MNI ASIA MARKETS ANALYSIS: USD Softer As FOMC Approaches

MNI ASIA MARKETS ANALYSIS:

MNI (NEW YORK) - HIGHLIGHTS:

• USD A Touch Softer, With CAD Volatile On Political Uncertainty
• Short-End US Yields Anchored To Start Fed Week, Tsys Bear Steepen
• UK Employment Data Eyed In Europe Trade Early Tuesday

US TSYS: Short-End Remains Anchored To Start Fed Week

Treasuries softened slightly Monday, with the Fed's December rate decision and communications coming into view.

• After modest upticks overnight in a minor recovery from last week's sell-off, stronger-than-expected preliminary December Services PMIs applied downside pressure on Treasuries.
• Futures would hit their worst levels around midday ET after president-elect Trump noted there had been some progress in stopping the war in Ukraine.
• That saw futures briefly hit their weakest intraday point since Nov 22 (TYH5 109-24.5), though losses were pared modestly going into the cash close.
• The cash curve lightly bear steepened on the day. Short end yields were unchanged, with the FOMC rate path seen very slightly more dovish than on Friday (1bp added to 2025 cuts), but this week's rate decision considered to be a done deal (25bp cut remaining ~95+% implied).
• Attention turns to Tuesday's Retail Sales data, with the Fed decision coming up on Wednesday as mentioned.
• The MNI Markets Team's Fed analyst preview, as well as our Policy Team's Sources article out today, point to expectations that the FOMC will signal 3 25bp cuts in 2025 via its Dot Plot, compared with 4 25bp cuts envisaged in the last set of forecasts in September.
• Latest levels: The Mar 25 T-Note future is down 1/32 at 109-27, having traded in a range of 109-24.5 to 110-35. In cash, the 2-Yr yield is unchanged at 4.2448%, 5-Yr is up 0.4bps at 4.2535%, 10-Yr is up 0.4bps at 4.4007%, and 30-Yr is up 1.4bps at 4.615%.
   

FED: Dec FOMC Analyst Outlook: Higher Longer-Run Rate Eyed

We've published our update of our Dec 13 December FOMC preview to include analyst expectations - PDF is here

• Analysts are unanimous in expecting a 25bp rate cut from the FOMC this week, but there are varying opinions on the path of rates ahead and the number of cuts that the Fed will signal in its Dot Plot for 2025. Here is the summary table from our report:

UK DATA: MNI UK CPI and Labour Market Preview - December 2024 Release

• After this morning’s flash PMIs, the remainder of the week remains key with both labour market data (Tues) and CPI data (Wed) ahead of the MPC policy decision and MPS being released on Thursday.
• The bottom line is that unless there are absolutely huge surprises in this week’s data, it looks very likely that Bank Rate will be left on hold. Our base case is for an 8-1 vote split (with Dhingra again preferring a 25bp cut) but soft CPI and wage data could lead to additional dissents for sequential cuts from either Taylor or Ramsden.
• We see downside risks to CPI if the survey date is 19 November (rather than the widely expected 12 November). We discuss the impact of the date on Black Friday discounts.
• For the labour market, we continue to pay most attention to private sector regular (i.e. non-bonus) AWE. This came in at 4.80%Y/Y in the 3-months to September (0.05ppt above the BOE’s 4.75% projection in the November MPR). 7/9 of the analyst previews that we have read look for a pickup of 2 tenths to 5.0%Y/Y in the 3-months to October (with one analyst at 5.1%Y/Y and one at 4.9%Y/Y).

For the full document including sell side summaries click here.

SOFR FIXES AND PRIOR SESSION REFERENCE RATES

US TSYS/OVERNIGHT REPO: Secured Rates Expected To Dip In Line With Fed RRP Tweak

The pullback in secured rates from December's highs continued Friday, with SOFR down 2bp to 4.60%. That's back to Dec 6 levels, lower than the 4.64% peak on Dec 10 (which was more reminiscent of month-end levels). 

• Heavy Treasury settlements are set to underpin secured rates again in today's print. But that too should dissipate. There is relatively more debate over the effect on broader rates from the FOMC's broadly expected 5bp downward adjustment to ON RRP rates on Wednesday (to 4.25% from 4.55%, so 30bp, assuming the Fed cuts the funds rate by 25bp as expected).
• Some analysts see the lower ON RRP passing through to at least some degree to EFFR (potentially lowering it by 2-3bp), but some don't see it affected at all.
• While both recognize that EFFR is more influenced by IORB (which is set to remain 15bp above the lower bound, so 4.40% from 4.65% currently) than ON RRP, Deutsche pencils in a 2bp EFFR adjustment, while  Wrightson ICAP sees fed funds pricing "determined almost exclusively by the IORB rate", ie no change (they also now see the tweak happening in January and not this week).
• Secured rates are expected to fall more clearly in line, however, with triparty (TGCR) rates falling by 4-5bp in line with ON RRP, with a similar for SOFR either immediately or over the coming weeks.

