MNI ASIA OPEN: Fed Gov Waller Rekindles Rate Cut Hopes

EXECUTIVE SUMMARY

• MNI BRIEF: Waller Sees Fed Cuts Sooner Than Markets Expect
• MNI BRIEF: Bessent Expects Inflation Easing Toward 2% Fed Goal
• MNI US: Trump Eyes Sanctions Strategy To Facilitate Ukraine Peace Settlement, BBG
• MNI US DATA: Control Retail Sales End 2024 On High Note
• MNI US DATA: Second Highest Philly Fed Reading Since 1984
• MNI US DATA: Higher But Still Healthy Initial Jobless Claims

US

MNI BRIEF: Waller Sees Fed Cuts Sooner Than Markets Expect

U.S. inflation could get back to target sooner than some expect, and the Federal Reserve could lower interest rates again in the next few months and cut as many as four times this year, Fed Governor Chris Waller said Thursday. Traders are currently pricing in one quarter-point cut by July and two by year-end. Core inflation is "getting very close to where we want to be," he told CNBC in an interview. "If we continue getting numbers like this it's reasonable to think rate cuts could happen in the first half of the year." 

• "I don't think March could be completely ruled out depending on the data, but anything that disrupts that is likely to push it back some," he said. The median estimate of the neutral rate among FOMC members would imply three to four more cuts, he added. Three or four cuts this year could be possible if data cooperate, he said. 

NEWS

MNI BRIEF: Bessent Expects Inflation Easing Toward 2% Fed Goal

U.S. Treasury nominee Scott Bessent told his confirmation hearing Thursday that President-elect Donald Trump's policies will leave inflation on an easing path toward the Federal Reserve's 2% goal. "I believe that inflation will be much closer to the Federal Reserve's target of 2%" during the Trump administration, Bessent said during a Senate confirmation hearing, without providing much specificity about the timing of inflation's expected fall. Trump's policies "will increase real wages and lower inflation closer to the Federal Reserve's 2% target as it did the during President Trump's first administration," he said.

MNI US: HFC Floats Corporation Tax Hike To Resolve Standoff Over SALT

The conservative House Freedom Caucus has proposed a corporate tax hike to offset the cost of raising the cap on State and Local Tax deductions (SALT) - a singular political priority for a handful of blue-state Republicans, and one of the most challenging issues to resolve in reconciliation budget talks. House Speaker Mike Johnson (R-LA) is eyeing an April floor vote for a huge energy, tax, border security reconciliation bill but is hamstrung by the spending priorities of HFC and SALT Republicans, both of whom can sink legislation.

MNI US: Trump Eyes Sanctions Strategy To Facilitate Ukraine Peace Settlement, BBG

Bloomberg reports that US President-elect Donald Trump’s advisors, “are crafting a wide-ranging sanctions strategy to facilitate a Russia-Ukraine diplomatic accord in the coming months while at the same time squeezing Iran and Venezuela.” Bloomberg notes the two likely options: “...if the incoming administration believes a resolution to the Ukraine war is in sight [they may include] some good-faith measures to benefit sanctioned Russian oil producers that could help seal a peace deal... A second option would build on the sanctions, ramping up pressure even further to increase leverage...”

MNI EU-RUSSIA: Hungary Min-Need To Discuss Sanctions w/Trump Admin Before Rollover

Reuters reports comments from Hungary's Minister for European Union Affairs János Bóka. Says that the Hungarian gov't has not yet decided whether to support the rollover of EU sanctions due at the end of January. Says that the decision should only come after discussions with the incoming administration of US President-elect Donald Trump. The deadline for agreeing to roll over sanctions on Russia for another six months is 31 January. 

MNI US: DeSantis Picks FL. AG Moody To Fill Rubio's Senate Seat

Florida Governor Ron DeSantis has confirmed the state's Attorney General Ashley Moody as his pick to fill the US Senate seat vacated by President-elect Donald Trump's nominee for Secretary of State Marco Rubio. Chad Pergram at Fox News says the selection of Moody "addresses a combination of other issues in Florida [...] the appointment of Moody would clear the field for Rep. Byron Donalds (R-FL) to run for Governor. Fox is told that Moody has tinkered with running for governor. [...] Also, Rep. Cory Mills (R-FL) has been interested in the Senate seat. But appointing Mills to the Senate seat creates another vacancy in the House – which Republicans ABSOLUTELY CANNOT HANDLE considering how narrow the majority is."

