MNI US MARKETS ANALYSIS - US Yields Extend Recovery, Undermining Equities

US TSYS: Further Sell-Off Nears Initial Support Ahead Of Important Session

• Cash Tsys are off overnight lows but still trade 2.5-4.5bp cheaper, with $ supply from Indonesia and Hungary adding to yesterday’s supply-induced pressure. 10s stopped short of testing 4% earlier with a high of 3.986%.
• TYH4 at 112-03+ (-06+) trades close to earlier lows of 112-00. The corrective pullback has for now stopped just shy of initial technical support at 111-31+ (Dec 14 low) closely followed by 111-29+ (20-day EMA).
• The continuation of yesterday’s cheapening pressure comes ahead of the closely watched FOMC minutes from the Dec 12-13 meeting, which could help guide market expectations around the timing of a first cut having pulled back from being fully priced for the March meeting. JOLTS and ISM mfg also provide notable data inputs.
• Fed: Barkin ’24 voter with text (0830ET), FOMC minutes for Dec 12-13 meeting (1400ET)
• Data: Weekly MBA mortgage data (0700ET), ISM mfg Dec (1000ET), JOLTS Nov (1000ET)
• Bill issuance: US Tsy $56B 17W Bill auction (1130ET)

2024 Kicks Off w/ $36.8B Corporate Debt Issuance

• Date $MM Issuer (Priced *, Launch #)
• 1/3 $Benchmark World Bank 7Y SOFR+55
• 1/3 $Benchmark Hungary 12Y +200a
• 1/3 $Benchmark Credit Agricole 6NC5 +170a, 11NC10 +260a
• 1/3 $Benchmark Hyundai 3Y +150a, 3Y SOFR, 5Y +170a, 7Y +185a
• $36.8B Priced Tuesday, surpassing 2022's year opener of $33.5B
• 1/2 $7.5B *United Mexican States $1B 5Y +115, $4B 12Y +215, $2.5B 30Y +235
• 1/2 $4B *UBS $1.75B 6NC5 +152, $2.25B 11NC10 +177 (6NC5 SOFR leg dropped)
• 1/2 $3.8B *Lloyds $1.5B 4NC3 +137.5, $300M 4NC3 SOFR+158, $2B 11NC10 +175
• 1/2 $3B *Toyota $900M 2Y +50, $500M 2Y SOFR+65, $800M 5Y +75, $800M 10Y +87.5
• 1/2 $2.5B *Ford Motors $1.5B 3Y +175, $1B 7Y +215 (3Y SOFR leg dropped)
• 1/2 $2.25B *Rabobank $1B 2Y +55, $750M 2Y SOFR+71, $500M 5Y +90
• 1/2 $2.1B *Williams Cos $1.1B 5Y +102, $1B 10Y +122
• 1/2 $2B *Enterprise Products $1B each 3Y +55, 10Y +95
• 1/2 $1.75B *BNP Paribas 6NC5 +125
• 1/2 $1.75B *John Deere $750M 3Y +45, $1B 3Y SOFR, 5Y +62.5
• 1/2 $1.3B *MetLife $750M 5Y +93, $550M 10Y +113
• 1/2 $1.1B *Duke Energy $550M each: 3Y +7, 5Y +95
• 1/2 $1B *Virginia Electric $500M each 10Y +115, 30Y +127
• 1/2 $1B *Santander Holdings 6NC5 +225
• 1/2 $650M *PPL Electric 10Y +92
• 1/2 $600M *Consumers Energy 5Y +73
• 1/2 $500M *Caterpillar 3Y +45

STIR FUTURES: Fed Rate Path Pushes Higher Ahead Of Minutes & Notable Data

• Fed Funds implied rates are off overnight highs but have still pushed higher in a move that could dent the impact of any relatively hawkish content in today’s FOMC minutes.
• Still to come before then, Fedspeak from Barkin (’24 voter) at 0830ET including text before ISM mfg and JOLTS both at 1000ET.
• There is 20.5bp of cumulative cuts priced for March, 69bp for June and 147bp for Dec. March implied rates are at the highest since Dec 19/20 whilst the Dec implied rate of 3.86% is up 10bps from Friday’s close.

