MNI US OPEN - ECB's Centeno Favours Sooner but More Gradual Cuts

NEWS

MIDEAST (MNI): Killing of US Personnel Raises Prospect of Direct Response Against Iran

The killing of three US service personnel, and the injuring of at least 34 others, in a strike on a remote military outpost in Jordan on 28 Jan could see a notable escalation in US military actions in the Middle East in response to the attack. Iranian-backed militia the Islamic Resistance in Iraq has claimed responsibility. For the geopolitical outlook of the region, which in turn could impact on areas including financial and commodity markets, there is the notable risk of a significant US response to the attacks. This adds to the myriad security risks already evident in the Middle East.

US (BBG): Biden Adviser Sees Limited Inflation Impact From Red Sea Attacks

President Joe Biden’s energy security adviser said the impact of Houthi rebel attacks on commercial ships in the Red Sea is limited and pledged continued US action to curb the Iranian-backed group’s ability to disrupt markets. Cost pressures have been more on logistics than on energy commodities, Amos Hochstein said on CBS’s Face the Nation on Sunday. “The costs do go up,” Hochstein said. “But if you look at what they impact, the inflationary impacts are relatively muted.”

US (BBG): US Wants Cloud Firms to Reveal Foreign Clients in China AI Race

The US wants cloud services providers such as Amazon.com Inc. and Microsoft Corp. to actively investigate and call out foreign clients developing artificial intelligence applications on their platforms, escalating a tech conflict between Washington and Beijing. The Biden administration proposal, scheduled for release Monday, requires such firms to reveal foreign customers’ names and IP addresses. Amazon and its peers, which include Alphabet Inc.’s Google, would have to devise a budget for collecting those details and report any suspicious activity, according to draft rule published Sunday.

MNI UST ISSUANCE DEEP DIVE - FEBRUARY 2024: Refunding Preview

Treasury’s Quarterly Refunding process for the Feb-Apr quarter begins with borrowing estimates released on Mon Jan 29 (0830ET), followed by the refunding announcement itself on Wed Jan 31 (also 0830ET). As we noted in our mini-preview earlier in January, there will be three key elements to watch in the refunding announcement itself: the main thing will be the projected increases in Treasury coupon sizes, but also worth noting are the guidance for future quarters, and the (likely) announcement of a buyback program. We elaborate on those in this preview, in addition to the outlook for Monday’s borrowing estimates.

ISRAEL (BBG): Netanyahu Says Big Gaps Remain in New Hostage Negotiations

Israeli Prime Minister Benjamin Netanyahu said a summit in Paris on Sunday to negotiate a return of hostages held by Hamas in exchange for a cease-fire in Gaza was “constructive,” but “significant gaps” remain. Those differences will be discussed at additional meetings this week, according to a statement from Netanyahu’s office.

ECB (RTRS): ECB's Centeno Says Rate Cuts Should Start Sooner Rather Than Later

The European Central Bank should lower interest rates sooner rather than later and in small steps rather than abruptly, Governing Council member Mario Centeno told Reuters in an interview. “We don’t need to wait for May wage data to get an idea about the inflation trajectory,” Reuters reports Centeno as saying. He sees “a lot of evidence that inflation is falling in a sustained way.”

ECB (BBG): Kazimir Says June More Likely Than April for First ECB Rate Cut

The European Central Bank won’t rush into cutting interest rates to avoid undoing progress on inflation, according to Governing Council member Peter Kazimir, who said June is more likely than April for a first move. “Acting hastily based on short-term surprises without having more clarity about the medium term would be risky,” he said in an opinion piece published Monday. “It could easily derail the progress we have made toward reaching our target.”

ECB (BBG): ECB’s Guindos Says Policy Will Reflect Good Inflation News

Better prospects for consumer prices will ultimately prompt officials to cut interest rates, European Central Bank Vice President Luis de Guindos said. “There has been good news regarding the evolution of inflation, and that — sooner or later — will end up being reflected in the monetary policy,” he told Spain’s RNE radio on Monday. “We are going to be dependent on the data, we don’t have any kind of calendar, it will depend on the evolution of inflation and I am optimistic regarding the evolution of inflation.”

EU (MNI): Draghi Report to Call for Joint EU Borrowing - Sources

Former European Central Bank President Mario Draghi will call for a far-reaching federalist revamp of the European Union, including making joint borrowing a permanent financing instrument rather than a one-off crisis tool, when he presents his report on the bloc’s competitiveness later this year, sources told MNI. Draghi aims to present the report to EU leaders sometime in late June, after European parliamentary elections, so that its conclusions can avoid stirring controversy in the election campaign but still play a role in shaping the EU’s policy agenda, said sources close to Draghi and others who had met with him.

FRANCE (BBG): French Farmers Threaten Paris Blockade as Appeasement Fails

French farmers’ unions threatened to block highways around Paris on Monday after government efforts to defuse recent protests with promises of additional aid fell short. The country’s powerful FNSEA union, along with the Young Farmers union, has called for a “siege” of the capital even as Prime Minister Gabriel Attal pledged further support during a visit to farmers on Sunday. “We’re stepping up the pressure because we’ve realized that when it’s far from Paris, the message doesn’t get through,” Arnaud Rousseau, the head of FNSEA, said on RTL radio Monday.

