities could opt for alternative tools to support the FX rate, particularly if part of a posturing phase before negotiating with the US on trade.
- In contrast with the YTD lows printed in the US 10y yield today, the Chinese 10yr yield traded through 1.80% for the first time since mid-December today - while the USD/CNH remains within the January/February range. In tandem, bank lending rates have climbed to sit comfortably above last year's average - even when excluding the pre-new year spike.
- Most have pinned the run higher in Chinese yields this month on constrained onshore liquidity conditions - a spillover effect from the PBOC's net liquidity drain across February, in part designed to support the currency in the face of tariff pressure (USD/CNH is lower by ~1% this year).
- The longer liquidity stays tight, the greater the risk to the real economy via constrained bank lending - meaning the authorities could lean more closely on other tools to support the FX rate, particularly if the PBOC are looking to contain markets before any potential negotiations with the US on trade. We wrote back in December: "Beijing would not be completely closed to discussing a new exchange rate settlement with the U.S. aimed at allowing a moderate appreciation of the yuan, particularly against the currencies of China’s other major trading partners"
CHINA: PBoC Must Tread Lightly, Supporting FX While Avoiding Ire
- Late last week, the NYT reported Trump is eyeing a "bigger, better" trade deal with China that goes beyond reworking their trade relationship to encompass "substantial" investments, purchase commitments and even nuclear security.
- 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, in light of the Phase One deal, the PBoC must tread lightly in protecting the real economy, but avoiding any critiques of FX policy. While the bank could look beyond USD liquidity tweaks (leaning more heavily on the counter-cyclical factor), tweaks to both the FX RRR (last used in 2023) and deposit requirements on FX forwards may become trickier given the headline-grabbing, more direct nature of the measures. This may mean the tools only come into play in the even of a disorderly CNY sell-off.
- The formal installation of 25% aluminium and steel tariffs may be the next flashpoint for tensions here. Coming into effect on March 12th, the measures are seen as indirectly targeting Chinese imports to the US given concerns China are "flooding" the global market and harming US manufacturing in the process.
UK: The Sun-PM To Cut Aid Bill In Order To Increase Def Spend To 2.5% Of GDP
The Sun reportsthat PM Sir Keir Starmer "will today set out a path to hike defence spending to 2.5 per cent of GDP." The article claims that the PM will pledge to boost military spending "immediately", with Starmer's pledges on defence expenditure to date having come without a set timeline. As The Sun notes, "Cabinet departments have been bracing for deep spending cuts in order to fund the massive armed forces cash injection." The report claims that Starmer "will today vow to slash Britain's aid budget in order to hike defence spending".
- Starmer is set to deliver a statement to the House of Commons regarding defence and security at 1230GMT (0730ET, 1330CET). Livestream here.
- The statement will come just days ahead of the PM's planned visit to Washington, D.C., for talks with US President Donald Trump. The second senior NATO leader to meet with Trump this week after French President Emmanuel Macron on 24 Feb, Starmer will use the visit in an effort to try to convince Trump that US security guarantees for Ukraine as part of any ceasefire agreement with Russia are a necessity and worthwhile for the US.
- Earlier this morning, leader of the main opposition centre-right Conservatives Kemi Badenoch said that 2.5% of GDP on defence "is now no longer sufficient".
EU: Costa Convenes Leaders' Call On 26 Feb For Macron-Trump Talks Debrief
European Council President António Costa has confirmed a videoconference of member state leaders on the morning of 26 Feb to hear a debrief from French President Emmanuel Macron following his meetings with US President Donald Trump at the White House on 24 Feb.
- This videoconference comes ahead of the special European Council summit that has been called for 6 March to discuss Ukraine and the EU's defence and security in the wake of major shifts in regional geopolitics in recent weeks.
- Reports of the Trump-Macron meetings have focused on the public comments by both leaders that appeared tentatively positive. From the European perspective, Trump not referring to Ukrainian President Volodymyr Zelenskyy once again as a 'dictator' will be welcomed.
