Highlights:
- Consensus sees core CPI inflation decelerating slightly to between 0.2 to 0.3% M/M in December.
- JPY is outperforming on Wednesday, as lower core yields and BOJ rhetoric provide a boost for the yen.
- All focus will be on the US CPI release as the near-term driver for US yields and associated greenback sentiment.
US TSYS: Modestly Firmer Ahead of CPI
- Treasuries are modestly richer across the curve this morning after yesterday’s twist steepening, with US CPI set to headline the docket. Away from the regular calendar, today also sees a heavy schedule for bank earnings.
- Cash yields are 1.5-2.7bp lower on the day, with declines led by 7s.
- 2s10s sits at 41.6bp (-1.2bps), off yesterday’s 43.2bps that came within less than 0.5bp of recent highs.
- TYH5 has lifted to 107-15+ (+04) but has remained within yesterday’s range throughout, on reasonable cumulative volumes for a pre-CPI overnight session of 285k.
- The trend structure remains bearish with support at 107-06 (Jan 13 low) whilst a softer CPI print could see greater attention on resistance at 108-17+ (20-day EMA).
- Data: MBA mortgages (0700ET), CPI Dec (0830ET), Real av earnings Dec (0830ET), Empire mfg Jan (0830ET)
- Fedspeak: Barkin (0920ET), Kashkari (1000ET), Williams (1100ET), Goolsbee (1200ET), Fed Beige Book (1400ET) – see STIR bullet.
- Bill issuance: US Tsy $64B 17W bill auction
US TSY FUTURES: Long Setting in TY Futures Seen Tuesday
Net long setting in TY futures provided the only positioning swing of note during Tuesday’s uptick, with modest rounds of net short cover and long setting seen elsewhere on the curve.
| 14-Jan-25 | 13-Jan-25 | Daily OI Change | OI DV01 Equivalent Change ($) |
TU | 4,302,592 | 4,309,031 | -6,439 | -245,794 |
FV | 6,120,366 | 6,133,700 | -13,334 | -552,773 |
TY | 4,702,565 | 4,657,700 | +44,865 | +2,844,734 |
UXY | 2,219,579 | 2,225,317 | -5,738 | -493,088 |
US | 1,937,292 | 1,937,409 | -117 | -14,216 |
WN | 1,799,702 | 1,796,761 | +2,941 | +534,732 |
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| Total | +22,178 | +2,073,594 |
STIR: Next Fed Cut Seen in September Ahead of US CPI
- Fed Funds implied rates have pulled back a little further from post-NFP driven highs, aided overnight by some spillover from softer than expected UK CPI. US CPI is firmly in focus today.
- CPI is however followed by Fedspeak (including Williams expected to reiterate a desire for rates to move lower towards neutral) before an increasingly important Beige Book as some FOMC members question data quality (e.g. Gov. Bowman last week).
- Cumulative cuts from 4.33% effective: 0.5bp Jan, 5bp Mar, 10bp May, 18bp Jun, 21bp Jul, 26bp Sep and 31.5bp Dec.
- All four of today’s scheduled Fed speakers come after CPI but we place most focus on NY Fed’s Williams in a keynote address at 1100ET and before that Minneapolis Fed’s Kashkari in a Q&A.
- 0920ET – Barkin (non-voter). He again repeats a speech from Jan 3 but Q&A could be more notable for any post CPI views.
- 1000ET – Kashkari (’26) in Q&A. There’s a chance he was one of the four dots who preferred no rate cut last month. He last spoke Nov 25, saying a December cut was a reasonable consideration whilst the neutral rate may be higher, with policy not as restrictive. Tit-for-tat tariffs could be inflationary.
- 1100ET – Williams (voter) keynote remarks (text + Q&A). One of the most senior FOMC members, he last spoke on Dec 20 to CNBC, seeing time to assess the data with policy in a great place. He is one of the FOMC members who has started to incorporate some assumptions about a second Trump term but notes a lot of uncertainty for 2025. He sees rates as being “pretty restrictive” and doesn’t think we’re at a long-run neutral rate now, with a real run neutral estimate currently at 0.75% (lifted “a bit” by post-pandemic productivity). We expect a repeat that his baseline is for the Fed to continue moving towards neutral.
- 1200ET – Goolsbee (’25). The most dovish member of the FOMC, he said after last week’s payrolls that he still expects rates to decline and that it’s wrong to say that the Fed isn’t making progress on inflation. He doesn’t see evidence of any overheating US economy and policy is still restrictive on rate-sensitive sectors.
STIR: Mix of Long Setting & Short Cover in SOFR Futures on Tuesday
OI data points to a mix of net long setting and short cover during Tuesday’s uptick in SOFR futures.
