MNI US MARKETS ANALYSIS - USD Gains as Bond Correction Tips US Yields Above 4.00%

Belly-Led Cheapening Ahead Of Payrolls, ISM Services

• Cash Tsys trade 3-4.5bp cheaper, led by the belly with yields across the curve continuing to retreat from late 2023 lows. Today's move sees firmer clearance of 4% for the 10Y, latest 4.04%.
• Yesterday’s solid labor indicators, with hawkish surprises for ADP employment and jobless claims plus lower Challenger job cuts, have helped along with broader sentiment around what had been more than six Fed rate cuts priced for 2024.
• Today’s payrolls report (MNI Preview) and then 90 minutes later the ISM services report should help set the tone from here, kickstarting the top tier data for the year.
• TYH4 trades close to session lows of 111-18+ as it extends its corrective pullback amidst solid volumes of 345k. Having previously cleared support at 111-31+ (20-day EMA), it now sets its sights on 111-09+ (Dec 7 high).
• Data: Payrolls report Dec (0830ET), ISM Services Dec (1000ET), Factory orders Nov (1000ET)
• Fedspeak: Barkin (’24 voter) with Maryland Bankers’ Association (1330ET incl text), but he's already spoken this week.

Fed Rate Path Continues Push Higher Pre-NFP

• Fed Funds implied rates have pushed to fresh highs since the Dec 13 FOMC decision, rising between 0.5bp (Jan/Mar) and 4.5bp (Dec) from yesterday.
• In part buoyed by some stronger labor indicators of recent days and ahead of today’s payrolls report, it leaves 17bp of cumulative cuts for March, 59bp for June and 134bp for December.
• The latter marks a notable lift from the 160bp late last month.

Annual Revision To Household Survey Seasonality With Friday's Payrolls Report

• Released with Friday's payrolls report, it's possible that some of the recent, particularly large volatility in the household measure of employment, unemployment and the labor force could be reduced by this month’s annual re-estimation of seasonal factors for the most recent five years.
• As Morgan Stanley note: “Household survey data will also include the annual re-estimation of seasonal factors. The changes to  the unemployment rate that result are usually insignificant—perhaps a tenth of a percentage point up or down in a given month, with revisions netting to zero over the year. The report a month from now will include the benchmark revision to payrolls as well as new population controls for the household-survey data.”
• Citi on the potential impact of these revisions: “The repeat of a similar pattern in seasonally adjusted data in 2023 as in 2022 suggests some issues with seasonal adjustment and greater potential for revisions that would smooth through monthly fluctuations. This may imply stronger employment earlier in the year and softer employment in H2, although with a high degree of uncertainty. Revisions to seasonally adjusted 2022 data this time last year were minimal.”

OI Points To Mixed Positioning Swings On SOFR Strip On Thursday

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

• Whites: A mix of long setting (SFRZ3), short setting (SFRH4 & U4) & long cover (SFRM4).
• Reds, Greens & Blues: Long cover dominated in all 3 packs in net terms, with pockets of short setting seen.

OI Points To Light Short Setting In Net Terms On Thursday

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

• Spill over from bearish price action in European/UK peers, the impact of robust U.S. labour market data and continued repricing of expectations re: global central banks, was in the driving seat ahead of today’s NFP & ISM services survey releases.
  
• Positioning saw a light bias towards net short setting in DV01 equivalent terms, with only TU and WN seemingly seeing net long cover on the day.

FOREX: Greenback Gains as Bond Market Correction Tips US 10y North of 4.00%

• The greenback trades well, firmer against all others in G10 early Friday as the correction in bond markets continues. The US 10y yield has crested above the psychological 4.00% mark that had contained prices in Thursday trade, helping aid a tailwind to the greenback.
• Elsewhere, the CNH is modestly outperforming, defying the strong dollar backdrop amid reports that state-owned Chinese banks are swapping CNY for USD in the domestic market, to sell in spot and pressure the USD/CNY rate across the week. USD/CNH has slipped off the overnight high of 7.1803 ahead of the NY crossover, in contrast with the likes of EUR/USD, which remain under pressure.
• Eurozone CPI came in inline with expectations, doing little to shift market thinking. ECB rate cut pricing across 2024 continues to oscillate just below 150bps for the calendar year - a factor that's kept EUR/GBP offered and pressed to new '24 pullback lows.
• GBP is mixed, but is holding ground against the AUD. GBP/AUD is higher for a third session, and is nearing the first few layers of key resistance at 1.9008 and 1.9046, the 50- and 200-dmas respectively.
• Focus Friday rests on the nonfarm payrolls release, with markets expecting the US to have added 175k jobs over the month of December, tipping the unemployment rate higher by 0.1ppts to 3.8%. Both AHE and the unemployment rate are seen marginally dovish vs November, but exaggerated by rounding and with primary dealer analysts tilted to a small hawkish surprise across both categories.

Expiries for Jan05 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0937-42(E569mln), $1.1075(E1.1bln)
  
• USD/JPY: Y142.00-15($524mln), Y143.00($522mln), Y143.80-00($531mln)
  
• USD/CAD: C$1.3300-10($594mln)

EGBS: Weakness Persists Across the Board; EZ December Flash Inflation In Line

Core/semi-core EGBs have continued yesterday's downward momentum, printing at intraday lows at typing. An inline Eurozone HICP flash release for December, alongside weaker-than-expected German retail sales this morning proved insufficient to halt the latest selling pressure.

• Bund and OAT futures trade ~70 ticks lower on the day, while German and French cash curves have bear flattened. Price action coincides with a further pricing-out of central bank easing this year, as ECB-dated OIS now prices below 150bps of rate cuts through '24 for the first time since the Dec13 Fed.
• Periphery spreads to Bunds are mixed, with the 10Y BTP/Bund spread -0.6bps tighter on the day and Spanish/Portuguese spreads a little wider. Greece once again underperforms, with the GGB/Bund spread over 2bps wider on the day, having widened over 10bps this week.
• The remainder of today's docket is highlighted by the US labour market release at 1330GMT. Markets expect the US to have added 175k jobs over the month of December, tipping the unemployment rate higher by 0.1ppts to 3.8%.

EQUITIES: E-Mini S&P Pierces First Notable Support at 20-Day EMA

• A bullish theme in Eurostoxx 50 futures remains intact and weakness into the Wednesday close 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 at the 20-day EMA has been pierced, turning focus to the 50-day EMA of 4436.30.
• The pullback off last week’s highs in E-mini S&P has now cracked first material support at the 20-day EMA of 4744.58, with prices stabilising above the mark headed through the Thursday open. While the level has been pierced on an intraday basis, a close below will be needed to accelerate any reversal, keeping the medium-term view more positive. Last week’s fresh trend highs reinforce current conditions, with sights on 4854.75 next, a Fibonacci projection.

COMMODITIES: Gains in WTI Futures Continue to Look Corrective, Price Below 50-Day EMA

• Bearish conditions in WTI futures remain intact and recent gains at these levels continue to look 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.