- The comments from Trump suggesting that Russian President Vladimir Putin would accept NATO peacekeepers in Ukraine are likely to be closely interrogated by EU leaders. Russian Foreign Minister Sergey Lavrov has indicated the opposite, that such a move would be unacceptable for the Kremlin.
BUNDS: /SWAPS: Swap Spreads Remain Under Pressure On Debt Brake Reform Risk
BBG headlines note that German 10-Year swap spreads hit an all-time low.
- The headline is based on closing levels if quoting conventional swaps vs. Bunds, spread last ~-8bp, all-time intraday low at -9.26bp.
- Although both Bund vs. 3-month & 6-month Euribor ASWs are at all-time lows, just for completeness.
- Debt brake reform odds continue to weigh on long dated swap spreads/ASWs..
- We've written a lot about how fundamentals continue to screen bearish for long end swap spreads, although debt brake negotiations and already short positioning in spreads may promote vol.
EUROPE ISSUANCE UPDATE:
Spain syndication: Spread set
- EUR benchmark (MNI expects E5-10bln) of the new Jan-41 Obli. Books in excess of E89bln, spread set at 3.90% Jul-39 Obli (mid) + 9bps (guidance was +11bps area).
UK auction results
- GBP1.6bln of the Sep-35 linker. Avg yield 1.115% (bid-to-cover 3.52x).
Italy auction results
- E2.75bln of the 2.55% Feb-27 BTP Short Term. Avg yield 2.38% (bid-to-cover 1.59x).
- E1.5bln of the 1.80% May-36 BTPei. Avg yield 1.9% (bid-to-cover 1.61x).
German auction results
- E1.5bln (E1.495bln allotted) of the 1.80% Aug-53 Green Bund. Avg yield 2.73% (bid-to-offer 2.34x; bid-to-cover 2.35x).
FOREX: Vague Risk-Off Theme Helps Support USD
- Markets trade with a general risk-off feel, after the European open ushered in a phase of stock weakness, USD buying and a pullback in US yields as traders responded to reports that Trump is set to expand and extend restrictions on chip trade with China. Importantly, the Trump administration have reached out to their Dutch and Japanese counterparts to cooperate in the sector - reinforcing the potential impact of any levies.
- The single currency looked through the release of the ECB's negotiated wages tracker, which came and went with little market ripple - the numbers are unlikely to be a needle mover for the ECB, but the data does underscore the ECB's confidence in the inflation outlook, with services expected to start seeing more meaningful disinflation below 4% in the next few months.
- The USD remains among the strongest performers in G10 headed into the crossover, but is off the session's best levels. AUD and NZD remain the hardest hit - as growth sensitive currencies fade a recent rally as the proximity to potential Canadian/Mexican tariffs next week come nearer.
- Consumer confidence data for February is the highlight of the US schedule, with Richmond Fed Manufacturing and Philadelphia Fed non-manufacturing also set to follow. The central bank speaker schedule sees ECB's Centeno & Schnabel, BoE's Pill and Fed's Barr & Barkin.
OPTIONS: Expiries for Feb25 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.0390-00(E1.2bln), $1.0450-55(E560mln)
- USD/JPY: Y149.00($751mln), Y149.75-80($790mln)
- USD/CNY: Cny7.3500($1.1bln)
EQUITIES: Recent Move Lower in E-Mini S&P Considered Corrective For Now
- The trend condition in the Eurostoxx 50 futures contract remains up and last week’s climb to a new alltime high on the continuation contract, reinforces a bull theme. Note too that moving average studies are in a bull-mode set-up, highlighting a dominant uptrend and positive market sentiment. Sights are on 5574.57 next, a Fibonacci projection. Initial firm support to watch is 5387.59, the 20-day EMA. A pullback would be considered corrective.
- S&P E-Minis traded lower again, on Monday. The move down appears corrective, however, price has breached support at 6014.00, the Feb 10 low. This signals scope for a deeper retracement and has exposed a key support at 5935.50, the Feb 3 low. Moving average studies remain in a bull-mode condition that suggests the trend direction remains up. A resumption of gains would refocus attention on key resistance at 6178.75, the Dec 6 ‘24 high.