REPO REFERENCE RATES (rate, change from prev. day, volume):
* Secured Overnight Financing Rate (SOFR): 4.60%, -0.02%, $2255B
* Broad General Collateral Rate (BGCR): 4.59%, -0.01%, $844B
* Tri-Party General Collateral Rate (TGCR): 4.59%, -0.01%, $815B

New York Fed EFFR for prior session (rate, chg from prev day):
* Daily Effective Fed Funds Rate: 4.58%, no change, volume:  $102B
* Daily Overnight Bank Funding Rate: 4.58%, no change, volume:  $249B

US TSYS/OVERNIGHT REPO: ON RRP Hits Fresh Post-Pandemic Low As FOMC Eyes Tweak

Takeup of the Fed's overnight reverse repo facility fell $25B to $110.8B today - the lowest level since April 2021, and now down around $70B in 3 sessions.

• Today's pullback is not a major surprise as it comes amid large Treasury auction settlements, but the overall trend seems clearly to the downside and comes as the FOMC is likely this week to debate reducing the offer rate on the facility by 5bp vs other administered rates.

US: SOFR FIX - 16/12/24

SOFR Fix - Source: Market source

• 1mth 4.37521 -0.00661
• 3mth 4.35138 0.00266
• 6mth 4.27273 0.01232
• 12mth 4.17105 0.03526

BONDS: EGBs-GILTS CASH CLOSE: Gilts Underperform Ahead Of Heavy UK Calendar

Gilts underperformed Bunds Monday at the start of a busy week on the UK calendar.

• December flash PMIs were the session's focus, and both the Eurozone and UK readings proved mixed (manufacturing weaker, services rebounding), though there was only limited lasting hawkish reaction to evidence of inflation pressures.
• Global core FI weakened in the afternoon on strong US Services PMI data and a modest rebound in oil prices, with Gilts hardest-hit. Chancellor Scholz's government lost its vote of confidence as expected, setting up early German elections on 23 Feb.
• ECB's Schnabel echoed the broader Governing Council's view that further easing toward neutral is appropriate, though again she did not sound supportive of easing past neutral. Earlier, ECB's Wunsch had similar sentiments.
• The UK curve bear flattened on the day, with Germany's twist steepening.
• Periphery EGB spreads widened, and while French spreads did too the move was contained given the sovereign's downgrade late Friday.
• The week's Europe highlight is the Bank of England decision released Thursday - as our preview of this week's CPI and Labour Market data (PDF) noted, unless there are absolutely huge surprises in thew data, it looks very likely that Bank Rate will be left on hold. Tuesday sees the Labour Market data, as well as German IFO/ZEW.

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is down 2.1bps at 2.05%, 5-Yr is down 1.7bps at 2.071%, 10-Yr is down 1bps at 2.247%, and 30-Yr is up 0.4bps at 2.483%.
• UK: The 2-Yr yield is up 4.9bps at 4.357%, 5-Yr is up 4.5bps at 4.28%, 10-Yr is up 3bps at 4.442%, and 30-Yr is up 2.1bps at 4.988%.
• Italian BTP spread up 1.8bps at 115.4bps / French OAT up 1.5bps at 79.9bps  
   

EUROPE OPTIONS: Mostly Upside In Rates Seen Monday

Monday's Europe rates/bond options flow included:

• ERF5 97.375 puts paper paid 0.25 on 12.5K
• ERH5 97.75/97.875/98.00 call fly, bought for 1.5 in 10k
• SFIU5 96.15/96.50 call spread vs. 95.50/95.35 put spread, paper paid 8 for the call spread on 3K vs. 96.00, delta 22%.

