MNI US MARKETS ANALYSIS - UK Retail Sales Point to Weak Consumer Into End-'23

Soft European Data Aids Move Off Lows, Last Day Before FOMC Blackout

• Cash Tsys trade unchanged to 2bp richer, pulling back off overnight lows with assistance from softer than expected German PPI and notably so UK retail sales. 2s10s trades 2bps flatter on the day, with -22.5bp marking the middle to low end of the holiday-shortened week’s range.
• TYH4 sits at 111-09 at typing (+ 02+) having lifted off an earlier low of 111-00, which pushed through both 111-06+ (Jan 5 low) and 111-02+ (50-day EMA) to open 110-16 (Dec 13 low) after the extension of the week's bearish move.
• U.Mich inflation expectations and existing home sales provide data interest whilst Fedspeak is watched on the final day before the FOMC blackout starts tonight. More on Fedspeak in the STIR bullet.
• Data: U.Mich Jan prelim (1000ET), Existing home sales Dec (1000ET), TIC Flows Nov (1600ET)
• Fedspeak: Goolsbee (’25) on CNBC at 0830ET, Daly (’24) on Fox at 1115ET, Barr (voter) bank supervision Q&A at 1300ET, Daly (’24) fireside chat (1615ET)

STIR: Moving Closer To 50% Probability Of March Fed Cut

• Fed Funds implied rates have lifted slightly overnight, consolidating a push to seeing just 14bp of cumulative cuts for March which then builds to 61.5bp for June and 140bp for end-2024.
• U.Mich inflation expectations and existing home sales provide data interest whilst Fedspeak is watched on the final day before the FOMC blackout starts tonight. Daly (’24) and Goolsbee (’25) should see monetary policy relevant discussions in media interviews/a fireside chat, whilst VC for Supervision Barr (voter) speaks on bank regulation.
• Daly last spoke on Dec 18, revealing she was part of the median dot seeing three cuts in 2024 to avoid overtightening, with two-sided risks. Goolsbee has spoken more recently in comments the day after CPI, saying the market may have put the cart before the horse on cuts. He added there’s been a very substantial drop in inflation over the last year but there’s good and bad news on inflation.

OI Suggests Long Cover Provided Most Meaningful Positioning Swing On Thursday

The combination of Thursday's general weakness in Tsy futures and preliminary OI data points to the following positioning swings:

• Short setting: UXY & US futures.
• Long cover: FV, TY & WN futures
• It is hard to be sure when it comes to positioning in TU futures, given the unchanged price status come settlement.
• The largest net DV01 equivalent OI swing came in TY futures, with contained net swings seen elsewhere.
• The net curve OI saw a relatively limited move lower, as the apparent rounds of net long cover outweighed the apparent rounds of modest net long setting.

OI Indicated Mix Of Positioning Swings Across SOFR Strip On Thursday

The combination of Thursday's twist steepening of the SOFR strip and preliminary OI data points to the following positioning swings:

• Whites: It seems that short cover was seen in SFRH4, M4 & U4. It is hard to be sure when it comes to SFRZ3 positioning given the unchanged price status come settlement. Also note that the net OI change in that contract was very modest, meaning that the apparent short cover seen elsewhere was the dominant factor in net pack terms.
• Reds: An apparent mix of short cover (SFRZ4) & long cover (SFRM5 & U5). It is hard to be definitive when it comes to SFRH5 positioning given the unchanged price status come settlement.
• Greens: All contracts seemingly saw shorts set on net.
• Blues: Apparent short setting in SFRH7 managed to more than offset what looked like long cover elsewhere in the pack when it came to the net pack positioning swing.

VVD Senate Vote On Asylum Complicates Gov't Coalition Talks

The voteon 16 January by senators from the centre-right People's Party for Freedom and Democracy (VVD) to back a law that will force Dutch municipalities to take in a certain number of asylum seekers has caused rifts among the several parties looking to form a governing coalition following the Nov '23 elections. The VVD senators voted against the wishes of party leadership, with VVD senate leader Edith Schippers writing to party members about why she and her fellow lawmakers defied party head Dilan Yesilgöz.

