MNI US MARKETS ANALYSIS - USD Drifts as Markets Look Toward Festive Period

US TSYS: Treasuries Drift Richer On Very Light Volumes Pre-PCE

• Cash Tsys are close to session highs, sitting 2-3bps richer, having more than retraced an initial overnight cheapening with some support from negative UK GDP revisions appearing to outweigh stronger retail sales data.
• 2s have remained within yesterday’s range throughout whilst subsequent benchmarks had briefly drifted lower but are now back firmly within it.
• TYH4 trades close to the day’s high of 112-28+ on particularly low volumes of just 150k. The trend needle still points north, near initial resistance at yesterday’s high of 113-04+ after which lies 113-12+ (Fibo projection of Oct-Nov price swing).
• Today’s docket is heavily data-focused, led by the monthly PCE report for Nov at 0830ET after yesterday’s Q3 data saw core PCE inflation revised down sharply from 2.3% to 2.0% annualized in the third reading. Recall Chair Powell saw it at 3.1% Y/Y in Nov and the median FOMC participant looks for 3.2% in 4Q23.
• Other releases: Preliminary durable goods Nov (0830ET), U.Mich consumer survey Dec final (1000ET) New home sales Nov (1000ET), Kansas City Services Dec (1100ET)

STIR: Roughly Pricing 25bp Cut Per Meeting Through Mar-Sept

• Fed Funds implied rates have ebbed lower overnight to broadly price a 25bp cut per meeting through March-September.
• Cumulative cuts are seen with 24bp for March, 51bp for May, 78bp for June, 102bp for July and 125bp for September, before 159bp by end-2024.
• There is no scheduled Fedspeak again today, with primary focus on the monthly PCE release for November after yesterday’s surprisingly large downward revisions to Q3.

OI Points To Mixed Positioning Swings On Thursday

The combination of preliminary open interest data and Thursday’s twist steepening of the Tsy futures curve points to the following net positioning swings:

• Short cover: TU futures
• Short setting: TY, US & WN futures.
• Long cover: FV & UXY futures.
• DV01 adjusted net positioning moves were generally contained on the day, with the most notable swings coming via the apparent short setting in TY & WN futures.

OI Points To Mix Of Long Setting & Short Cover Through SOFR Greens On Thursday

The combination of preliminary OI data and yesterday's twist steepening on the SOFR strip points to a general mix of net long setting and short cover through the greens (long setting for whites and reds, short cover in the greens), while the blues saw limited net OI change on a pack basis.

• Note that net OI swings were relatively limited on the day.

MNI GLOBAL MACRO OUTLOOK - What Could Go Wrong?

MNI's December 2023 Global Macro Outlook meeting surveyed the consensus outlook for the year ahead - PDF available here

• Market pricing overwhelmingly expects a “soft landing” in 2024; analysts agree but less so
• Global growth is seen below potential in 2024, with the US and Eurozone at stall speed
• Inflation is set to remain above 2% in most developed countries by well down and closed to target by 2025
• Modest fiscal drag is seen on 2024 growth vs 2023; historically low unemployment rates are seen ticking higher
• Manufacturing appears to be bottoming out, but services will be the key to 2024 growth and inflation outcomes
• Amid large-scale central bank rate cuts in 2024, consensus is for US dollar weakness

MNI POLITICAL RISK ANALYSIS - Political Event Calendar 2024

• In our Political Risk calendar for 2024 we include details on the major political events scheduled to take place in developed and major emerging markets over the course of the next 12 months. We only include those events that have a set date or period in which they will take place.
• Moreover, in a year that is already packed with major market-moving elections, summits, bilaterals, and conferences, there are a number of potential event that are seen as likely to take place but have no confirmed date, such as snap elections in Japan or the United Kingdom.
• The plethora of dates outlined in the table below, combined with unconfirmed but expected events; ongoing conflicts in Ukraine, the Middle East and elsewhere; continued political, economic, and resource competition between global powers; and the ever-present prospect of ‘black swan’ events will ensure that political risks continue to have a significant impact on financial and commodity markets through 2024.
• Full PDF here.