- The most notable positioning swings came via net long setting in SFRM5 & Z5 and net short cover in SFRH6.
- Net pack positioning swings were more modest than what was seen in recent sessions.
| 14-Jan-25 | 13-Jan-25 | Daily OI Change |
| Daily OI Change In Packs |
SFRZ4 | 1,081,734 | 1,087,770 | -6,036 | Whites | +12,175 |
SFRH5 | 1,200,828 | 1,198,583 | +2,245 | Reds | -11,357 |
SFRM5 | 1,075,226 | 1,065,028 | +10,198 | Greens | +2,150 |
SFRU5 | 827,759 | 821,991 | +5,768 | Blues | +8,505 |
SFRZ5 | 1,039,818 | 1,024,840 | +14,978 |
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SFRH6 | 653,378 | 670,335 | -16,957 |
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SFRM6 | 651,829 | 655,656 | -3,827 |
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SFRU6 | 626,416 | 631,967 | -5,551 |
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SFRZ6 | 744,212 | 751,926 | -7,714 |
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SFRH7 | 495,410 | 493,360 | +2,050 |
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SFRM7 | 402,650 | 399,045 | +3,605 |
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SFRU7 | 291,725 | 287,516 | +4,209 |
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SFRZ7 | 274,471 | 269,851 | +4,620 |
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SFRH8 | 214,427 | 216,396 | -1,969 |
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SFRM8 | 178,425 | 176,340 | +2,085 |
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SFRU8 | 109,691 | 105,922 | +3,769 |
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MNI US CPI PREVIEW: Still Too High For Comfort
Our preview of Wednesday's December CPI release has been published (see here):
- Consensus sees core CPI inflation decelerating slightly to between 0.2 to 0.3% M/M in December, with MNI’s analyst review pointing to an average estimate of 0.24% so a bias toward a 0.2% rounded figure.
- Likely to be the single most closely watched individual aspect of Wednesday’s CPI report, rental inflation is expected to accelerate to an average figure that firmly rounds to 0.3% M/M in December.
- Supercore inflation is seen pulling back, though, to the upper 0.20s%, from 0.34% in November.
- If housing is our top pick to watch this month then core goods inflation – which is seen pulling back in December - is closely second, amid tariffs speculation.
- Initial estimates point to core PCE inflation at ~0.20% M/M, softer in outright terms but on a relative basis an acceleration from the softer 0.115% in Nov. That outlook will hinge partly on PPI data out Tuesday.
- It is clear that the Fed will hold in January, with the first plausibly “live” meeting not until March. But with pricing having shifted so quickly away from 2025 cuts, it’s a good juncture to assess whether markets have gotten too hawkish.
- Even in-line inflation readings could bolster the FOMC leadership’s confidence that they are on track to get PCE to 2%, and leave the door open to two rate cuts later this year, though this report is not widely expected to provide the requisite evidence.
US INFLATION: PCE Forecasts Adjusted Upward After PPI
Some revisions to pre-PPI estimates of core PCE that we have seen are understandably to the upside, on the order of about 0.03pp (almost entirely due to the outsized increase in airfare PPI, offset at least partially by other PCE-relevant components, as we had flagged yesterday). Pre-PPI, core PCE consensus was 0.20% M/M, and if that is correct, now it looks like the gap between core CPI (0.24% consensus) and PCE will be closer to zero.
Post-PPI release core PCE M/M estimates include:
- Goldman Sachs: 0.22% (0.18% pre-PPI)
- ING: 0.3% (only a rounded forecast provided)
- Nomura: 0.272% (0.242% pre-PPI)
- Wrightson ICAP: 0.2% (only a rounded forecast provided; notes the PPI components did not change their estimates).
US INFLATION: No Changes to Core CPI Forecasts After PPI
For CPI, the softer-than-expected-overall PPI report (which more often than not comes out after and not before CPI) appears to have been muted - we have seen no changes to CPI forecasts as a result (most analysts have said as much explicitly). Pre-PPI consensus for CPI per MNI medians were 0.38% M/M for headline, and 0.24% for core.
- Some analysts noted that sequential food prices were low in PPI (-0.2% M/M), which could on the margins have bring some softer implications for headline CPI (consensus is for CPI food prices to rise 0.4% for a 2nd month).
- But if anything, we could see a slight upside bias to core PCE vs pre-PPI consensus on account of airfares coming in much higher than expected in PPI than analysts had expected (up 7%) which may be reflected to some degree in airfares (CPI consensus was for a little above 1% after 0.4%). See chart.