FOREX: USD Index a Touch Softer as FOMC Approaches, EURJPY Above 50-Day EMA

• Initial gains for the greenback on Monday were short-lived, with the USD index slipping into negative territory. The DXY is down 0.2% as we approach the APAC crossover and higher equity indices in the US may be weighing at the margin.
• Headlines surrounding the resignation of Canada’s finance minister Chrystia Freeland sparked some momentary CAD weakness, however, USDCAD has trade back to unchanged on the session around 1.4236 from a 1.4271 high.
• Once again, the Japanese Yen is weakening, with USDJPY rising back above 154 and briefly reaching a recovery high of 154.48. The moves come amid the backdrop of media snippets suggesting the BoJ sees little risks in waiting for 2025 for its next policy move. Indeed, MNI has also highlighted the domestic political backdrop as a constraint on sharp policy shifts, diminishing the likelihood of a rate move later this week.
• A firmer single currency has allowed EURJPY to rise a further 0.4%, piercing the 162 handle in the process. Gains today have seen the cross extend above the 50-day EMA, its first breach above the average since November 21.
• GBP is an outperformer, rising against all others in G10 on the back of a better-than-expected UK Services PMI print, which has resultingly seen GBP/USD trade to a daily high of 1.2699. The release showed some similar themes to the EZ PMIs across the morning, with average prices increasing at the fastest pace for nine months, particularly in services. Dynamics may limit the potential for more dovish dissents at the BOE meeting this week.
• UK labour market data highlights on Tuesday, before German IFO and ZEW sentiment data. Canadian CPI and US retail sales then highlight the North American data calendar.

FX OPTIONS: Larger FX Option Pipeline

• EUR/USD: Dec18 $1.0550-65(E1.6bln); Dec20 $1.0420-40(E5.4bln), $1.0443-50(E4.9bln), $1.0500(E7.2bln), $1.0525(E3.4bln), $1.0550-55(E3.2bln), $1.0600(E3.7bln)
• USD/JPY: Dec19 Y155.00($1.5bln), Y158.00($1.1bln); Dec20 Y150.00($1.7bln), Y150.65($1.3bln), Y155.00($1.0bln), Y156.00($1.3bln), Y157.00-05($2.6bln)
• GBP/USD: Dec18 $1.2800-15(Gbp1.4bln)
• EUR/GBP: Dec20 Gbp0.8290-00(E2.6bln), Gbp0.8345(E2.0bln)
• AUD/USD: Dec20 $0.6494-00(A$2.0bln)
• NZD/USD: Dec20 $0.5850-60(N$1.0bln)
• USD/CAD: Dec20 C$1.4200($2.4bln)
   

Date	GMT/Local	Impact	Country	Event
17/12/2024	0700/0700	***	GB	Labour Market Survey
17/12/2024	0900/1000	***	DE	IFO Business Climate Index
17/12/2024	1000/1100	***	DE	ZEW Current Conditions Index
17/12/2024	1000/1100	***	DE	ZEW Current Expectations Index
17/12/2024	1000/1100	*	EU	Trade Balance
17/12/2024	1000/1000	**	GB	Gilt Outright Auction Result
17/12/2024	1000/1100		EU	ECB's Elderson at ECB Banking Supervision conference
17/12/2024	1330/0830	*	CA	International Canadian Transaction in Securities
17/12/2024	1330/0830	***	CA	CPI
17/12/2024	1330/0830	***	US	Retail Sales
17/12/2024	1355/0855	**	US	Redbook Retail Sales Index
17/12/2024	1415/0915	***	US	Industrial Production
17/12/2024	1500/1000	*	US	Business Inventories
17/12/2024	1500/1000	**	US	NAHB Home Builder Index
17/12/2024	1630/1130	*	US	US Treasury Auction Result for Cash Management Bill
17/12/2024	1800/1300	**	US	US Treasury Auction Result for 20 Year Bond
18/12/2024	-		JP	Bank of Japan Meeting
18/12/2024	-		SE	Riksbank Meeting
18/12/2024	0700/0700	***	GB	Consumer inflation report
18/12/2024	0700/0700	***	GB	Producer Prices
18/12/2024	0700/1500	**	CN	MNI China Money Market Index (MMI)
18/12/2024	0900/1000		EU	ECB's Lane in fireside chat at MNI Connect Event
18/12/2024	1000/1100	***	EU	HICP (f)
18/12/2024	1000/1100	**	EU	Construction Production
18/12/2024	1100/1100	**	GB	CBI Industrial Trends
18/12/2024	1200/0700	**	US	MBA Weekly Applications Index
18/12/2024	1330/0830	*	US	Current Account Balance
18/12/2024	1330/0830	***	US	Housing Starts
18/12/2024	1530/1030	**	US	DOE Weekly Crude Oil Stocks
18/12/2024	1900/1400	***	US	FOMC Statement
19/12/2024	2145/1045	***	NZ	GDP
19/12/2024	-		NO	NorgesBank Meeting
19/12/2024	0001/0001	*	GB	Brightmine pay deals for whole economy
19/12/2024	0300/1200	***	JP	BOJ Policy Rate Announcement