FOREX: USD Index Weakness Puts Greenback at New Multi-month Lows

• The USD Index's weakness into NY hours has put the currency at the lowest levels since late July, mirroring the pullback in the bellow of the US yield curve. Greenback weakness is most notable against NOK and GBP, both of which trade firmer on the session.
• EUR/USD has matched yesterday's high, led by the slippage in Treasury yields mentioned above. Should momentum pick up on any break of the 1.1013 level, the next upside level crosses at 1.1017 - the Nov 29 high and bull trigger. Clearance here puts the pair at highest level since mid-August.
• The brings the more notable expiries for today's cut into play, with E699mln rolling off at the $1.1020 strike - which could come into focus should today's PCE/durable goods/new home sales data fail to move prices meaningfully.
• Recall the solid equity rally this month may prompt month-end FX rebalancing flows to be USD negative - an effect that could be brought forward given the staggered nature of market opening/closings across the next week or so.
• EUR/GBP slippage followed a mixed set of UK data releases, with retail sales topping expectations with growth of 1.3% on the month vs. Exp. 0.4%. GDP, however, fared more poorly - with Q3 growth revised lower to -0.1%. Another negative quarter would tip the economy into recession.
• November’s PCE data headlines the NY docket ahead of the weekend, with ~23.5bp of cuts priced into the Fed funds futures strip through the March FOMC and a cumulative ~157bp of cuts showing through ’24.
• Note that final UoM sentiment survey prints, preliminary durable goods data and new home sales readings will also cross in NY hours.

FX OPTIONS: Expiries for Dec22 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0945-60(E2.2bln)
• USD/JPY: Y141.00($1.7bln), Y141.50($500mln), Y142.00($1.6bln), Y143.00($1.1bln), Y143.50-55($1.2bln), Y144.00($1.2bln), Y144.45-50($1.4bln), Y145.00($2.7bln)
• AUD/USD: $0.6625(A$768mln), $0.6650(A$1.7bln), $0.6775(A$1.5bln)
• USD/CAD: C$1.3500($1.3bln)
• USD/CNY: Cny7.00($1.1bln), Cny7.10($700mln)

BONDS: Early Pressure Reversed, Generally a Little Firmer on the Day

Late NY/Asia Tsy & JGB weakness helped bias Bund futures lower before the old Eurex open. UK data and a modest downtick for European equities seems to have helped stabilise wider core global FI markets since, with some light richening now seen on core bond curves. Tsy and Bund futures had a limited look below Thursday lows in Asia, before bouncing.

• Cash Tsy yields run 2-3bp lower across the curve, with TYH4 just off the top of a 0-10+ range. PCE data presents the major risk event ahead of the elongated Christmas weekend, while durable goods, new home sales and final UoM sentiment data will also be eyed during NY hours. Fed Funds futures show ~158bp of cuts through ’24, with ~23.5bp of easing priced through the end of the Mar ’24 FOMC.
• German yields are little changed to 1.5bp lower on the day, with a light bull steepening move seen on the curve. Bund futures have reversed overnight losses and now sit a handful of ticks above unchanged levels. EGB spreads vs. Bunds are little changed on the day generally sitting within -/+1bp of yesterday’s closing levels.
• Mixed UK economic data presented two-way trade at the London open, but it seems that the negative revisions in the final Q3 GDP prints had more meaningful market feedthrough than the firmer-than-expected retail sales data. Cash yields are 1-3bp lower on the day, with some bull steepening seen. Futures are +25, sticking within yesterday’s range thus far. BoE-dated OIS hovers just off recent dovish extremes, showing ~145bp of cuts for ’24.
• We have flagged closing times/Christmas holiday operating hours for various exchanges elsewhere.

EQUITIES: Bullish Theme in E-Mini S&P Intact, Wednesday's Sell-Off Considered Corrective

• A bullish theme in Eurostoxx 50 futures remains intact and the latest pullback appears to be a correction. Recent gains confirmed, once again, a resumption of the uptrend and this has maintained the bullish price sequence of higher highs and higher lows. Moving average studies are in a bull-mode position too, signalling a rising cycle. The focus is on 4636.70, a long-term Fibonacci retracement. Support to watch is at 4509.10, the 20-day EMA.
• A bullish theme in S&P e-minis remains intact and Wednesday’s abrupt sell-off appears to be a correction. This week’s fresh trend highs, confirm once again a resumption of the uptrend that started Oct 27. The contract has 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 4692.70, the 20-day EMA.

COMMODITIES: Gold Moving Average Studies Remain in Bull-Mode Position

• Bearish conditions in WTI futures remain intact and recent gains still appear to be a correction. Resistance to watch is $75.98, the 50-day EMA. A clear break of this hurdle 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 bear trigger lies at $67.98, the Dec 13 low. A break of this level would open $65.24, the May 4 low and a key support.
• The Dec 13 reversal in Gold signals the end of the recent Dec 4 - 13 corrective pullback and highlights a bullish theme. Moving average studies are in a bull-mode position too, highlighting an uptrend. A continuation of gains would signal scope for a climb towards key resistance and the Dec 4 all-time high of $2135.4. A break of this level would resume the primary bull trend. Initial firm support lies at $1973.2, the Dec 13 low.