MNI US MARKETS ANALYSIS - BoJ Steps In as JGBs Test Their Nerves

US TSYS SUMMARY:  Short End Firms Ahead Of CPI

• Cash Tsys have bull steepened on the day with the short end down 2bps and the long end flat, having started as a broad rally through Asian hours before the long end unwound gains as Europe came in.
• 2YY are -2bps at 1.343%, 5YY -1.5bps at 1.802%, 10YY +0.2bps at 1.937% and 30YY -0.1bps at 2.243%.
  TYH2 is in a relatively narrow range at 126-22 on marginally below average volumes. Whilst well within yesterday's range, it sits in a narrow technical corridor with support at 126-13+ (Feb 8 low) and resistance at 127-01 (Feb 7 high).
  Focus is on CPI for January (0830ET) with consensus for core at +0.5% M/M(average 0.45% M/M) after the 0.56% M/M in Dec. It's followed by the monthly budget statement at 1400ET.
  Fedspeak: Barkin (2023 voter, hawk) on the policy response amid pandemic uncertainty at 1900ET.
• Issuance: US Tsy $50B 4W, $40B 8W bill auctions (1130ET) followed by $23B 30YBond auction (1300ET)
  

EGB/GILT SUMMARY:  Curve Steepening

European curves have broadly steepened this morning alongside gains for equities.

• Gilts started the session on a weak footing before recovering losses and now trade close to flat on the day.
• The bund curve has twist flattened with the 2s30s spread widening 4bp.
• It is a similar story for OATs where the curve is 2-3bp steeper.
• BTPs have recovered some of the earlier losses while still trading below yesterday's close. Cash yields are 2-4bp higher.
• Speaking in Le Monde newspaper, the ECB's Francois Villeroy de Galhau stated that euro area inflation is now likely near a peak. Meanwhile Olli Rehn suggested that raising rates too fast risks damaging the economy and that policy normalisation should be conducted at a gradual pace.
• UK Foreign Secretary Liz Truss met with her Russian counterpart Sergei Lavrov for talks in Moscow. Reflecting the simmering tensions between both nations,Truss urged Russia to respect Ukrainian sovereignty while Lavrov stated that bilateral relations were at their lowest point in years and played down Western threats.
• The final results from Portugal's legislative elections confirm that Prime Minister Antonio Costa's centre-left Socialist Party (PS) has won an outright majority.
• Supply this morning came from Italy (BOTs, EUR6.5bn).

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXM2 161 put, bought for 130 in 4k
RXJ2 165.5p, suggest sold at 315 in 2.5k

FOREX: JPY Slips as BoJ Step In to Cap Yields

• The rally in the Japanese curve continued apace across Asia-Pac hours, pushing the 10y yield to the highest levels since early 2016 and putting the BoJ's yield cap under considerable pressure. In response the Bank stepped in with an unscheduled asset purchase programme, committing themselves to buying an unlimited quantity of 10y JGBs as part of their yield curve control policy tool. USD/JPY rallied in response, adding around 30 pips to touch session highs of Y115.88, keeping the JPY close to the bottom of the G10 pile.
• SEK underperformed all others through the European morning, including the JPY, following a dovish turn from Sweden's Riksbank. The bank's governor Ingves stepped in to block a growing view among the bank board that the pace of asset purchases should be tapered over the coming period. As a result, EUR/SEK rallied to touch 10.4849, just shy of the Monday high at 10.4868.
• US inflation data takes focus going forward, with markets expecting a new multi-decade high for the Y/Y read at 7.2%, with more pressure on the core reading also. Weekly jobless claims also cross, with speeches from ECB's de Guindos, Villeroy and Lane. The Mexican central bank decision is also due.