COMMODITIES: Fresh Short-Term Cycle Lows in WTI Futures Reinforces Bearish Theme
- A bearish theme in WTI futures remains intact and the move lower last week, and Monday’s fresh short-term cycle low, reinforces a bear condition. Support at $70.20, the Feb 6 low, has been pierced. A clear break of it would strengthen the downtrend and confirm a breach of the 50-day EMA. This would open $67.75, the Dec 20 ‘24 low. Key S/T resistance has been defined at $74.06, Feb 3 high. A move above this level would reinstate a bull theme.
- A bull cycle in Gold remains in play and the yellow metal continues to trade at its latest highs. Fresh cycle highs once again 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 the $2962.2, a Fibonacci projection. The first key support to watch is $2875.2, the 20-day EMA.
| Date | GMT/Local | Impact | Country | Event |
| 25/02/2025 | 1300/1400 |  EU | ECB's Schnabel at BOE's Annual Conference on Balance Sheet | |
| 25/02/2025 | 1330/0830 | ** |  US | Philadelphia Fed Nonmanufacturing Index |
| 25/02/2025 | 1355/0855 | ** | US | Redbook Retail Sales Index |
| 25/02/2025 | 1400/0900 | ** | US | S&P Case-Shiller Home Price Index |
| 25/02/2025 | 1400/0900 | ** | US | FHFA Home Price Index |
| 25/02/2025 | 1400/0900 | ** | US | FHFA Home Price Index |
| 25/02/2025 | 1400/0900 | ** | US | FHFA Quarterly Price Index |
| 25/02/2025 | 1400/0900 | ** | US | FHFA Quarterly Price Index |
| 25/02/2025 | 1400/1400 |  GB | BOE's Pill remarks at BEAR Conference | |
| 25/02/2025 | 1500/1000 | *** | US | Conference Board Consumer Confidence |
| 25/02/2025 | 1500/1000 | ** | US | Richmond Fed Survey |
| 25/02/2025 | 1530/1030 | ** | US | Dallas Fed Services Survey |
| 25/02/2025 | 1645/1145 | US | Fed Governor Michael Barr | |
| 25/02/2025 | 1800/1300 | US | Richmond Fed's Tom Barkin | |
| 25/02/2025 | 1800/1300 | * | US | US Treasury Auction Result for 5 Year Note |
| 26/02/2025 | 0030/1130 | *** |  AU | CPI Inflation Monthly |
| 26/02/2025 | 0030/1130 | *** | AU | Quarterly construction work done |
| 26/02/2025 | 0700/0800 | ** |  SE | PPI |
| 26/02/2025 | 0700/0800 | * |  DE | GFK Consumer Climate |
| 26/02/2025 | 0700/1500 | ** |  CN | MNI China Money Market Index (MMI) |
| 26/02/2025 | 0745/0845 | ** |  FR | Consumer Sentiment |
| 26/02/2025 | 0800/0900 | ** |  ES | PPI |
| 26/02/2025 | 1200/0700 | ** | US | MBA Weekly Applications Index |
| 26/02/2025 | - | EU | ECB's Lagarde and Cipollone in G20 FMs and CB Governors meeting | |
| 26/02/2025 | 1330/0830 | * |  CA | Capital and repair expenditure survey |
| 26/02/2025 | 1330/0830 | US | Richmond Fed's Tom Barkin | |
| 26/02/2025 | 1500/1000 | *** | US | New Home Sales |
| 26/02/2025 | 1530/1030 | ** | US | DOE Weekly Crude Oil Stocks |
| 26/02/2025 | 1630/1630 | GB | BOE's Dhingra lecture on Trade fragmentation and monetary policy | |
| 26/02/2025 | 1630/1130 | ** | US | US Treasury Auction Result for 2 Year Floating Rate Note |
| 26/02/2025 | 1700/1200 | US | Atlanta Fed's Raphael Bostic | |
| 26/02/2025 | 1800/1300 | ** | US | US Treasury Auction Result for 7 Year Note |
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