- On another note, upward revisions to PPI in prior months could marginally upwardly bias prior month PCE revisions.
UK DATA: Inflation Slows in December as Services Ease
- UK headline inflation slowed modestly in December, with the annual rate of increase 2.5%, down from 2.6% in November , the Office for Naional Statistics said Wednesday
- On a monthly basis, CPI rose by 0.3%. Core CPI rose by 3.2%, down from 3.5% in November. The CPI goods annual rate rose from 0.4% to 0.7%, while the CPI services annual rate -- closely watched by the Bank of England -- fell from 5.0% to 4.4%.
- The largest downward contribution to the monthly change in CPI annual rates came from restaurants and hotels; the largest upward contribution to both came from transport, particularly higher petrol prices.
- The data came in above the BOE's 2% target rate, but the decline in services inflation will be a welcome boost and probably keeps a February rate cut a live possibility.
FOREX: USDJPY Slips Below 20-Day EMA, GBP Whipsaws Post-CPI
- The Japanese Yen is outperforming on Wednesday, as lower core yields and BOJ rhetoric have boosted local FX sentiment. USDJPY has declined 0.77% at typing and is around 130 pips off session highs at 156.70.
- As a reminder, headlines from BoJ Governor Ueda have crossed overnight, reiterating that a decision on whether to raise rates will be made next week (so largely echoing Deputy Governor Himino's remarks from yesterday). The probability for a hike on Jan 24 has now risen to around 70%. Alongside this dynamic, lower core yields have assisted the move lower for USDJPY, with the pair slipping below its 20-day EMA for the first time since Dec 12.
- With Fed pricing having shifted so quickly away from 2025 cuts, CPI data today is a good juncture to assess whether markets have gotten too hawkish, and a deeper correction for USDJPY will target 156.02 (Dec 31 low) and 154.71, the 50-day EMA.
- GBP volatility has also been a key feature of the early Wednesday session, following the lower-than-expected UK CPI data. While sterling initially traded weaker on the release (GBPUSD down to a 1.2163 low), the potentially good news for the UK economy and the fact the downside surprise was mostly driven by volatile components assisted a sterling recovery.
- GBPUSD reversed as high as 1.2241, with similar price action for EURGBP seeing the cross briefly slip back to 0.8420.
- The USD index sits 0.2% lower on the session, extending its pullback to around 1.1% from cycle highs earlier in the week. All focus will be on the US CPI release as the near-term driver for US yields and associated greenback sentiment.
EUROPEAN ISSUANCE UPDATE
EFSF RfP
- “Today, EFSF has sent a Request for Proposal to a selection of banks from the EFSF/ESM Market Group with regards to an upcoming transaction, subject to market conditions.”
- We had written in our Issuance Deep Dive that we expected a dual-tranche EFSF syndication in January. There has been a dual-tranche transaction in early January each year since 2021 with the transactions gradually growing in size (E5.0bln in 2021, E5.5bln in 2022, E6.0bln in 2023 and E7.0bln in 2024). We see E6.0bln as the minimum transaction size with a larger transaction very possible.
- We don't have a strong view regarding the bonds on offer, but we expect the transaction to take place on Monday or Tuesday next week.
UK auction results
- The 0.9bp yield tail is below the 1.3bp tail seen at the Dec 11 re-opening, but still sits within the range of the last four auctions (0.8-1.3bps). We had flagged the risk of a relatively wide tail ahead of the auction, given the recent volatility in UK markets and the slightly larger auction size (GBP4bln vs GBP3.75bln prior).
- The bid-to-cover ratio of 2.80x is below the five previous re-openings of the 4.25% Jul-34 gilt (prior 5 auction average of 2.94x).
- The lowest accepted price of 95.703 was below the 95.7535 pre-auction mid price.
- Limited reaction in Gilt futures following the auction result.
- GBP4bln of the 4.25% Jul-34 Gilt. Avg yield 4.808% (bid-to-cover 2.80x, tail 0.9bp).
Germany auction results
- Average 30-year Bund auction with the stop price coming in above the pre-auction mid-price for both lines.
- Bid-to-covers generally ok - not stellar, not disappointing.
- E1bln (E754mln allotted) of the 1.80% Aug-53 Bund. Avg yield 2.84% (bid-to-offer 1.96x; bid-to-cover 2.59x).
- E1.5bln (E1.19bln allotted) of the 2.50% Aug-54 Bund. Avg yield 2.84% (bid-to-offer 2.19x; bid-to-cover 2.76x).