FX OPTIONS: Expiries for Feb10 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1250-65(E560mln), $1.1280-00(E768mln), $1.1330-40(E1.3bln), $1.1410-30(E753mln), $1.1500(E1.7bln), $1.1600(E1.6bln)
• GBP/USD: $1.3500(Gbp564mln)
• AUD/USD: $0.7150-60(A$1.4bln), $0.7170-75(A$635mln), $0.7190-00(A$545mln)
• USD/CAD: C$1.2670-80($830mln), C$1.2810($1.2bln)
• USD/CNY: Cny6.3000($760mln)

Price Signal Summary - S&P E-Minis Crosses Above The 50-day EMA

• In the equity space, S&P E-minis have continued to extend this week’s gains. Attention remains on the 50-day EMA that intersects at 4564.03 today. The average has been probed however, a clear break is still required to suggest scope for a stronger recovery that would open 4671.75 initially, Jan 18 high. Initial support to watch is 4438.50, the Feb 4 low. EUROSTOXX 50 futures have traded higher again today and price has crossed above the 50-day EMA that intersects at 4196.50. The EMA marks a key resistance point and a clear break would suggest scope for a stronger recovery towards 4324.50, Jan 13 high. A reversal lower again though would refocus attention on 3990.50, Jan 24 low.
• In FX, EURUSD is consolidating and trading closer to its recent highs. The recent consolidation appears to be a bull flag, reinforcing the current uptrend. The focus is on 1.1483/84 next, the Jan 14 and Feb 4 high. A break would resume bullish activity. Support is seen at 1.1331, the former bear channel top. GBPUSD maintains its short-term bullish theme following last week’s gains. The focus is on 1.3662 next, Jan 20 high. Support lies at 1.3491/3435, Feb 7 and Feb 1 low. USDJPY continues to climb and trend conditions remain bullish. The pair has breached initial resistance at 115.67/68, 76.4% of the Jan 4 - 24 downleg and the Jan 28 high. This strengthens bullish conditions and signals scope for a climb towards 116.35, this year’s high on Jan 4 and the key bull trigger.
• On the commodity front, Gold has continued to strengthen this week. The recovery has resulted in a break of resistance at $1822.2, the Jan 27 high. An extension would expose the firm resistance at $1853.9, Jan 25 high. Note that the recovery this week also suggests that the recent break of the bull channe,l drawn from the Aug 9, 2021 low, has again been a false one. WTI futures remain in a clear uptrend however the contract appears to have entered a corrective cycle. The focus is on a climb towards $94.13 next, 2.618 projection of the Dec 2 - 9 - 20 price swing. Support to watch is at $86.34, the Jan 31 low.
• In the FI space, Bund futures remain vulnerable. The focus is on 164.82, the May 3, 2019 low (cont). Gilts trend conditions remain bearish. Sights are on the 120.00 psychological handle.

EQUITIES: FTSE Returns To Pre-Pandemic Levels

• Asian markets closed stronger: Japan's NIKKEI closed up 116.21 pts or +0.42% at 27696.08 and the TOPIX ended 10.39 pts higher or +0.53% at 1962.61. China's SHANGHAI closed up 5.961 pts or +0.17% at 3485.907 and the HANG SENG ended 94.36 pts higher or +0.38% at 24924.35.
• European equities are gaining (FTSE hitting post-2020 nominal highs), with the German Dax up 17.78 pts or +0.11% at 15499.44, FTSE 100 up 10.06 pts or +0.13% at 7653.74, CAC 40 up 8.37 pts or +0.12% at 7139.43 and Euro Stoxx 50 up 5.15 pts or +0.12% at 4209.6.
• U.S. futures are mostly lower, led by tech, with the Dow Jones mini up 13 pts or +0.04% at 35654, S&P 500 mini down 10 pts or -0.22% at 4567.75, NASDAQ mini down 57.5 pts or -0.38% at 14980.75.

COMMODITIES: Mixed So Far, Oil And Copper Leading

• WTI Crude up $0.75 or +0.84% at $90.4
• Natural Gas down $0.01 or -0.2% at $4.004
• Gold spot down $1.71 or -0.09% at $1831.61
• Copper up $6.45 or +1.4% at $466.5
• Silver up $0.01 or +0.05% at $23.3256
• Platinum down $10.55 or -1.02% at $1027.32