MNI US MARKETS ANALYSIS - Curve Modestly Flatter Pre-CPI

US TSYS SUMMARY: Treasuries Bear Flatten Ahead Of CPI

• Short-dated Tsys have partially unwound yesterday’s post-Powell rally, with 2Y yields +1.8bps at 0.901% as Tsys bear flatten.
• 2Y yields 1.8bps at 0.901%, 5Y +0.7bps at 1.506%, 10Y +0.4bps at 1.739% and 30Y +0.2bps at 2.064%.
• The 2Y remains 4bps below yesterday’s pandemic era high of 0.9429% after Mester comments of March being live and before Powell’s hearing. The move was largely as London came in after a subdued overnight where short-term inflation expectations were modestly dampened by weaker-than-expected Chinese CPI & PPI.
• US CPI is at 0830ET/1330GMT with a relatively narrow consensus for another strong +0.5% M/M on continued strength in car prices and shelter along with medical prices and airfares.* Tsy issuance later for bills ($40B 119D CMB bill) and longer end ($36B 10Y re-open).
• Fedspeak: Kashkari (2023 voter) discusses the economic outlook at 1300ET.
• Tsy issuance: $40B 119D Bill CMB bill auction (1130ET), $36B 10Y re-open (1300ET).

EGB/GILT SUMMARY: Firming Across The Board

European government bonds have pushed higher this morning alongside broad gains for equities.

• Gilt cash yields are 1-2bp lower on the day with the curve marginally bull flattening.
• It is a similar story for bunds where the 2s30s spread has narrowed 1bp.
• OAT yields are now 1-3bp lower on the day.
• BTPs have marginally outperformed core EGBs with the curve 2bp flatter.
• Amid the ongoing fallout over the Downing St party during a previous period of tightened Covid restrictions, UK PM Boris Johnson is set to face a intense backlash during today's prime minister's questions.
• Supply this morning came from Germany (Bund, EUR1.256bn allotted) Italy (BOTs, EUR6.5bn).
• There was little in the way of tier one European data this morning. Focus now shifts to US CPI data later today.

EUROPE ISSUANCE UPDATE

Germany allots E1.256bln 0% Aug-52 Bund, Avg yield 0.28% (Prev. 0.08%), Bid-to-cover 0.94x (Prev. 0.77x), Buba cover 1.12x (Prev. 1.12x)

EUROPE OPTION FLOW SUMMARY

Eurozone:
DUH2 112.00/111.90/111.80p ladder bought for 0.75 in 4k
DUH2 111.80, bought for 4 in 5k

ERZ2 100.25/100.12/99.87 broken p fly 1x1.5x0.25, bought for half in 10kx15kx2.5k

FOREX: USD is mixed in G10 ahead of inflation

• A steady trading session for FX during our morning European session.
• Market participants have mainly been on the side line, something that is noticed across most assets.
• USD pared some of its overnight weakness, albeit close to flat against CHF, AUD, EUR, GBP, JPY.
• On either side of the spectrum, the Dollar is up 0.14% against the SEK and down 0.57% versus the NOK.
• ALL EYES are on the US CPI, but Mr Powell will still want to see a second release in February for the January reading, ahead of the first expected hike in March.
• Today will nonetheless give the market its first clue on how gradual or aggressive to Fed will be in their tightening cycle.
• Besides the US Inflation, speakers include, BoE Cunliffe, Fed Kashkari and BoJ Kuroda.
• US also release their Beige Book

FX OPTIONS: Expiries for Jan12 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1275-85(E618mln), $1.1300-05(E2.4bln), $1.1400(E542mln)
• USD/JPY: Y112.90-10($784mln), Y113.50-70($1.2bln), Y115.50($638mln), Y116.00-05($750mln)
• GBP/USD: $1.3595-00(Gbp797mln)
• EUR/GBP: Gbp0.8494-00(E1.2bln)
• USD/CAD: C$1.2690($1.0bln), C$1.2750-60($1.2bln), C$1.2790($1.8bln)
• USD/CNY: Cny6.4500($1.3bln)

Price Signal Summary - EURUSD Still Trading Inside It’s Month Old Range

• In the equity space, S&P E-minis are holding onto this week’s gains following Monday’s sharp reversal from 4572.75. A continuation higher would reinforce the bullish significance of the move back above the 50-day EMA and would open 4808.25, Jan 4 high and the bull trigger. Key support lies at 4572.75. EUROSTOXX 50 futures remain above the 50-day EMA. Key short-term support has been defined at 4216.50, Monday’s low. A stronger recovery would open 4381.5, the Jan 5 high.
• In FX, EURUSD remains below resistance at 1.1383/86, the Nov 30 and Dec 31 high and the top of the month old range. The supports to watch are 1.1222, Dec 15 low and the bear trigger at 1.1185, Jul 1, 2020 low. GBPUSD bullish conditions remain in place and sights are on 1.3676 next, 76.4% of the Oct - Dec sell-off. Support to watch is still at the 1.3474, 20-day EMA level. The USDJPY trend outlook remains bullish following last week's break of 115.52, Nov 24 high and the most recent pullback is considered corrective. Potential is seen for a climb towards 117.08, 2.00 projection of Apr 23 - Jul 2 - Aug 4 price swing. 114.96, the 20-day EMA is seen as a firm support.
• On the commodity front, Gold traded higher yesterday. The yellow metal has managed to remain inside its bull channel drawn from the Aug 9 low - last Friday's low of $1782.8 and the recovery from this level means the channel base has provided support. The focus is on key near-term resistance at $1831.9, Jan 3 high. WTI futures remain in an uptrend and attention is on the major resistance at $82.13, Oct 25 high. A break of this hurdle would confirm a resumption of the broader uptrend.
• In the FI space, Bund futures remain in a downtrend and the contract traded lower again yesterday. The focus is on 169.34, Oct 29 low. Gilts remain in a downtrend too and futures have recently traded below the 123.00 handle. This opens 122.66 next, 3.764 projection of the Dec 8 - 16 - 20 price swing.

EQUITIES: European markets follow Asian stocks higher

• Japan's NIKKEI up 543.18 pts or +1.92% at 28765.66 and the TOPIX up 32.54 pts or +1.64% at 2019.36
• China's SHANGHAI closed up 29.991 pts or +0.84% at 3597.432 and the HANG SENG ended 663.11 pts higher or +2.79% at 24402.17
• German Dax up 81.9 pts or +0.51% at 16024.27, FTSE 100 up 58.18 pts or +0.78% at 7549.89, CAC 40 up 31.75 pts or +0.44% at 7215.67 and Euro Stoxx 50 up 27.82 pts or +0.65% at 4309.59.
• Dow Jones mini up 27 pts or +0.07% at 36154, S&P 500 mini up 1.5 pts or +0.03% at 4707, NASDAQ mini down 2.25 pts or -0.01% at 15831.75.

COMMODITIES: Precious metals lower, everything else higher

• WTI Crude up $0.61 or +0.75% at $81.72
• Natural Gas (NYM) up $0.17 or +4.1% at $4.424
• Natural Gas (ICE Dutch TTF) up $2.41 or +3.07% at $81.155
• Gold spot down $5.93 or -0.33% at $1815.8
• Copper up $8.85 or +2% at $451.15
• Silver down $0.09 or -0.38% at $22.6997
• Platinum down $1.51 or -0.15% at $973.6