MNI US MARKETS ANALYSIS - USD Index Fades Amid Lighter Newsflow

US TSYS: Bull Steeper In A Light Paring Of Retail Sales Inspired Lows

• Cash Tsys trade 0.5-3.5bp richer, with the front end leading the rally for a modest bull steepening after yesterday’s significant bear flattening. It leaves 2s10s at -23.5bps, vs yesterday’s low of -26.7bps having pulled back from recent highs earlier in the week of -15bps.
• TYH4 at 111-17+ is off the earlier high of 111-21 but has nevertheless drifted higher from yesterday’s retail sales inspired low of 111-09. Support is watched, seen at 111-06+ (Jan 5 low) as a bearish indicator. Volumes are solid at 340k.
• Weekly claims are in focus for data, with initial claims just about linking with a payrolls reference week, with perhaps added focus on the Philly Fed manufacturing index after the particularly large slump in the Empire on Tue. The reaction to retail sales suggests continued sensitivity to any surprises in data across the board.
• Data: Weekly claims (0830ET), Building permits/housing starts Dec (0830ET), Philly Fed mfg Jan (0830ET)
• Fedspeak: Bostic (’24 voter) on economic outlook at 0730ET (brief remarks, Q&A) and 1205ET (text, no Q&A)
• Note/bond issuance: US Tsy $18B 10Y TIPS (1300ET)
• Bills issuance: US Tsy $85B 4W, $85B 8W Bill auctions (1130ET)

STIR FUTURES: Fed Rate Path Cools From Post Retail Sales Highs, Bostic To Remain Hawkish?

• Fed Funds implied rates have pulled back a little further from yesterday’s highs, with March having fully unwound the retail sales boost and end-2024 pricing unwinding about half of it.
• Cumulative cuts: 16bp for March, 64bp for June and 144bp for Dec.
• The implied 3.89% effective rate for end-2024 is down from 3.95% seen just before the Fed’s Beige Book, but is still 22bps higher than pre-Waller.
• The Beige Book noted little or no change in economic activity since, with nearly all districts citing one or more signs of a cooling labor market and some increased consumer sensitivity to prices.
• Bostic (’24) has two appearances on the economic outlook today, with brief remarks and Q&A at 0730ET before prepared text but no Q&A at 1205ET. He has recently seen fewer cuts than the FOMC median, starting in Q3 with 50bps in 2024 (median 75bp), and on Sunday told the FT he expects “to see much slower progression on inflation moving forward”.

Long Cover Seemed To Dominate During Wednesday's Sell Off

The combination of yesterday's sell off (promoted by UK CPI, U.S. retail sales and ECB speak) and preliminary OI data points to long cover in TU, TY. UXY & WN futures, while FV & US futures appeared to see modest net short setting.

• TY futures saw the largest swing in DV01 equivalent terms, while the net impact of the previously flagged rounds of long cover comfortably outweighed the more modest rounds of net short setting in net curve terms.

OI Points To Mix Of SOFR Short Setting & Long Cover On Wednesday

The combination of yesterday's sell off on the SOFR strip and preliminary OI data point to the following position swings

• Whites: Apparent rounds of net short setting in SFRM4 & U4 outweighed apparent net long cover in SFRZ3 & SFRH4.
• Reds: Apparent net short setting dominated in net pack terms, with only seeming long cover in SFRZ4 breaking the wider theme seen in the pack.
• Greens: What seemed to be long cover in SFRH6 & U6 seemed to outweigh apparent net short setting in SFRZ5 & M6 when it came to net pack terms.
• Blues: Net long cover seemed to dominate in pack terms, with only SFRM7 breaking that theme (apparent modest net short setting in that contract).
• UK CPI, U.S. retail sales and ECB speak provided the key fundamental inputs on Wednesday, pressuring bond and core global STIR markets.

JAPAN: PM Considering Disbanding Kishida Faction In LDP-FNN

FNN reporting that PM Fumio Kishida is considering the disbanding of the political faction that bears his name within the governing Liberal Democratic Party (LDP). MNI noted earlier (see 0927GMT bullet) that the party was under notable pressure amid prosecutors preparing charges against the treasurers of three LDP factions for alleged violations of political funding regulations, including the Kishida faction.