MNI ISRAEL: PM Claims Hamas Reneging On Gaza Deal Points, Cabinet Meeting Delayed

Times of Israel reporting comments attributed to the office of Israeli PM Benjamin Netanyahu claiming that Hamas is “reneging on the understandings and creating a last-minute crisis that is preventing an agreement,” with regards to the Gaza ceasefire-for-hostages deal announced on 15 Jan. The PM's office claims “The Israeli cabinet will not convene until the mediators notify Israel that Hamas has accepted all elements of the agreement.”

MNI MIDEAST: Shipping World Watches For Houthi Reaction To Gaza Ceasefire

The emerging Gaza ceasefire-for-hostages deal - yet to be confirmed by the Israeli gov't - will not only be watched in the context of security in Israel and the Palestinian territories, but also for the potential impact on global shipping flows, supply chains, and inflationary pressures. Since the outbreak of the conflict following the Hamas attacks of 7 Oct 2023, the Houthi rebels in Yemen have engaged in a significant campaign of attacks on commercial shipping in and around the Red Sea and Gulf of Aden. The Houthis, backed by Iran as part of its 'axis of resistance', have previously said the attacks would continue as long as Israeli forces remain in Gaza. 

MNI US TSYS: Fed Gov Waller Rekindles Rate Cut Hopes

• Treasuries look to finish near late session highs Thursday, scaling to the highest levels since January 6 after Fed Gov Waller's dovish comments on CNBC earlier estimated as many as three rate cuts are still possible this year if data cooperates.
• Projected rate cuts through mid-2025 have regained traction after cooling this morning, current lvls vs. this morning* as follows: Jan'25 steady at -0.7bp, Mar'25 at -7.6bp (-6.3bp), May'25 -14bp (-11.8bp), Jun'25 -24.2bp (-20.4bp), Jul'25 at -28.7bp (-23.7bp).
• Treasuries had pared early losses but held to narrow ranges after this morning's mixed data:
• Retail sales closed December on a solid note, signifying continued strong domestic demand to end 2024. While headline retail sales growth was slightly softer than expected (0.4% vs 0.6% survey), but that was offset in part by an upward revision to November (0.8% from 0.7%).
• Initial jobless claims surprised higher but remained at a healthy level last week whilst continuing claims continued a trend modest easing away from recent months. The combination continues to point to dampened re-hiring activity compared to much of 2024 but actual layoffs remain very low and don’t show signs of stress.
• Reminder, The Fed enters their self imposed media Blackout at midnight Friday through January 30.

OVERNIGHT DATA

MNI US DATA: Control Retail Sales End 2024 On High Note

Retail sales closed December on a solid note, signifying continued strong domestic demand to end 2024. While headline retail sales growth was slightly softer than expected (0.4% vs 0.6% survey), but that was offset in part by an upward revision to November (0.8% from 0.7%).

• More importantly, the GDP-input Control Group category easily beat expectations, rising by a 3-month high 0.7% (0.4% expected and prior), with ex-auto (0.4%) and ex-auto/gas (0.3%) each missing expectations by 0.1pp but nonetheless accelerating 0.1pp from November's prints.
• The vast majority of retail sales category saw sequential growth, the exceptions being declines in food services/drinking places (the third-largest retail category, falling -0.3%), health/personal care, and building materials establishments.
• But the large categories were mostly solid: motor vehicles/parts +0.7%, non-store retailers +0.2%, food/beverage +0.8%, general merchandise +0.3%, gasoline +1.5%.
• All of those are in nominal terms. From an inflation-adjusted perspective, it looks as though retail sales momentum may have peaked earlier in Q4 (see chart). But that's still consistent with real PCE goods growth in the 4-6% Q/Q range for Q4 (though not necessarily so for real PCE services, as we have been pointing out for the past few months).
• And momentum remains solid overall, with total sales rising 7.3% on a 3M/3M annualized basis nominal / 6.3% real, and control group up 5.4% on that basis in nominal terms/ 4.2% real, marking 4 to 5 months of well-above trend expansion.

