CHINA: J.P. Morgan On China Outlook (Post Weekend Inflation Data)
The US bank weighs in on the policy outlook post the weekend inflation prints. It notes encouraging higher frequency data, but broader deflation pressures remain.
J.P. Morgan: "In the near term, high-frequency tracking of LNY activity looks encouraging. Daily consumption-related sales rose 10.8% compared to the LNY holiday last year, led by strong sales of home appliances (+166.4%,) and communication equipment (+181.9%) on trade-in subsidy support. Passenger traffic hit a new record high (rising 6.0%), domestic tourism spending rose 7.0% and tourism-related services rose 37.5%. In addition, movie box jumped 18.6% to register a new record high.
In the broader picture, the deflation pressure in the Chinese economy will not fade away easily, in our view. On the domestic front, regarding the pork cycle, the steady upward trend in pork prices earlier in 2024 seems to have peaked and come off steadily in recent months. The demand-supply imbalance in the domestic economy will continue to weigh on the overall pricing trend, while US tariff hikes on imports from China will weaken China’s export activity (the key sector that has helped to partly absorb excessive industrial capacity in recent quarters). Following the LNY-related uptick in January, we expect CPI inflation rate to ease in the coming months. Our latest forecasts look for average CPI inflation of 0.2% in 2025 (vs. 0.2% in 2024), with average PPI deflation at -1.1% in 2025 (vs. -2.2% in 2024).
Regarding domestic policy, the need to boost consumption has been the area of increasing policy focus lately. The first batch of 81 billion yuan trade-in subsidy announced by the NDRC in early January, with an expanded list of beneficiary products, appears to be providing near-term support for retail sales. Overall, we think policy support for consumption will step up in 2025, taking the form of further expansion of the trade-in subsidy policy, support for urban and rural basic pensions and medicare insurance, fiscal transfer for low-income households, and support for newborns, though the magnitude of 400-600 billion yuan (0.3-0.5% of GDP) will likely be smaller than the trillions investors hope to see. In all, relatively weak corporate pricing power, ongoing deflationary pressure and weak nominal GDP growth will likely remain the key challenges faced by the Chinese economy in 2025."
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US TSYS: Strong Jobs & Unemployment Rate Dip Dashes Rate Cut Hopes
- Treasuries gapped lower after Friday morning's larger than expected December non-farm and private payroll gains while unemployment dipped slightly.
- The 256k in December leaves a strong recent trend, with 255k in Sep, an average of 128k for those two months (initially 132k) before surprisingly reaccelerating again. Unemployment rate: 4.086% in Dec after very small downward revisions in the prior two months, with 4.23% in Nov (initially 4.246%) and 4.14% in Oct (initially 4.15%).
- The Dec'24 10Y contract traded down to 107-12 low (-27) well through technical support of 107-19.5 (1.618 proj of the Oct 1 - 14 - 16 price swing) next level: 107-04 (Low Apr 25 ‘24 and a key support). Curves bear flattened but finished off lows, 2s10s -3.937 at 38.383 vs. 36.572 low, 5s30s -9.612 at 37.484. 10Y yield taps 4.7860 - highest since May 2022.
- Futures retreated towards post data lows late in the session while projected rate cuts through mid-2025 have retreated since this morning's data, current vs. morning levels* as follows: Jan'25 at -0.7bp (-1.7bp), Mar'25 -6.3bp (-10.1bp), May'25 -10.5bp (-15.9bp), Jun'25 -18.2bp (-25.6bp), Jul'25 -20.2bp (25.5bp).
- Next week brings CPI and PPI inflation measures on Wednesday and Thursday respectively, the scheduled Fed speaker docket rather muted with the Fed Blackout next Friday.
US TSYS: Lat eSOFR/Treasury Option Roundup: Heavy SOFR Puts
Heavy option volumes reported Friday, SOFR outpacing Treasury flows with the former leaning towards downside puts as underlying futures retreated towards post data lows late in the session. Projected rate cuts through mid-2025 have retreated since this morning's data, current vs. morning levels* as follows: Jan'25 at -0.7bp (-1.7bp), Mar'25 -6.3bp (-10.1bp), May'25 -10.5bp (-15.9bp), Jun'25 -18.2bp (-25.6bp), Jul'25 -20.2bp (25.5bp).
