MNI US MARKETS ANALYSIS - Treasuries Sink as Markets Pare Thurs Rally

US TSYS SUMMARY: Treasuries Sell Off, Solid Docket Ahead

• Cash Tsys have sold off across the curve in a slight bear steepening, marginally underperforming Europe ahead of a solid day of US data and the last day of Fedspeak before the media blackout.
• 2Y yields +3.7bps at 0.930%, 5Y +4.2bps at 1.515%, 10Y +4.1bps at 1.745% and 30Y +4.6bps at 2.089%.
• TYH2 is touching sessions lows at 128-13+ on average volumes. This is the low end of yesterday’s range with support seen at 127-30 (1.764 proj of Dec 20-29-31 price swing) and resistance at 129-00 (Jan 6 high).
• Potential data highlights are retail sales and IP activity measures plus U.Mich consumer sentiment and inflation expectations.
• Fedspeak: Williams (permanent voter) is the only FOMC member scheduled to speak today at 1100ET.
• No issuance today whilst NY Fed buys resume on Tuesday after MLK Jr holiday Monday.

US FIXED INCOME: Implied Front Rates Back Towards Recent Highs

• Eurodollars have moved lower today, led by reds with both Jun'23 & Sep'23 at -6 ticks.
• The move has been more restrained in the whites but the Dec’22 is still down -4 ticks at 98.755. It’s close to lows from earlier in the week (98.74 Jan 11) as markets revert to moving closer to pricing in four hikes for 2022.
• Waller (permanent voter) gave some mixed comments late yesterday. He sees three rate hikes as “still a good baseline”. “If inflation stays high could be four even five hikes” but he also acknowledged that if inflation abates as many forecasters and him expect (he sees inflation ~2.5% end-22) then “you could actually pause and not even go the full three”. Balance sheet shrinking could start by the summer, with organic runoff.
• Williams (permanent voter) is the only FOMC member scheduled to speak today ahead of the media blackout starting midnight.

Winding Down QE: Updated NY Fed Operational Purchase Schedule

NY Fed updated purchase schedule: no new buys Friday through Monday's MLK Jr holiday, resume next week Tuesday. NY Fed operations desk "plans to purchase approximately $40 billion over the monthly period from 1/14/22 to 2/11/22" vs. $60B prior as QE winds down.

• Tue 01/18 1010-1030ET: Tsy 4.5Y-7Y, appr $6.025B vs. $4.525B prior
• Thu 01/20 1010-1030ET: Tsy 10Y-22.5Y, appr $1.625B steady
• Fri 01/21 1010-1030ET: Tsy 0Y-2.25Y, appr $12.425B vs. $9.325B prior
• Tue 01/25 1010-1030ET: TIPS 1Y-7.5Y, appr $2.025B vs. $1.525B prior
• Pause again around the FOMC policy annc on Jan 26
• Thu 01/27 1010-1030ET: Tsy 22.5Y-30Y, appr $1.825B steady
• Mon 01/31 1010-1030ET: Tsy 2.25Y-4.5Y, appr $8.425B vs. $6.325B prior
• Tue 02/01 1100-1120ET: TIPS 7.5Y-30Y, appr $1.225B vs. $0.925B prior
• Thu 02/03 1100-1120ET: Tsy 10Y-22.5Y, appr $1.625B steady
• Tue 02/08 1010-1030ET: Tsy 22.5Y-30Y, appr $1.825B steady
• Thu 02/10 1010-1030ET: Tsy 7Y-10Y, appr $3.225B vs. $2.425B prior

EGB/GILT SUMMARY: Broadly Lower

European sovereign bonds have traded weaker this morning alongside a broad more lower for equities.

• Gilts have progressively sold off during the morning with cash yields broadly 3bp higher across the curve.
• The bund curve has slightly bear steepened with the 2s30s spread widening by 1bp.
• The very long end of the OATs curve has steepened more than for bunds with the 2s30s spread trading up 3bp.
• BTP yields are up 2-3bp wiht the belly of the curve marginally underperforming on the day.
• The UK economy expanded more than expected in November (1.1% 3m/3m vs 0.8% expected) before the Omicron wave hit.
• Supply this morning came from the UK (UKTBs, GBP2bn).

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXH2 169.5/168.5ps, bough for 29 in 7.25k

OEH2 132.5/131.5ps 1x2 vs OEG2 133.25/132.25ps, bought the march, receives 25 in 3k

IKH2 144/142ps 1x1.5, bought for 24 in 2k

FOREX: USD Downtrend Pauses on Wall Street Slide

• Currency markets are in consolidation mode early Friday, with the greenback holding its ground and pausing the recent downtrend. Nonetheless EUR/USD gains overnight managed to put the pair at a new cycle high of 1.1483, again narrowing the gap with the next key level at the 100-dma of 1.1507.
• The pause in the USD downtrend follows the resolutely negative close on Wall Street yesterday, with the tech-led NASDAQ closing lower by just over 2.5% on the day. As a result, JPY has seen some support so far today, while recent outperformers including the AUD and NZD are at the bottom of the pile.
• USD/CNH made another attempt on recent cycle lows early Friday, dropping to touch 6.3425 before bouncing on reports that China's SAFE regulator had tightened restrictions on 'underground banks' and their interactions with the forex market.
• December retail sales numbers take focus in the US session, with markets expecting sales to have dropped 0.1% across the month, with the prelim Uni of Michigan confidence release following shortly afterward. Central bank speakers of note include ECB's Lagarde and Fed's Williams.

