MNI US MARKETS ANALYSIS - Treasury Curve Continues Flatter

US TSYS SUMMARY: Treasuries Flattening Continues

• Cash Tsys have twist flattened as they continue to adjust to the strong CPI print and Bullard adding to market hiking fears, tempered by a subsequent interview with Daly downplaying her view on the need a 50bp hike. Barkin added he needs to be convinced of the need for 50bps although hopes rates return to pre-Covid levels “relatively quickly”.
• 2s10s of 40bps are the flattest since Aug 2020 whilst 5s30s of 34bps are the flattest since Oct 2018.
• 2YY +0.9bps at 1.588%, 5YY -2.8bps at 1.923%, 10YY -3.0bps at 2.000% and 30YY -3.7bps at 2.269%.
• TYH2 is at the high end of today’s range at 126-00+, off from yesterday’s low of 125-17+ but far below the 126-26 prior to CPI. Volumes sit 25% above average.
• U.Mich consumer survey at 1000ET with focus no doubt on the inflation expectations component.
• No scheduled Fedspeak ahead but plenty of potential for unscheduled appearances.
• The NY Fed’s operational purchase schedule is updated at 1500ET.

EGB/GILT SUMMARY: Lagarde Stresses ECB Will Act Gradually In Response To Inflation

European government bonds have traded mixed this morning following yesterday's sell- off, while equities are broadly lower.

• Having presided over a notably hawkish press conference at the February GC meeting, ECB President Christine Lagarde stressed in an interview published today that rates increases will only occur once asset purchases are ended, and warned that tightening too quickly risked damaging the recovery.
• Bunds have edged higher through the morning with yields now 1-2bp lower on the day.
• OATs similarly now trade marginally above yesterday's close.
• BTPs have sold off with the curve bear flattening. The 2s30s spread has narrowed 3bp.
• The UK economy expanded by 1.0% Q/Q in Q4, a touch below expectations (1.1%) with the monthly print for December showing a 0.2% contraction compared the consensus forecast of -0.5%.
• The gilt curve has twist flattened with yields pushing up 1-3bp at the shorter end and falling 1-3bp at the longer end.
• Supply this morning came from the UK (UKTBs, GBP2bn) and Italy (BTPs, EUR7.75bn).

EUROPE OPTION FLOW SUMMARY

Eurozone:

2RH2 98.87/98.62ps, bought for 3.5 in 5k
ERZ2 99.25/98.75ps bought for 6.25 in 10k
2RH2 99.375p, bought for 31.75 in 14k (ref 99.09)
ERU3 99.75/100.00/100.25c fly, bought 3.25 in 10k
ERZ3 99.75/100.00/100.25c fly, bought for 3.25 in 20k

FOREX: Greenback Extends Post-Bullard Move Higher

• Equities are weaker, with the USD stronger and yields retracing as the dust settles after a volatile Thursday session. Prevailing USD weakness that followed CPI has wholly reversed following Bullard's acutely hawkish comments after the London close, which continues to exert influence over markets this morning.
• The USD Index has shown above the 50-dma, but is yet to make a convincing break above, and the considerable distance to the 2022 highs printed in late January leaves the greenback with a solid runway on any protracted rally.
• AUD is the poorest performer so far, weaker against all others in G10 and putting EUR/AUD higher for a second session. The cross eyes near-term resistance at 1.6033 - the 50% retracement for the February downleg - and a consolidation above here opens 1.6226 over the more medium-term.
• Lastly, JPY trades well amid equity market weakness, with a negative close across Asia-Pac markets feeding into lower futures across the US and Europe today.
• The data slate is lighter for the rest of the session, with just the prelim Uni. of Michigan Confidence Survey due. Central bank speakers are similarly few and far between, but markets will be on watched for any further unscheduled commentary from FOMC members, after Bullard and Daly's impactful speeches yesterday.

FX OPTIONS: Expiries for Feb11 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1300(E1.4bln), $1.1340-60(E753mln), $1.1400(E701mln), $1.1475(E668mln), $1.1495-05(E3.1bln), $1.1550(E1.0bln)
• USD/JPY: Y115.75($750mln)
• EUR/GBP: Gbp0.8410-25(E608mln), Gbp0.8500-10(E613mln)
• USD/CAD: C$1.2650-60($4.66bln), C$1.2680-85($1.5bln)

Price Signal Summary - Bonds Head South Once Again

• In the equity space, S&P E-minis have failed to hold above the 50-day EMA - at 4561.44 today. This average continues to provide a firm resistance and a clear breach of it is required to suggest scope for a stronger rally that would open 4671.75 initially, Jan 18 high. Note that yesterday’s candle pattern is a bearish engulfing, signalling a potential top. Watch support at 4438.50, Feb 4 low. EUROSTOXX 50 futures have failed to hold above the 50-day EMA - at 4196.30 today. The average continues to represent a key resistance point. A clear break of it would suggest scope for a stronger recovery that would open 4324.50, Jan 13 high. The shift lower however is bearish and an extension would refocus attention on 3990.50, Jan 24 low.
• In FX, EURUSD is trading in a more volatile manner near its recent highs. Thursday’s high of 1.1495 marks initial resistance where a break is required to signal a resumption of the uptrend. 1.1495 also coincides with the March 2020 high. Key short-term support is seen at 1.1326, the top of the former channel drawn from the Jun 1 2021 high. GBPUSD maintains its short-term bullish theme although the pair is trading in a more volatile manner. The focus is on 1.3662 next, Jan 20 high. Support lies at 1.3491, Feb 7 low. USDJPY is closing in on key resistance at 116.35, the Jan 4 high and bull trigger. A clear break of this hurdle would confirm a resumption of the uptrend and pave the way for a climb towards 117.08, 2.00 projection of the Apr 23 - Jul 2 - Aug 4 price swing.
• On the commodity front, Gold maintains this week’s bullish theme despite the pullback from yesterday’s high. A continuation higher would expose firmer resistance and a bull trigger at $1853.9, Jan 25 high. WTI futures remain in a clear uptrend however the contract has entered in a corrective cycle having pulled back from recent highs. 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 and the contract delivered a fresh trend low on Thursday. The focus is on the 164.00 handle. Gilts resumed its downtrend yesterday and breached the 120.00 psychological handle. The focus is on 119.36, Oct 10, 2018 low (cont).

EQUITIES: Weaker But Off Overnight Lows

• Chinese markets closed weaker (Japan's closed for holiday): China's SHANGHAI closed down 22.959 pts or -0.66% at 3462.948 and the HANG SENG ended 17.69 pts lower or -0.07% at 24906.66.
  
• European equities are lower, with the German Dax down 128.97 pts or -0.83% at 15490.44, FTSE 100 down 68.36 pts or -0.89% at 7672.4, CAC 40 down 98.44 pts or -1.39% at 7101.55 and Euro Stoxx 50 down 52.01 pts or -1.24% at 4197.07.
  
• U.S. futures are weaker as well, with the Dow Jones mini down 150 pts or -0.43% at 34989, S&P 500 mini down 24.75 pts or -0.55% at 4472.75, NASDAQ mini down 113.25 pts or -0.77% at 14587.75.

COMMODITIES: Metals Head Lower

• WTI Crude up $0.58 or +0.65% at $89.73
• Natural Gas up $0.04 or +1.06% at $3.966
• Gold spot down $1.08 or -0.06% at $1825.96
• Copper down $11.3 or -2.43% at $453.7
• Silver down $0.25 or -1.06% at $22.9544
• Platinum down $0.56 or -0.05% at $1024.49