OI Points To Short Setting Dominating On Tuesday

The combination of yesterday's weakness in Tsy futures and preliminary OI data points to a mix of short setting and long cover on Tuesday.

• The only round of apparent long cover was seemingly seen in FV futures, with the net DV01 equivalent swing across the curve pointing to relatively large short setting.
• This suggests that those willing to challenge consensus views i.e. long bonds/lower yields used the heavy start to '24 IG supply as a likely entry trigger across most of the curve..

OI Points To Short Setting On SOFR Strip On Tuesday

The combination of yesterday's weakness on the SOFR strip and preliminary OI data points to short setting as the dominant positioning swing factor in the initial rounds of '24 trading. Weakness in wider core global FI markets and a reassessment of the degree of '24 easing priced into major STIR curves fed into the move.

• The reds seemed to see the largest round of net short setting in pack terms, with pockets of long cover (of varying sizes) seen across contracts in all packs through the blues.

Hezbollah-Linked Paper: Israel Crossed Nasrallah's Line w/Hamas Hit

Israel's Yedioth Ahronoth reportingcomments from Lebanese outlet Al Akhbar claiming that the assassination of senior Hamas figure Saleh al-Arouri in Beirut on 2 Jan 'crossed the red line' for the leader of Hezbollah, risking an escalation in tensions. Al Akbar is seen as being closely linked to Hezbollah, and therefore potentially reflective of the mood within the group's leadership.

• Al Akber: "Hours before Hezbollah commemorated the anniversary of the assassination of the former Quds Force commander, Qasem Soleimani, Israel decided to violate the rules of engagement with Lebanon. It crossed the red line set by Hezbollah's Secretary-General Hassan Nasrallah a few months ago and targeted Saleh al-Arouri in an airstrike in the Dahieh district of Beirut."
• As MNI noted earlier (see 0903GMT bullet), Nasrallah is due to deliver a televised address later today at around 1800 local time (1100ET, 1600GMT).

EUROPE ISSUANCE UPDATE:

• E4.5bln (E3.562bln allotted) of the 3.10% Dec-25 Schatz. Avg yield 2.44% (bid-to-cover 1.44x). A decent Schatz auction despite both the bid-to-offer and bid-to-cover falling versus December's auction.
• The lowest accepted price of 101.220 was close to the day's pre-auction high (which was 101.221) with the average price at the auction of 101.223 exceeding today's secondary market pricing. This has helpe1d the 3.10% Dec-25 Schatz move to a new day's high of 101.231 following the release of the results.

Portugal has released a mandate for a 10-year OT in the "near future". MNI looks for a E3-4bln issue size with the transaction likely tomorrow.

The EFSF has sent an RFP to banks. MNI looks for a syndicated transaction on Monday 8 January.

Slovenia 10-year syndication:
Books in excess of E7.6bln (MNI expects issue size of E1.0-1.5bln). Spread set at MS+58bp.

FOREX: Corrective USD Strength Persists

• The corrective bounce in the USD persists early Wednesday, putting the USD higher against most others in G10. The USD Index has now recouped close to 1.75% off the late December low, aided by the bounce in US yields, which are led by a 5bps rally in the very long-end. Moves are deemed corrective at these levels, with most major pairs including GBP/USD, EUR/USD and others yet to encounter meaningful support that would trigger a broader reversal.
• The subsequent USD/JPY rally has been the most meaningful move in G10, helping the pair narrow the gap with the 200-dma of 143.18. Below here, the bounce is seen as corrective as the oversold conditions from late '23 unwinds. 142.85 - the late Dec high - has contained prices so far, making a longer-lasting reversal unlikely below 143.00.
• GBP/USD has stabilised just above yesterday's lows, but the bounce looks lacking given USD strength. Similarly, EUR/GBP weakness is yet to encounter yesterday's lows and the support undercutting at the 0.8644 100-dma.
• Focus for the Wednesday session turns to December Manufacturing ISM, for which markets expect the print to improve slightly to 47.1 from 46.7, but remain below the key 50.0 level. JOLTS jobs numbers are also set for release ahead of the FOMC minutes after the European close. The first Fedspeak of the year is also due, as Fed's Barkin addresses the Raleigh chamber of commerce on the economic outlook.

