MNI US MARKETS ANALYSIS - EUR Vols Surge Ahead of US CPI

Highlights:

• EUR vols well bid as markets anticipate US CPI, ECB's last decision of the year
• USD/JPY surges off lows as BoJ see little risk in waiting for next hike
• CNH drags EM currencies lower as authorities could consider weaker currency policy next year

US TSYS: Extending The Week’s Decline Ahead Of CPI Report

• Treasuries have modestly extended the week’s push lower today, following yesterday’s further round of long cover, amidst particularly low volumes ahead of today's CPI report.
• The recent sell-off has diluted the potential magnitude of reaction to a hawkish CPI print if driven by stickier items although there is likely still high sensitivity there. Consensus eyes what would be a fourth core CPI print around 0.3% M/M (unrounded 0.27/0.28%) for a sizeable acceleration, although surprises will depend on core PCE tracking with early estimates on average looking for 0.21% M/M which would leave a same four-month average around 0.225% M/M.
• MNI US CPI Preview: https://media.marketnews.com/USCPI_Prev_Dec2024_b72e14af0a.pdf
• Cash yields are 1-2bps higher with increases led by the front end.
• 2s10s has dipped to 7.8bps (-0.7bp) as it pulls back further from yesterday’s post-Bessent pick high of 9.9bps.
• TYH5 trades close to session lows of 110-27 (-05) on exceptionally low volumes of 170k. It’s just above yesterday’s low of 110-26 and with support is seen at 110-18 (Dec 4 low), but the recent bull cycle is seen in play with resistance at 111-20+ (Dec 6 high).
• Data: MBA mortgage data Dec 6 (0700ET), CPI Nov (0830ET), Real earnings Nov (0830ET), Federal budget balance Nov (1400ET)
• Note/bond issuance: US Tsy $39B 10Y Note re-open - 91282CLW9 (1300ET)
• Bill issuance: US Tsy $64B 17W Bill auction (1130ET)

STIR: Fed Seen Cutting Next Week But Following Cut Not Until May

• Fed Funds implied rates are little changed overnight for Dec and Jan FOMC decisions although sit as much as 2.3bps higher for mid-2025 ahead of today’s CPI report.
• Cumulative cuts from 4.58% effective: 21.5bp Dec, 27bp Jan, 42bp Mar, 51bp May and 62bp Jun.
• Aside from an anticipated 25bp cut next week, the next fully priced 25bp cut is only just seen coming in May.
• The SOFR-implied terminal has also ticked another 2bps higher today. At 3.65%, it points to only a little over 90bp of cuts for the cycle (including next week’s decision).
• MNI US CPI Preview: https://media.marketnews.com/USCPI_Prev_Dec2024_b72e14af0a.pdf

US TSY FUTURES: OI Points To Another Round Of Long Cover On Tuesday

OI suggests that net long cover dominated during Tuesday’s downtick in Tsys, with that trend only broken by net short setting in FV futures.

• Long cover dominated in curve-wide terms for a second consecutive day, reversing much of the net long setting seen in the wake of Friday’s NFP release.

STIR: Short Setting Most Prominent During Tuesday's Downtick In SOFR Futures

OI data points to a mix of net short setting and long cover during Tuesday’s downtick in SOFR futures, with the former providing the largest curve-wide impact.

• The largest net OI swing came via apparent net short setting in SFRM6.

EUROPE ISSUANCE UPDATE:

UK auction results:

• GBP4bln of the 4.25% Jul-34 Gilt. Avg yield 4.332% (bid-to-cover 2.87x, tail 1.3bp).