- SOFR Options
- Block, 9,000 SFRM5 95.62/95.75 put spds, 6.0 ref 95.84
- +20,000 0QK5 95.25/95.50 put spds 1.0-1.25 over 96.00/96.12 call spds
- Block, +6,400 SFRZ5 97.00/98.00 call spds, 8.0 vs. 95.925/0.12%
- +8,000 0QM5/0QU5 94.50/95.00 put spd strip 9.75 total
- +5,000 0QM5 94.00/94.50/95.00 put flys, 2.5 vs. 95.87/0.05%
- +10,000 SFRZ5 95.25/95.75 2x1 put spds, 3.25 ref 95.915
- +6,000 SFRM5 96.00/96.25 call spds, 4.5 ref 95.845
- -5,000 SFRZ5 96.56 calls, 18.5 ref 95.905
- -6,000 0QM5 95.75 puts cvrd vs 2QM5/3QM5 95.75 put strip cvrd, 10.5 net puts over
- +20,000 0QM5 96.37/97.00 call spds vs 95.37/95.62 put spd, 3.0 net calls over
- -10,000 0QG5 96.00 calls, 12.0 ref 95.95
- -20,000 0QH5 96.62 calls, 3.0
- +7,000 0QZ5 97.25 calls, 9.5 vs. 95.87/0.14%
- +10,000 SFRJ5 96.50 calls, 2.75 ref 95.855
- -5,000 SRM5 96.00/96.25 call spds, 4.5 ref 95.845
- -8,000 SFRJ5 95.75 puts, 7.0 ref 95.84
- -10,000 SFRG5 95.68 puts, 1.5 ref 95.75
- +5,000 SFRU5 96.50/97.00 call spds 5.0 ref 95.88
- +10,000 SFRK5 96.50/96.75/97.00/97.25 call condors, 1.00 ref 95.91
- Block, 5,000 SFRZ5 95.25/95.75 2x1 put spds, 3.0 net ref 95.935
- 5,000 SFRM5 96.06/96.18 call spd vs. 0QM5 96.25/96.37 call spd
- 10,000 SFRF5 95.87 calls, cab
- 2,000 0QG5 95.81/95.87/95.93 put flys ref 96.02
- Block/screen, 10,000 2QH5 95.00/95.50 put spds, 4.0 vs. 95.94/0.15%
- +3,000 SFRH5 95.875/96.1875 call spd 3.25, ref 95.795
- 1,500 SFRK5 95.75/95.87/96.00 put flys ref 95.92
- Blocks, +10,000 SFRM5 95.75/95.9375/96.1875/96.375 call condor, 5.0 vs. 95.90/0.10%
- Blocks, +18,966 SFRJ5 96.125/96.3125/96.5625/96.75 call condor, 2.50 ref 95.93
- Treasury Options
- 10,000 TYG5 107.5/108.25 call spds 27 ref 107-24
- 4,000 TYG5 104.25/105.75 put spds ref 107-21
- -10,000 TYG5 106/106.5 put strips, 14
- 4,000 Monday wkly TY 107/107.25 put spds ref 108-03 (expire Monday)
- over -19,500 wk2 TY 107.5 puts, 4-5 (expire today, OI 39,662)
- 2,000 TYH5 106/108 2x1 put spd vs. 108.5/111 1x2 call spds ref 108-08.5
- 3,150 TYH5 111/113 1x2 call spds ref 108-02.5
- 2,000 TYG5 109.5/110.5/111.5 call flys ref 108-04.5
- +13,000 TYH 106.5/107.5 2x1 put spd, 4 ref 108-05 (106.5 strike appr 4.95%)
- 3,500 TYG5 108/109.5 put spds, ref 108-05
- 5,000 TYG5 106.5/107.5 put spds, ref 108-05
JGB TECHS: (H5) Downtrend Extends
- RES 3: 147.74 - High Jan 15 and bull trigger (cont)
- RES 2: 146.53 - High Aug 6
- RES 1: 142.73/144.48 - High Dec 9 / High Nov 11
- PRICE: 140.58 @ 19:10 GMT Jan 10
- SUP 1: 140.54 - 2.236 proj of the Aug 6 - Sep 3 - 9 price swing
- SUP 2: 140-00 - Round number support
- SUP 3: 139.38 - 2.764 proj of the Aug 6 - Sep 3 - 9 price swing
A clear downtrend in JGB futures remains intact and the latest fresh cycle lows, reinforces this condition. Note too that moving average studies on the continuation chart are in a bear-mode setup, highlighting a clear downtrend. The move down exposes the 140.00 psychological handle next. For bulls, a reversal would open 142.73 and 144.48, the Dec 9 and Nov 11 high respectively.