FX OPTIONS: Expiries for Jan14 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1235-50(E1.2bln), $1.1280-00(E3.9bln), $1.1320(E503mln), $1.1365-75(E1.5bln), $1.1395-05(E1.4bln), $1.1415-25(E2.5bln), $1.1460-70(E1.2bln)
• USD/JPY: Y110.75-00($1.8bln), Y111.80-00($560mln), Y113.35-50($1.6bln), Y113.65-80($1.1bln), Y114.45-55($835mln), Y114.90-10($1.7bln), Y116.00($1.5bln)
• GBP/USD: $1.3385-10(Gbp1.0bln)
• EUR/GBP: Gbp0.8350(E682mln)
• AUD/USD: $0.7125-40(A$1.3bln)
• NZD/USD: $0.6845-50(N$536mln)
• USD/CAD: C$1.2485($1.3bln), C$1.2500-10($2.0bln), C$1.2520-30($1.7bln), C$1.2540-50($929mln)
• USD/CNY: Cny6.35($620mln), Cny6.3750($555mln)

Price Signal Summary - Bonds Remain In A Downtrend

• In the equity space, S&P E-minis have failed to hold onto Wednesday’s high. Key near-term resistance is at 4739.50, Wednesday’s high and 4752.67, 76.4% of the Jan 4 - 10 sell-off. A break of this resistance zone would reinstate a bullish theme and expose the key resistance at 4808.25, the Jan 4 all-time high. EUROSTOXX 50 futures remain above the 50-day EMA. Key short-term support is unchanged at 4216.50, the Jan 10 low. A stronger recovery would open 4381.5, the Jan 5 high. Initial resistance is at 4324.50, Thursday’s high.
• In FX, EURUSD has this week cleared the top of its range and resistance at 1.1383/86, the Nov 30 and Dec 31 high. The pair has also traded through the top of a bear channel drawn from the Jun 1, 2021 high. This strengthens the bull theme and highlights an important reversal. The focus is on 1.1514 next, the Nov 5 low. GBPUSD maintains a bullish tone. The 200-dma at 1.3737 has been probed, a clear break would open 1.3835, Oct 20 high. USDJPY has continued to weaken and is through its 50-day EMA. This signals scope for an extension towards 113.14 next, Dec 17 low.
• On the commodity front, Gold maintains a bullish short-term tone. The yellow metal has managed to remain inside its bull channel drawn from the Aug 9 low - the Jan 7 low of $1782.8 and the recovery from this level means the channel base provided support. The focus is on key near-term resistance at $1831.9, Jan 3 high where a break would open $1849.1, the Nov 22 high. WTI futures remain in an uptrend. The contract has cleared key resistance at $82.13, Oct 25 high to confirm a resumption of the broader uptrend. The focus is on $83.71, 1.618 projection of the Dec 2 - 9 - 20 price swing.
• In the FI space, the Bund futures trend direction is unchanged and remains bearish. Short-term gains are considered corrective. The focus is on 169.34, Oct 29 low and resistance is at 171.44, the 20-day EMA. Gilts remain in a downtrend too and recent gains appear to be corrective. The focus is on 122.66 next, 3.764 projection of the Dec 8 - 16 - 20 price swing.

EQUITIES: U.S. Futures Off Overnight Lows

• Asian markets closed weaker: Japan's NIKKEI closed down 364.85 pts or -1.28% at 28124.28 and the TOPIX ended 27.92 pts lower or -1.39% at 1977.66. China's SHANGHAI closed down 34.003 pts or -0.96% at 3521.256 and the HANG SENG ended 46.45 pts lower or -0.19% at 24383.32
• European stocks are lower, with the German Dax down 102.16 pts or -0.64% at 16031.59, FTSE 100 down 5.6 pts or -0.07% at 7563.85, CAC 40 down 46.44 pts or -0.64% at 7201.14 and Euro Stoxx 50 down 36.27 pts or -0.84% at 4315.9.
• U.S. futures, conversely, are a little stronger. with the Dow Jones mini up 84 pts or +0.23% at 36073, S&P 500 mini up 8.5 pts or +0.18% at 4660.5, NASDAQ mini up 17.5 pts or +0.11% at 15507.75.

COMMODITIES: Oil Leading Gains

• WTI Crude up $0.57 or +0.69% at $82.23
• Natural Gas down $0.1 or -2.41% at $4.153
• Gold spot up $1.45 or +0.08% at $1827.77
• Copper down $0.75 or -0.17% at $451.9
• Silver up $0.05 or +0.21% at $23.213
• Platinum up $6.2 or +0.64% at $983.98