FOREX: USD/JPY Surges Off Lows as Mixed BoJ Headlines Favour JPY Sales

• USD/JPY has rallied well off lows, with the pair north of Y152.50 headed into the NY crossover. USD/JPY rallied hard off 151.02 lows on a Bloomberg sources report that flagged that while some officials are "not against" a rate hike in December, the Bank are said to see little cost in waiting for the next hike. The headlines prompted a flurry of activity, with over $1.3bln in JPY futures trading within a minute - comfortably the best participation of the session so far.
• As a result, the USD is firmer Wednesday, with only the AUD and NZD underperforming the JPY. Antipodean currencies came under pressure amid raised speculation that Chinese officials are considering a weaker CNY path across 2025 to counteract the potential impact of US tariffs. The Reuters piece tipped USD/CNH toward Monday highs of 7.2927 in response.
• EUR vols being marked notably higher today, as the overnight contracts now capture the fallout of both the US CPI print later today as well as the ECB rate decision tomorrow. Overnight implied has touched 18.5 points for the second highest reading of 2024 (after the US Presidential election results), which blows out the break-even on an ATM straddle to around 80 pips, over double the YTD average.
• US CPI is the data highlight ahead, with markets expecting the Y/Y print to tick up to 2.7%, and the M/M to 0.3% - an increase of 0.1ppts across both readings. The datapoint is last consequential release ahead of the Fed decision next week.
• The Bank of Canada decision is a key focus Wednesday, with markets expecting another follow-up 50bps rate cut, putting the policy rate at 3.25%. Ahead of the decision, USD/CAD is in minor positive territory and well within range of the cycle high and bull trigger of 1.4195. The pace of the uptrend is typified by the growing premium of the 50-dma over the 200-dma today, which has topped 200 pips - the highest since late 2022.

CHINA: CNY Sells Off As RTRS Flag Potential For Depreciation To Counter Trump

USD/CNH quickly adds ~400 pips after RTRS sources state that “China's top leaders and policymakers are considering allowing the yuan to weaken in 2025 as they brace for higher trade tariffs in a second Donald Trump presidency.”

• The piece also noted that “the contemplated move reflects China's recognition that it needs bigger economic stimulus to combat Trump's threat of bigger tariffs, people with knowledge of the matter said.
• A reminder that the PBoC has reintroduced the countercyclical factor to its daily CNY mid-point fixing in the time since Trump’s election victory (see chart below for USD/CNY mid-point fixing vs. BBG survey median).
• That, coupled with the RTRS sources piece, suggests that the central bank could be quelling yuan losses for now to preserve room to depreciate the CNY on its own terms as a counter to any Trump tariffs.
• The RTRS piece also noted that “a third source privy to the central bank's thinking told Reuters the PBpC has considered the possibility the yuan could drop to 7.5-per-dollar to counteract any trade shocks.”
• The initial reaction has faded after Monday’s high in USD/CNH held (session highs of 7.2921 vs. Monday’s peak at 7.2927), with the pair now ~200 pips off session highs, last 7.2720.
• A break of Monday’s highs would expose CNH7.3000, which protects last week’s ’24 high (7.3148).

Fig. 1: USD/CNY Mid-point Fixing Vs. BBG Survey Median

Source: MNI - Market News/Bloomberg

OPTIONS: EUR Vols Marked to Second Highest Level of '24 Pre-ECB, US CPI

EUR vols being marked notably higher today, as the overnight contracts now capture the fallout of both the US CPI print later today as well as the ECB rate decision tomorrow. Overnight implied has touched 18.5 points for the second highest reading of 2024 (after the US Presidential election results), which blows out the break-even on an ATM straddle to around 80 pips, over double the YTD average.

• The options-implied range brings the $1.0600 handle into focus - a level that's drawn considerable expiry interest on the lead-up into the end of the year, as mentioned above: a cumulative E10.8bln is set to roll off at that strike across the coming week, dominated by a E6.3bln strike expiring on Monday - made up of E3.4bln in calls, and E2.9bln put notional. Likely composed of sizeable year-end vol hedges, and those looking to capture any volatility following the final ECB decision of 2024.
• Trade activity so far Wednesday has favoured downside EUR exposure, with a EUR/USD put/call ratio of ~1.4. $1.0420 and 1.0380 strikes have drawn considerable demand, although puts have seen noteworthy trade with strikes as low as 1.0200-25.