MNI US DATA: Higher But Still Healthy Initial Jobless Claims

Initial jobless claims surprised higher but remained at a healthy level last week whilst continuing claims continued a trend modest easing away from recent months. The combination continues to point to dampened re-hiring activity compared to much of 2024 but actual layoffs remain very low and don’t show signs of stress. 

• Initial jobless claims were a little higher than expected at 217k (sa, cons 210k) in the week to Jan 11, falling just short of the payrolls reference period, after an upward revised 203k (initial 201k).
• The four-week average ticked 1k lower to 213k, a new low since Apr 2024 and a little further below the 218k averaged in 2019.
• In NSA terms, the increase from 307k to 352k is unusual but there can be seasonal adjustment quirks at the end and start of the year. Next week's data, which also coincides with the payrolls period, should be a better test.
• Continuing claims on the other hand surprised lower at 1859k (sa, cons 1870k) in the week to Jan 4 after an upward revised 1877k (initial 1867k).
• It continues to hold a pullback away from a recent high of 1898k in November. 

MNI US DATA: Second Highest Philly Fed Reading Since 1984

• The Philly Fed manufacturing business outlook surprisingly surged to 44.3 (cons -5) in January for a huge beat, after an upward revised -10.9 (initial -16.4).
• It’s the highest monthly reading since the 44.4 in Apr 2021 and before that 1984.
• Shipments and new orders were both behind the surge, from 1.7 to 41.0 and -3.6 to 42.9 respectively.
• It’s possible that this is a front-loading of orders ahead of expected tariffs but the comments in the press release don’t have enough detail to shed any light.  
• The six-month ahead series meanwhile has been elevated for a few months now, most recently bouncing from 33.8 to 46.3 but holding below the 53.9 in November. This series tends to run higher than the current conditions series though, with recent readings below post-pandemic highs through 2020-2 – see chart.
• Interestingly, on an ISM-equivalent basis, the overall Philly manufacturing series jumped from 48.9 to 61.3, but that kept it more easily contained by some 2021 readings which included the recent high of 65.6 in Nov 2021.
• Nevertheless, it’s far higher than the 50.0 equivalent for the Empire survey (the ISM survey was 49.3 in December for context), and highlighting the recent improvement for Philly, this is only the fourth month since mid-2022 with a >50 reading on this basis.

MNI CANADA DATA: Housing Starts Reach Third Highest Year On Record

• Housing starts in 2024 +2% YOY at 227,697 units, Canada Mortgage and Housing Corp says Thursday.
• After three straight months of increase, December housing starts -13% MOM to 231,468 units. That's below economist consensus for 270,000 units.
• 6M moving average in Dec. -0.7% at 242,637 units.
• “While this annual increase shows some signs of progress, Canada still needs significantly higher supply growth to restore affordability in urban centres, said Mathieu Laberge, CMHC’s Chief Economist. 

MARKETS SUMMARY

Key market levels of markets in late NY trade:
DJIA down 30.57 points (-0.07%) at 43191.15
S&P E-Mini Future up 1.25 points (0.02%) at 5990.5
Nasdaq down 57.2 points (-0.3%) at 19454.66
US 10-Yr yield is down 4.7 bps at 4.6064%
US Mar 10-Yr futures are up 8.5/32 at 108-19
EURUSD up 0.001 (0.1%) at 1.0299
USDJPY down 1.19 (-0.76%) at 155.28
WTI Crude Oil (front-month) down $1.31 (-1.64%) at $78.73
Gold is up $18.32 (0.68%) at $2714.64

European bourses closing levels:
EuroStoxx 50 up 74.62 points (1.48%) at 5106.93
FTSE 100 up 90.77 points (1.09%) at 8391.9
German DAX up 80.71 points (0.39%) at 20655.39
French CAC 40 up 160.15 points (2.14%) at 7634.74

US TREASURY FUTURES CLOSE

3M10Y -4.357, 29.772 (L: 27.947 / H: 37.195)
2Y10Y -1.928, 36.585 (L: 35.4 / H: 39.374)
2Y30Y -0.694, 60.462 (L: 57.687 / H: 63.261)
5Y30Y +1.611, 44.656 (L: 38.374 / H: 45.46)
Current futures levels:
Mar 2-Yr futures up 1.375/32 at 102-25.5 (L: 102-20.875 / H: 102-26.5)
Mar 5-Yr futures up 5.75/32 at 106-8.25 (L: 105-27 / H: 106-10.5)
Mar 10-Yr futures up 9/32 at 108-19.5 (L: 108-00 / H: 108-24)
Mar 30-Yr futures up 15/32 at 113-0 (L: 112-02 / H: 113-09)
Mar Ultra futures up 20/32 at 117-27 (L: 116-23 / H: 118-06)