• Kishida said, when responding to reporters' questions on the future of the his former faction, `If it would contribute to restoring trust in politics, we are considering disbanding the Kochi-kai (Kishida faction)."
• The dissolution of his faction would likely be seen as an attempt to 'get out in front' of the story that has dogged the governing party for some time.
• Japan Times notes that Kishida and the LDP could seek to run out the clock on prosecutors efforts, reporting that "A week ahead of the opening of what is set to be a particularly heated session of parliament, an ongoing investigation into a slush funds scandal entangling the upper echelons of the ruling Liberal Democratic Party is drawing to a close, with all party heavyweights largely unscathed."
• Adds that "...time is running out for investigators.The Constitution sets out that lawmakers can’t be arrested during a session of parliament. The assembly convenes Jan. 26 and draws to a close five months later on June 23."

EUROPE ISSUANCE UPDATE:

• E2.293bln of the 2.50% May-27 Bono. Avg yield 2.799% (bid-to-cover 1.63x)
• E1.649bln of the 1.25% Oct-30 Obli. Avg yield 2.954% (bid-to-cover 1.77x)
• E2.323bln of the 3.90% Jul-39 Obli. Avg yield 3.63% (bid-to-cover 1.46x)

• E5.616bln of the 2.50% Sep-27 OAT. Avg yield 2.56% (bid-to-cover 2.05x)
  
• E4.03bln of the 2.75% Feb-29 OAT. Avg yield 2.55% (bid-to-cover 2.14x)
• E2.353bln of the 0.50% May-29 OAT. Avg yield 2.53% (bid-to-cover 3.01x)
• E596mln of the 3.40% Jul-29 OATi. Avg yield 0.49% (bid-to-cover 2.71x)
• E561mln of the 0.10% Mar-36 OATi. Avg yield 0.76% (bid-to-cover 2.89x)
• E463mln of the 0.60% Jul-34 OATei. Avg yield 0.67% (bid-to-cover 2.89x)
• E378mln of the 0.10% Jul-38 Green OATei. Avg yield 0.75% (bid-to-cover 2.94x)

• New 10-year Feb-34 RAGB: Spread set at MS+22bps (guidance was MS+23bps area). Books in excess of E13bln (inc E2.6bln JLM interest)
• E1bn WNG (excl. issuer retention) of the 5-year May-29 Green RAGB tap: Spread set at MS-5bps (guidance was MS-3bps area). Books in excess of E25bln (inc E1.95bln JLM interest)
• E1bn WNG (excl. issuer retention) of the 25-year May-49 Green RAGB tap: Spread set at MS+56bps (guidance was MS+59 bps area). Books in excess of E25bln (inc E3.4255bln JLM interest).

FOREX: Greenback Fades Off Cycle Best, Aiding AUD, JPY Off Recent Lows

• The greenback has faded off yesterday's cycle high, with the Wednesday London close marking the near-term top in the USD Index at 103.692. Newsflow and consequential datapoints have been few and far between across Asia-Pac trade, leaving markets to drift somewhat into Thursday trade.
• This leaves the dollar among the poorest performers on an intraday basis, although off lows, while downtrodden AUD and JPY currencies are posting a corrective bounce.
• Australian jobs data may be restraining the recovery, however, after December data showed a surprise decline in full time employment over the month, but the pullback to 0.6526 in AUD/USD proved short-lived, with the pair recovering back above 0.6550 in short time.
• USD/JPY has reversed off yesterday's recovery high at 148.52, but the Wednesday lows remain intact, while the 100-dma could provide further support at 147.42.
• Focus for the remainder of the Thursday session rests on the weekly US jobless claims data as well as December housing starts and building permits numbers. Central bank speakers include Fed's Bostic and ECB's Lagarde ahead of both banks' pre-decision media blackout periods that kick in this weekend.