FX OPTIONS: Expiries for Jan03 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0865(E640mln), $1.0950(E519mln), $1.1000(E861mln), $1.1075-90(E1.8bln), $1.1100-10(E1.2bln)
• USD/CAD: C$1.3330-40($1.7bln)

EGBS: Lower on the Day Following Schatz Supply and Issuance Announcements

Core/semi-core EGBs are off intraday lows but remain weaker on the day with Schatz supply alongside sovereign/corporate issuance announcements weighing.

• Bunds sit 10 ticks lower at 136.79, having traded in a 49 tick range today. Yesterday's low of 136.25 is currently deemed as corrective in nature, with the broader uptrend still intact. OATs are 19 ticks lower at 131.08 at typing.
• The German cash curve has lightly twist steepened, with 10Y Bund yields up 0.1bp at 2.067% and Schatz yields down -0.3bp at 2.444%. The French curve has bear steepened.
• Today's macro slate has been highlighted by German and Spanish labour market data, neither of which were market movers. The German unemployment claims change for December was less than expected, while the unemployment claims rate ticked higher to 5.9% (vs a revised 5.8% prior).
• Periphery spreads to Bunds have widened, with Italy and Greece seeing the largest moves. The 10-Yr BTP/Bund spread is 3.7bps wider at 168bps, after posting below 160bps for the first time since July in late December.
• The remainder of today's docket is limited, with US jobs/ISM data likely to gain most traction.

EQUITIES: Trend in E-Mini S&P Bullish Despite Tuesday's Slight Dip

• A bullish theme in Eurostoxx 50 futures remains intact and recent weakness appears to be a correction. Moving average studies are in a bull-mode position, signalling a rising trend cycle. Furthermore, recent gains confirmed a resumption of the uptrend and this has maintained the bullish price sequence of higher highs and higher lows. The focus is on 4636.70, a L/T Fibonacci retracement. Support to watch is 4520.90, the 20-day EMA - a level pierced by the Tuesday low.
• A bullish theme in S&P e-minis remains intact and last week’s fresh trend highs reinforce current conditions. The move higher confirms the resumption of the uptrend that started Oct 27. The contract has also recently cleared resistance at 4738.50, the Jul 27 high, reinforcing current positive trend conditions. Sights are on 4854.75 next, a Fibonacci projection. On the downside, initial firm support lies at 4736.37, the 20-day EMA, a level untroubled by the pullback from the recent high this week.

COMMODITIES: WTI Futures Narrow Gap to Support at $67.98, the Dec 13 Low

• Bearish conditions in WTI futures remain intact and recent gains look to have been confirmed as corrective. Resistance to watch is $75.64, the 50-day EMA. The average was briefly pierced last week. A clear break of it would strengthen a bullish theme and highlight a stronger reversal. For bears, moving average studies are in a bear-mode position, highlighting a downtrend. The trigger for a resumption of the downtrend lies at $67.98, the Dec 13 low.
• The Dec 13 reversal in Gold and the subsequent move higher points to the end of the Dec 4 - 13 corrective pullback. Last week’s move also highlights a bullish theme and note that moving average studies are in a bull-mode position too, reflecting an uptrend. A continuation higher has opened $2097.1, 76.4% of the Dec 4 - 13 bear leg, ahead of key resistance and the Dec 4 all-time high of $2135.4. Key support lies at $1973.2, the Dec 13 low.