EQUITIES: Bull Cycle in Eurostoxx 50 Futures Remains Intact

• A bull cycle in the Eurostoxx 50 futures contract remains intact. Price has recently traded through the 50-day EMA, at 4881.26. The clear breach of this average strengthens a bullish theme and note that 4961.00, the Nov 6 high, has also been cleared. Sights are on 5015.00 next, the Oct 29 high. Key support is 4699.00, the Nov 19 low. Initial support to watch lies at 488653, the 20-day EMA.
• The S&P E-Minis contract maintains a bullish tone and the latest pullback is considered corrective. Recent gains confirm a resumption of the uptrend and signal scope for a continuation near-term. Note that moving average studies are in a bull-mode set-up, highlighting a dominant uptrend and positive market sentiment. Resumption of the uptrend would open 6145.26, a Fibonacci projection. Initial support to watch lies at 6017.78, the 20-day EMA.

COMMODITIES: Bear Threat in WTI Futures Remains, Support Seen at $65.74

• A bearish threat in WTI futures remains present and the contract is trading closer to its recent lows. A continuation of the bear cycle would open $65.74, the Oct 1 low, and $63.90, the Sep 10 low and key support. For bulls, a stronger reversal to the upside would instead refocus attention on the key short-term resistance at $77.04, the Oct 8 high. Initial firm resistance to watch is unchanged at $72.41, the Nov 7 high.
• Gold traded higher again yesterday. The long-term trend condition remains bullish and the Oct 31 - Nov 14 bear leg appears to have been a correction. Moving average studies are in a bull-mode position, highlighting a dominant uptrend. Resistance to watch is $2721.4, the Nov 25 high. Clearance of this level would highlight a bullish short-term development. Key support to monitor is $2536.9, the Nov 14 low. First support is $2605.3, the Nov 26 low.

Date	GMT/Local	Impact	Country	Event
11/12/2024	1000/1000	**	GB	Gilt Outright Auction Result
11/12/2024	1200/0700	**	US	MBA Weekly Applications Index
11/12/2024	1330/0830	***	US	CPI
11/12/2024	1330/0830	*	CA	Intl Investment Position
11/12/2024	1445/0945	***	CA	Bank of Canada Policy Decision
11/12/2024	1530/1030		CA	BOC Governor Press Conference
11/12/2024	1530/1030	**	US	DOE Weekly Crude Oil Stocks
11/12/2024	1800/1300	**	US	US Note 10 Year Treasury Auction Result
11/12/2024	1900/1400	**	US	Treasury Budget
12/12/2024	-		EU	European Central Bank Meeting
12/12/2024	-		CH	Swiss National Bank Meeting
12/12/2024	0030/1130	***	AU	Labor Force Survey
12/12/2024	0700/0800	***	SE	Inflation Report
12/12/2024	0830/0930	***	CH	SNB PolicyRate
12/12/2024	0830/0930	***	CH	SNB Interest Rate Decision
12/12/2024	-	***	CN	Money Supply
12/12/2024	-	***	CN	New Loans
12/12/2024	-	***	CN	Social Financing
12/12/2024	1315/1415	***	EU	ECB Deposit Rate
12/12/2024	1315/1415	***	EU	ECB Main Refi Rate
12/12/2024	1315/1415	***	EU	ECB Marginal Lending Rate
12/12/2024	1330/0830	***	US	Jobless Claims
12/12/2024	1330/0830	***	US	PPI
12/12/2024	1330/0830	*	CA	Building Permits
12/12/2024	1330/0830	*	CA	Household debt-to-income
12/12/2024	1330/0830	**	US	WASDE Weekly Import/Export
12/12/2024	1345/1445		EU	ECB Monetary Policy Press Conference
12/12/2024	1500/1000	*	US	Services Revenues
12/12/2024	1530/1030	**	US	Natural Gas Stocks
12/12/2024	1630/1130	**	US	US Bill 04 Week Treasury Auction Result
12/12/2024	1630/1130	*	US	US Bill 08 Week Treasury Auction Result
12/12/2024	1800/1300	***	US	US Treasury Auction Result for 30 Year Bond
13/12/2024	2350/0850	***	JP	Tankan