MNI US 10YR FUTURE TECHS: (H5) Corrective Cycle

• RES 4: 111-20+ High 6 and the bull trigger
• RES 3: 110-25   High Dec 12  
• RES 2: 109-20   50-day EMA 
• RES 1: 108-23/109-06 Intraday high / High Dec 31
• PRICE:‌‌ 108-22+ @ 19:16 GMT Jan 16
• SUP 1: 107-06   Low Jan 13 and the bear trigger   
• SUP 2: 107-04   Low Apr 25 ‘24 and a key support 
• SUP 3: 107-00   Round number support
• SUP 4: 106-11   2.00 proj of the Oct 1 - 14 - 16 price swing  

The trend condition in Treasury futures remains bearish, however Wednesday’s gains and today’s follow through, highlight a stronger short-term corrective cycle. The contract has traded through the 20-day EMA, at 108-16+. This exposes 109-06, the Dec 31 high, and 109-20, the 50-day EMA. A clear break of the 50-day average is required to strengthen a bullish theme. The bear trigger has been defined at 107-06, the Jan 13 low.

SOFR FUTURES CLOSE

Mar 25 +0.005 at 95.780
Jun 25 +0.010 at 95.910
Sep 25 +0.020 at 960
Dec 25 +0.025 at 96.045
Red Pack (Mar 26-Dec 26) +0.030 to +0.045
Green Pack (Mar 27-Dec 27) +0.050 to +0.055
Blue Pack (Mar 28-Dec 28) +0.060 to +0.065
Gold Pack (Mar 29-Dec 29) +0.045 to +0.060

SOFR FIXES AND PRIOR SESSION REFERENCE RATES
​​​​​​​
SOFR Benchmark Settlements:

• 1M -0.00233 to 4.29872 (-0.00382/wk)
• 3M -0.00971 to 4.29317 (+0.00616/wk)
• 6M -0.02649 to 4.26213 (+0.01755/wk)
• 12M -0.05634 to 4.20801 (+0.02968/wk)

US TSYS: Repo Reference Rates

• Secured Overnight Financing Rate (SOFR): 4.28% (+0.00), volume: $2.280T
• Broad General Collateral Rate (BGCR): 4.26% (-0.01), volume: $859B
• Tri-Party General Collateral Rate (TGCR): 4.26% (-0.01), volume: $844B
• (rate, volume levels reflect prior session)

STIR: FRBNY EFFR for prior session:

• Daily Effective Fed Funds Rate: 4.33% (+0.00), volume: $112B
• Daily Overnight Bank Funding Rate: 4.33% (+0.00), volume: $306B

FED Reverse Repo Operation

A swift decline in RRP usage continues -- lowest level since mid-April 2021 as it fall below $100B this afternoon to $94.489B from $119.977B on Wednesday. The number of counterparties retreats to 34 from 39.

MNI PIPELINE: Dealers Make Up Near 75% of Thu's $33B Corporate Issuance

Surprisingly large $8B multi-tranche issuance each from Morgan Stanley and JP Morgan as well as $6B Wells Fargo makes up nearly 75% of today's $33.15B total issuance, total for the week at $69.8B.

• Date $MM Issuer (Priced *, Launch #)
• 01/16 $8B #Morgan Stanley 2B 4NC3 +72, $500M 4NC3 SOFR+90, $2.5B 6NC5 +85, $3B 11NC10 +100
• 01/16 $8B #JP Morgan $2B 4NC3 +62, $750M 4NC3 SOFR+80, $2.5B 6NC5 +75, $2.75B 11NC10 +90
• 01/16 $6B #Wells Fargo $2.35B 3NC2 SOFR+67, $650M 3NC2 SOFR+78, 6NC5 +85 $3B +85
• 01/16 $3B #Citigroup 11NC10 +143
• 01/16 $1.9B #Goldman Sachs PerpNC5 6.85%
• 01/16 $1.5B #CABEI 3Y +70
• 01/16 $1.5B *CDP Financial 5Y SOFR+60
• 01/16 $1.25B *OKB 5Y SOFR+43
• 01/16 $1B #Dexia 5Y SOFR+73
• 01/16 $1B Kommuninvest WNG 3Y SOFR+36
• Expected Friday
• 01/17 $1B Saskatchewan WNG 5Y SOFR +60a

MNI BONDS: EGBs-GILTS CASH CLOSE: Gilt Relief Rally Continues

Gilts outperformed for a second consecutive session Thursday, as Wednesday's softer-than-expected US inflation data maintained the global FI relief rally.