FX OPTIONS: Expiries for Jan18 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0740-52(E1.0bln), $1.0880-85(E743mln), $1.0915-20(E613mln), $1.0975-90(E2.0bln), $1.1065-75(E1.8bln)
• USD/JPY: Y143.90-05($1.5bln), Y145.00($1.5bln), Y148.00-05($770mln)
• GBP/USD: $1.2600(Gbp552mln), $1.2640-60(Gbp746mln)
• AUD/USD: $0.6490(A$578mln), $0.6650(A$1.1bln), $0.6735-50(A$1.2bln)
• NZD/USD: $0.6200(N$867mln)
• USD/CAD: C$1.3380-90($1.1bln)
• USD/CNY: Cny7.2000($2.2bln)

EGBS: Remain Close to Yesterday's Lows as Supply Weighs

Core/semi-core EGBs have failed to meaningfully recover from yesterday's lows, as supply from Spain, France and Austria weighed on the space this morning.

• Bunds are up 7 ticks at typing, with yesterday's low of 134.15 the first support. OATs perform a touch better in spite of today's domestic supply, currently 11 ticks higher at 128.82.
• Headline flow has otherwise been light, with no market-moving domestic data scheduled today.
• The German and French cash curves have twist steepened, while periphery spreads to Bunds are narrower. The 10-year BTP/Bund spread has fallen back below 160bps, currently 1.8bps tighter at 158.3bps.
• The account of the ECB's December meeting will be released at 1230 GMT/1330 CET, while President Lagarde speaks in Davos at 1515GMT/1615 CET (though major deviations from yesterday's rhetoric are not expected).

‘National Team’ Buying Speculation As Mainland Shares See Sharp Afternoon Turnaround

The CSI 300 and Hang Seng finished 1.4% & 0.8% higher on Thursday, respectively.

• Still, that doesn’t tell the entire story, with a sharp turnaround in mainland shares witnessed during the afternoon. Both the CSI 300 and Hang Seng registered fresh ’24 lows earlier in the day, with the former down 1.8% at one point.
• During the rally we noted that these sort of afternoon turnarounds often generate speculation re: potential state-backed (‘national team’) buying given historical tendencies/precedent, particularly when news flow is light.
• Some ETFs (a favoured channel of the ‘national team’) saw notable volume spikes, adding credence to this idea.
• A reminder that state-backed and regulatory entities have flagged the potential for/their intentions re: supporting the equity market in recent weeks/months.
• International investors didn’t show any meaningful participation in the rally in net terms, with modest net outflows seen via the northbound legs of the HK-China Stock Connect schemes on the day (~CNY0.7bn), although that measure ticked away from session extremes during the rally.
• Yesterday saw those links provide the largest net daily outflow seen since Oct ’22.
• Wires have flagged structured product flow-related pressure re: the recent sell off in the Hang Seng, a reminder that various desks had already earmarked option-linked flow as a key driver of the sell off.
• Economic worry and a light touch on immediate policy support (MLF rate cut disappointment and no meaningful signals from Premier Li) also continued to factor in to the early sell off.
• More granularly, renewable energy names did well, with a focus on potential growth drivers.
• Baidu benefitted from a brokerage comment.

EQUITIES: Recent Move Lower in Eurostoxx 50 Futures Deemed Technically Corrective

• 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, suggests scope for an extension of the current bear cycle. This has opened 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 are trading lower this week but - for now - price remains above the Jan 5 low. 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, a Fibonacci projection. Support at the 20-day EMA of 4773.33 has been pierced. A clear break of this average would strengthen a short-term bearish threat and open the 50-day EMA, at 4687.54.

COMMODITIES: Weakness in Gold Strengthens a Bearish Threat

• Trend signals in WTI futures remain bearish and the pullback from last Friday’s high reinforces this theme. Resistance to watch is $74.29, the 50-day EMA. It has recently 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 pulled back from its most recent highs and the yellow metal traded lower yesterday. The 50-day EMA has been cleared and support at $2013.4, the Jan 11 low, has also been breached. This strengthens a bearish threat and exposes 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.