CHINA (BBG): Evergrande Heads for Liquidation in Property Crisis Milestone

China Evergrande Group received a liquidation order from a Hong Kong court, setting off a daunting process to carve up one of the biggest casualties of a property crisis that’s upending the world’s second-largest economy. The ruling on Monday from Hong Kong judge Linda Chan is the latest twist in a saga that saw Evergrande amass more than $300 billion of liabilities during China’s debt-fueled property boom, before turning into the poster child of a market bust that shows few signs of ending. The builder was valued at just $275 million on Monday before trading in its shares was halted, down more than 99% from its peak.

CHINA (BBG): China Tightens Securities Lending Rule to Support Stock Market

China will halt the lending of certain shares for short selling from Monday, the securities regulator announced Sunday, in a move to support the country’s slumping stock markets. Strategic investors won’t be allowed to lend out shares during agreed lock-up periods, the Shanghai Stock Exchange and Shenzhen Stock Exchange said in separate releases following the China Securities Regulatory Commission’s statement.

CHINA (MNI): PBOC Seen Easing MLF, Repo Rates Later in 2024

MNI (Beijing) The People’s Bank of China will likely cut rates for policy tools such as its medium-term lending facilities and 7-day repo by around mid-year, but weak credit demand will divert liquidity released by easing moves – such as last week's reserve requirement ratio cut – to unproductive financial arbitrage, policy advisors and economists told MNI. Easing policy rates later this year will boost market sentiment as low inflation pushes up real funding costs and easier U.S. monetary policy tends to strengthen the yuan against the dollar, said Wu Chaoming, deputy director of the Chasing International Economic Institute.

CHINA (BBG): Chinese Copper Smelters Call for Output Cuts to Limit Losses

Top Chinese copper smelters have called for sector-wide production curbs to cope with tightening global concentrate supply that has weighed heavily on treatment charges and profit margins. Major smelters including Jiangxi Copper Co. and Tongling Nonferrous Metals Group Co. met on Friday to discuss measures including moving maintenance forward and reducing runs, according to people with knowledge of the conversations. They declined to be identified as the talks are private.

RBNZ (MNI): RBNZ to Cut Mid-Year, Despite Tough Talk

The Reserve Bank of New Zealand will maintain a vigilant stance on inflation and refrain from discussing cuts in the near term as non-tradable inflation remains above the upper end of its targets, however, considerable economic headwinds could force it to cut mid-year despite its tough talk, a former staffer told MNI. Geof Mortlock, financial consultant and former financial stability advisor at the RBNZ, said the Bank will likely cut the Official Cash Rate by July or August.

DATA

SWEDEN DATA (MNI): GDP Indicator Clouded by Retail Sales Revisions

• SWEDEN Q4 GDP +0% Y/Y
• SWEDEN DEC RETAIL SALES -2.2% Y/Y

The Swedish flash SA Q4 GDP indicator came in at +0.1% Q/Q (vs +0.3% cons, 0.0% in Q3). In its November MPR, the Riksbank forecasted Q4 GDP at -0.4% Q/Q. On an annual basis, GDP was flat at 0.0% Y/Y (vs -0.4% cons, -1.2% prior), while the Riksbank forecasted a weaker -0.8% Y/Y. There are few details given in the flash release, though Statistics Sweden note that stronger net exports offset weaker domestic components in the fourth quarter. This is consistent with the last few monthly GDP releases.

FOREX: A Very Busy Week Ahead

• The Dollar was underpinned overnight, going into the European session, after Equity futures gaped lower led by US Troops killed in Jordan and a Tanker was hit in the red sea.
• Equities have since recovered during the early European session, and the Dollar has also pared gains to trade mixed against G10s.
• Best performers are NZD, AUD, CHF and Yen in that order, while the SEK and the EUR are leaning in the red.
• Lower US Yields has kept the USDJPY close to its traded low of 147.71, now trading at 147.83.
• The EUR is offered in G10 so far today, as German Yield drifts lower, and Dovish ECB speakers have kept the lid on the EUR.
• Besides the SEK, which is down a small 0.06%, the EUR trades in the red versus all the majors.
• Some will look at 1.0813 in EURUSD, Friday's low for support, but better is seen at 1.0793 50.0% retracement of the Oct - Dec bull leg.
• Looking ahead, there's no notable data for the session, but this week will be the busiest week so far this year, with Data, Risk Events (CBs), Earnings, Month End and supply.

EGBS: Futures Close to Session Highs Following Dovish STIR Feed Through

Core/semi-core EGBs trade at session highs as moves in STIR/ECB-dated OIS markets support the wider FI space, following dovish ECB communication this morning/over the weekend.

