US DATA: Flash PMIs Disappoint Along With Strong Service Selling Price Inflation

Gilts are away from lows, benefitting from spillover support from Tsys after U.S. President Trump suggested that he will not use force when it comes to acquiring Greenland (reversing a little of the ‘sell America’ trade).

• Still, recoveries remain relatively shallow at this stage, with yesterday’s price action eroding some of the bullish technical picture.
• Futures last +15 at 91.74.
• Bulls will want to close yesterday’s opening gap lower (92.16), which protects more meaningful resistance at Monday’s top (92.51). Initial support is located at yesterday’s low (91.21).
• Yields 0.5-2.0bp lower, curve holds flatter.
• 10s haven’t retested the 4.50% mark after the level held during yesterday’s sell off, last 4.45%.
• SONIA futures flat to +2.5.
• BoE-dated OIS pricing ~44bp of easing for this year, with the next cut not fully discounted until the end of the June MPC (over 80% priced through April).
• This morning’s slightly firmer-than-expected headline CPI data had little impact on pricing, with the 0.1ppt upside surprise vs. the BBG survey median driven by non-core items.
• Rhetoric at the Bank’s February MPC will be key, we expect no change in policy settings at that event.
• Further deterioration in the labour market presents the most obvious dovish risk to pricing at this stage.

DUH6 106.90/106.80 1x2 put spread paper paid 0.25 on 5K.

Pending home sales dropped by 9.3% M/M in December, far greater than the -0.3% drop expected and bringing the sales index down in line with the lowest levels seen in the last 25 years. This is a large setback following 4 consecutive monthly increases and while it's just one month of data, as a leading indicator of existing home sales it suggests that the recent improvement in residential activity should be viewed cautiously.

• Sales fell sharply in all 4 US regions M/M, with 3 of 4 falling Y/Y (the South saw a rise), per the National Association of Realtors release.
• The release quoted NAR Chief Economist Lawrence Yun as saying “The housing sector is not out of the woods yet. After several months of encouraging signs in pending contracts and closed sales, the December new contract figures have dampened the short-term outlook.”
• However Yun suggests that the lack of agreed sales is due to sellers being reticent to list their homes: "the decline in pending home sales could be a result of dampened consumer enthusiasm about buying a home when there are so few options listed for sale."
• Given the pickup in mortgage purchase applications evident in January amid a fall in mortgage rates, we could see a bounce in pending sales early in the year, but overall affordability remains limited for buyers and there is less evidence now that a meaningful pickup is in the offing.