• Bunds and Gilts started the session mixed, with Gilts outperforming on dovish comments from BoE's Taylor late Wednesday, with UK GDP coming in on the soft side.
• Global markets largely shrugged off mixed US data in the European afternoon. But dovish comments by US Federal Reserve Governor Waller on prospective 2025 rate cuts helped European FI rally into the cash close, with yields finishing at/near the session lows.
• The accounts of the ECB December meeting noted "some" saw acase for a 50bp cut last month but this was not a market mover.
• The UK and German curves bull steepened on the day. EGB periphery and semi-core spreads were broadly tighter to Bunds, with BTPs and GGBs outperforming.
• Friday's calendar includes UK retail sales and the final reading of Eurozone December inflation. We also get appearances by ECB's Nagel, Escriva and Centeno, as well as BOE's Bailey.

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is down 3bps at 2.229%, 5-Yr is down 2.1bps at 2.346%, 10-Yr is down 1.3bps at 2.547%, and 30-Yr is down 0.1bps at 2.785%.
• UK: The 2-Yr yield is down 8.5bps at 4.381%, 5-Yr is down 6.1bps at 4.406%, 10-Yr is down 5.4bps at 4.677%, and 30-Yr is down 5.8bps at 5.241%.
• Italian BTP spread down 2.7bps at 110.8bps / French OAT down 0.2bps at 79.5bps  

MNI FOREX: Waller Remarks Prompt Softer Dollar, USDJPY Prints 4-Week Lows

• There has been broad dollar weakness in the aftermath of comments from Fed’s Waller, who failed to rule out a rate cut in March, contrasting with current market pricing. While not substantially different to his prior comments, the ICE USD index slid from session gains to losses amid March Fed cut pricing lifting to 8.5bps vs 6bp pre-Waller and 5bp pre-CPI.
• With Japanese yen volatility in focus overnight, USDJPY (-0.75%) had the most significant adjustment, falling from 156.10 to fresh four-week lows of 155.11. Spot has narrowed the gap to the 50-day EMA, intersecting today at 154.90.
• Price action so far appears to be technically corrective, however, it is worth noting USDJPY trendline support at 153.83 (drawn from the Sep 16 low), a break of which would be a stronger signal of a directional trend shift.
• EURJPY (-0.61%) and GBPJPY (-0.71%) are notably pressuring the psychological pivots of 160.00 and 190.00 respectively once again, with bearish threats for both crosses continuing to develop.
• Barring the 100 pip range in the aftermath of the US inflation data yesterday, EURUSD has spent the majority of the past three sessions trading in close proximity to 1.0300, with a decent amount of option expiries either side of this mark helping to contain momentum in either direction. For reference, there is 5.54bn rolling off between 1.0250/1.0350 today, with a further 3.17bn at 1.0300 on Friday and 2bn at 1.0300/1.0305 on Monday.
• China activity data will be a focus for Friday’s APAC calendar, before UK retail sales. In the US, building permits and industrial production highlights a lighter docket.

FRIDAY DATA CALENDAR

Date	GMT/Local	Impact	Country	Event
17/01/2025	0700/0700	***	GB	Retail Sales
17/01/2025	0900/1000	**	EU	EZ Current Account
17/01/2025	1000/1100	***	EU	HICP (f)
17/01/2025	1100/1200		EU	ECB's Cipollone lecture at Crypto Asset Lab conference
17/01/2025	1330/0830	*	CA	International Canadian Transaction in Securities
17/01/2025	1330/0830	***	US	Housing Starts
17/01/2025	1415/0915	***	US	Industrial Production
17/01/2025	1600/1100		CA	BOC releases review of pandemic policy actions.
17/01/2025	2100/1600	**	US	TICS