• Bank of Portugal Governor Centeno struck a familiarly dovish rhetoric in a RTRS interview released this morning (echoing a similar sentiment to that first reported by MNI before the turn of the year. See here)
• This added to weekend comments from BdF's Villeroy (who is seen as being more reflective as the ECB consensus), who noted "everything will be open at our next meetings".
• The above comments have seemingly outweighed hawkish pushback from Knot and Kazimir, while Vice President de Guindos struck a balanced tone similar to last week's ECB presser.
• Bunds are +79 ticks at 135.08 at typing. A clear break of 135.02 (Jan 26 high) is required to ease bearish pressure. OAT and BTP futures are also around +80 on the day.
• The German and French short-ends lead the rally and promote a bull steepening dynamic, with 2/5-year yields 8-9bps lower today.
• Periphery spreads are generally tighter, with the exception of GGBs.
• Syndication mandates for a new 30-year DBR benchmark and 10-year GGB have just been announced. MNI expects the German 30-year to have a size of E3-4bln, and the Greek 10-year a size of E3.0-3.5bln.
• Today's regional calendar is light, with the week's main focus on the January flash inflation data round (though Q4 '23 flash GDP prints and manufacturing PMI readings will also garner attention). ECB's de Guindos is scheduled to speak again (1310GMT).

GILTS: Comfortably Firmer on the Day, Local Inflation Exp. Data Supports Alongside Wider Bid

Gilts continue to look to wider core global FI markets for direction, with dovish ECB speak and heightened geopolitical tensions helping futures move higher and yields lower.

• Gilt futures sit 53 ticks higher on the day at 98.87, with bulls running out of steam just ahead of 99.00 (session high of 98.99).
• A break of 99.00 would expose the 20-day EMA (99.43). A clear break of that level is needed to ease the bearish pressure.
• Cash gilt yields are 2.5-4.5bp lower, with 10s leading the rally.
• Local inputs saw a continued moderation in the Citi/YouGov 1-Year ahead inflation expectation metric, which would have provided some background support.
• Note that the 1-Year ahead measure in that survey moved to fresh cycle lows, but the longer run measure sits 0.2ppt above its own ’23 base.
• On the other hand, continued speculation re: UK fiscal loosening (the potential for further National Insurance cuts got airtime in the local press via weekend source reports) will have provided some (modest) counter, which capped the bid at the open, before a second round of demand came in.
• SONIA futures are -0.5 to +6.5 through the blues, with a light twist flattening bias.
• BoE-dated OIS stabilises showing 107-108bp of cuts through ’24, with ’24 contracts running little changed to 3.5bp softer on the day.
• The BoE will conduct APF sales from its short maturity bucket later today.

EQUITIES: Last Week's Move Higher Reinforces Uptrend in E-Mini S&P

Eurostoxx 50 futures traded sharply higher last week. This resulted in a move through key resistance at 4634.00, the Dec 14 high. The break of this hurdle confirms a resumption of the medium-term uptrend and opens 4662.90 next, a Fibonacci projection, ahead of the 4700.00 handle. Initial support lies at 4522.80, the 20-day EMA. Key trend support has been defined at 4402.00, the Jan 17 low. The uptrend in S&P E-Minis remains intact and last week’s move higher reinforces current conditions. Resistance at 4841.50, the Dec 28 high, has recently been cleared, confirming an extension of the price sequence of higher highs and higher lows. Moving average studies remain in a bull-mode condition, highlighting positive market sentiment. Sights are on 4952.45 next, a Fibonacci projection. Key support lies at 4736.35, the 50-day EMA.

• Japan's NIKKEI closed higher by 275.87 pts or +0.77% at 36026.94 and the TOPIX ended 31.83 pts higher or +1.27% at 2529.48.
• Elsewhere, in China the SHANGHAI closed lower by 26.867 pts or -0.92% at 2883.356 and the HANG SENG ended 125.01 pts higher or +0.78% at 16077.24.
• Across Europe, Germany's DAX trades lower by 87.88 pts or -0.52% at 16873.63, FTSE 100 higher by 12.44 pts or +0.16% at 7647.46, CAC 40 down 2.88 pts or -0.04% at 7631.33 and Euro Stoxx 50 down 6.87 pts or -0.15% at 4628.42.
• Dow Jones mini down 52 pts or -0.14% at 38206, S&P 500 mini down 2.75 pts or -0.06% at 4913.5, NASDAQ mini up 16 pts or +0.09% at 17543.

COMMODITIES: Breach of Late-Dec High Highlights S-T Bullish WTI Conditions

WTI futures traded higher last week. The contract has breached resistance at $76.31, the Dec 26 high. The clear break of this hurdle undermines the recent bearish theme and highlights a stronger short-term bullish condition. A continuation higher would signal scope for a climb towards $79.56, the Nov 30 high. On the downside, initial key support lies at $74.55, the 50-day EMA. A break would be a bearish development. Gold remains in consolidation mode and continues to trade above the Jan 17 low of $2001.9. The recent print below the 50-day EMA and the break of support at $2013.4, the Jan 11 low, has strengthened a bearish threat and a resumption of weakness would open 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.

• WTI Crude down $0.35 or -0.45% at $77.71
• Natural Gas down $0.07 or -2.47% at $2.645
• Gold spot up $10.81 or +0.54% at $2029.34
• Copper down $0.95 or -0.25% at $384.25
• Silver up $0.16 or +0.71% at $22.9698
• Platinum down $3.54 or -0.39% at $912.37