EQUITIES: Bear Threat in E-Mini S&P Remains Present
- A bull cycle in the Eurostoxx 50 futures contract remains intact and the latest pullback appears corrective. Initial support is at 4939.33, the 50-day EMA. It has been pierced, a clear break of this EMA would undermine a bullish theme and signal scope for a deeper retracement. For bulls, resistance at 5040.00, Dec 9 high, has recently been pierced. Clearance of it would resume the bull cycle that started on Nov 21 and open 5068.13, a Fibonacci projection.
- A bear threat in the S&P E-Minis contract remains present and short-term gains are considered corrective - for now. The reversal from the Dec 26 high, confirmed the end of the Dec 20 - 26 correction. 5866.00, the Dec 20 low and a key short-term support, has been breached. This strengthens a bearish theme and sights are on 5784.00, the Nov 4 low and an important short-term support. Initial pivot resistance is seen at 5987.43, the 50-day EMA.
COMMODITIES: Recent Gains in Gold Appear Technically Corrective, For Now
- The trend structure in WTI futures remains bullish and the contract is trading just ahead of its recent highs. The stronger reversal to the upside has resulted in a breach of key short-term resistance at $76.41, the Oct 8 high. Clearance of this hurdle strengthens a bull theme and opens $79.59, the Jul 5 ‘24 high. On the downside, a reversal lower would expose the 20-day EMA, at $73.15. This average is seen as a key short-term support.
- Recent gains in Gold appear corrective - for now. However, the yellow metal continues to hold on to the bulk of last week’s gains and scope is seen for a continuation higher near-term. A stronger recovery would open $2726.2, the Dec 12 high and an important resistance. Clearance of this level would be a bullish development. On the downside, a reversal lower would expose $2583.6, the Dec 19 low. Initial support is at $2644.3, the 50-day EMA.
| Date | GMT/Local | Impact | Country | Event |
| 15/01/2025 | 1330/0830 | ** |  CA | Monthly Survey of Manufacturing |
| 15/01/2025 | 1330/0830 | ** | CA | Wholesale Trade |
| 15/01/2025 | 1330/0830 | *** |  US | CPI |
| 15/01/2025 | 1330/0830 | ** | US | Empire State Manufacturing Survey |
| 15/01/2025 | 1400/0900 | * | CA | CREA Existing Home Sales |
| 15/01/2025 | 1420/0920 | US | Fed's Barkin | |
| 15/01/2025 | 1530/1030 | ** | US | DOE Weekly Crude Oil Stocks |
| 15/01/2025 | 1600/1100 | US | Fed's Williams | |
| 15/01/2025 | 1630/1630 |  GB | BOE's Taylor Speech on Inflation Dynamics and Outlook | |
| 15/01/2025 | 1900/1400 | US | Fed Beige Book | |
| 16/01/2025 | 0030/1130 | *** |  AU | Labor Force Survey |
| 16/01/2025 | 0700/0700 | ** | GB | UK Monthly GDP |
| 16/01/2025 | 0700/0700 | ** | GB | Trade Balance |
| 16/01/2025 | 0700/0700 | ** | GB | Index of Services |
| 16/01/2025 | 0700/0800 | *** |  DE | HICP (f) |
| 16/01/2025 | 0700/0700 | *** | GB | Index of Production |
| 16/01/2025 | 0700/0700 | ** | GB | Output in the Construction Industry |
| 16/01/2025 | 0900/1000 | *** |  IT | HICP (f) |
| 16/01/2025 | 1000/1100 | * |  EU | Trade Balance |
| 16/01/2025 | 1230/1330 | EU | Account of Dec 2024 ECB Monetary Policy Meeting | |
| 16/01/2025 | 1315/0815 | ** | CA | CMHC Housing Starts |
| 16/01/2025 | 1330/0830 | *** | US | Jobless Claims |
| 16/01/2025 | 1330/0830 | ** | US | WASDE Weekly Import/Export |
| 16/01/2025 | 1330/0830 | *** | US | Retail Sales |
| 16/01/2025 | 1330/0830 | ** | US | Import/Export Price Index |
| 16/01/2025 | 1330/0830 | ** | US | Philadelphia Fed Manufacturing Index |
| 16/01/2025 | 1500/1000 | * | US | Business Inventories |
| 16/01/2025 | 1500/1000 | ** | US | NAHB Home Builder Index |
| 16/01/2025 | 1530/1030 | ** | US | Natural Gas Stocks |
| 16/01/2025 | 1630/1130 | ** | US | US Bill 04 Week Treasury Auction Result |
| 16/01/2025 | 1630/1130 | * | US | US Bill 08 Week Treasury Auction Result |
| 16/01/2025 | 1730/1230 | CA | BOC Deputy Gravelle speech to women in markets group. |
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