• Coalition talks continue between the VVD, Geert Wilders' right-wing nationalist Party for Freedom (PVV), the centrist New Social Contract (NSC), and the agrarian populist Farmer-Citizen Movement (BBB). However, following the passage of the legislation, Wilders statedthat 'a major problem' had arisen due to the liberal turn in the Senate,"
• This comes as the centre-left/environmentalist Labour Party-GreenLeft (PvdA-GL) alliance, which would sit as the main opposition should a right-wing coalition be formed, called on informateurRonald Plasterk to answer to the House of Representatives. Left-leaning outlet BNN VARA reports that according to PvdA-GL leader Frans Timmermans, the parties are already discussing policy options before assurances have been made about respect for the constitution should Wilders lead the gov't.
• The current talks run until end-Feb, when the Parliament expects another report from Plasterk on the progress towards a new gov't.

Downside Risks Pervade in EUR/USD, Despite Recovery into NY Hours

• EUR/USD improves to re-test the overnight high at 1.0890, but clearance here would still leave the pair short of yesterday's best levels (1.0907) as well as the 50-dma resistance of 1.0918. Volumes are faring just below recent averages, with EUR futures ~20% below average for this time of day.
• As a result, the pair remains closer to recent lows, but did find support earlier this week at 1.0846 - a level that will be watched on any return lower.
• Today's Michigan data will be carefully eyed for any shift in inflation expectations, (1y is exp. Unchanged at 3.1%, although gas prices fell further over the first half of January) and any upside surprises could press the USD Index back toward YTD highs.
• Options interest into today's NY cut is tilted lower, with the most sizeable strike at 1.0800 ($2.5bln set to roll off) before a more balanced pipeline over the first half of next week.

FOREX: GBP Fails to Benefit as Retail Sales Post Worst in 3 Years

• The USD Index has faded further off the January high, and back below the 200-dma at 103.466. Moves mirror the retreat in the US 10y yield and the uptick in the e-mini S&P, which has narrowed the gap with first resistance at 4838.00 and the cycle high of 4841.50.
• UK retail sales data came in soft, with December ex auto fuel sales slipping 3.3% on the month vs. Exp. -0.7%. It was a broad-based decline in sales, and the largest monthly fall since January 2021, with evidence that Christmas shopping was shifted forward to take advantage of Black Friday sales in November. GBP/USD is softer as a result, however yesterday's range remains intact for now. This keeps support at 1.2648, with the sell-on-rallies theme holding into the end of the week.
• Scandi currencies trade well on the recovery in equity markets, with NOK and SEK among the best performers in G10. NOK has gained an additional tailwind thanks to the stronger Brent crude futures price puts oil to new weekly highs.
• Canadian retail sales and the prelim Uni of Michigan sentiment release is the focus for Friday trade. Markets expect Michigan inflation expectations to hold steady at 3.1%. Existing home sales is set to follow. Fed speakers to come ahead of the media blackout period include Fed's Goolsbee, Daly and Barr, while ECB's Lagarde appears on a panel.

Expiries for Jan19 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0800(E2.4bln), $1.0850(E1.0bln), $1.0890(E507mln), $1.1050(E1.0bln), $1.1100(E1.1bln)
• USD/JPY: Y145.70($981mln), Y146.00($1.2bln), Y146.50-57($980mln), Y147.00($651mln), Y147.45($533mln), Y148.00($864mln)
• GBP/USD: $1.2650(Gbp727mln)
• AUD/USD: $0.6600(A$673mln), $0.6650(A$585mln)
• USD/CAD: C$1.3335($1.8bln)
• USD/CNY: Cny7.1950($1.3bln)

EQUITIES: E-Mini S&P Extends Recovery From Wednesday's Low

• Eurostoxx 50 futures have this week breached support at the Jan 5 low of 4444.0. The primary trend direction is up and the recent move lower is considered corrective. However, the break below 4444.00 and 4450.70, the 50-day EMA, does suggest scope for an extension of the current bear cycle. A continuation lower would open 4370.00, the Nov 28 low. Initial resistance is 4536.00, the Jan 11 high. A break would highlight a potential reversal.
• S&P E-Minis have recovered from Wednesday’s low and this is seen as a short-term bullish development. Key resistance and the bull trigger is unchanged at 4841.50, the Dec 28 high. A break of this level would resume the uptrend and open 4854.75, the 1.00 projection of the Nov 10 - Dec 1 - 7 price swing. Initial support is at 4746.25, the Jan 17 low. The 50-day EMA, at 4692.39, remains the key support.

COMMODITIES: Short-Term Gains in WTI Futures Considered Corrective

• Trend signals in WTI futures remain bearish and short-term gains are considered corrective. Resistance to watch is $74.28, the 50-day EMA. It has been pierced, a clear break would strengthen a bullish theme and expose $76.18, 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 $67.98, Dec 13 low.
• Gold has recovered from Wednesday’s low. However, this 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.