MNI US MARKETS ANALYSIS - Fed Path Consolidating CPI Lift Pre-Fed

US TSYS: 2s10s Most Inverted Since Late September With FOMC Eyed

• Cash Tsys trade 1-3bp richer, with the front end consolidating the post-CPI sell-off whilst the longer-end extends the rally instigated by yesterday’s better-received 30Y auction with its first trade through since June.
• The combination sees 2s10s push to -53.5bps for lows since late September.
• TYH4 at 110-22+ (+04+) trades at joint session highs but remains below yesterday’s speculative snap higher to 110-31+ just ahead of the CPI data. Firmer resistance is seen at the bull trigger of 111-09+ (Dec 7 high). Volumes are subdued at 240k, unsurprisingly so with Fed ahead.
• PPI provides a first point of interest with its usual implications for core PCE estimates after yesterday’s CPI report has left some modest preliminary readings. Focus will clearly be on the FOMC decision ahead - MNI Preview here.
• Fed: FOMC announce/SEP (1400ET), Powell presser (1430ET)
• Data: Weekly MBA data Dec 8 (0700ET), PPI Nov (0830ET)
• No issuance

US 2s10sSource: Bloomberg

STIR: Fed Rate Path Consolidates CPI Lift, Awaiting FOMC

• Fed Funds implied rates are little changed overnight, consolidating yesterday’s lift on the CPI report which in turn reversed a sizeable rally leading into the report.
• Ahead of today’s FOMC decision and updated SEP, it sees circa 50/50 probability of a first cut in May, fully prices that first cut in May (26bp cumulative) and builds to 110bp of cuts to end-2024.
• The Dec’24 implied rate of 4.23% has lifted 12bps since just before Friday’s payrolls report but remains 85bps before the median 2024 dot from the September SEP.

TSYS: Supercore CPI & 30-Year Supply Reception Result In Mixed Positioning Swings On Tues

The combination of yesterday’s twist flattening of the Tsy futures curve (a product of an uptick in supercore CPI and 30-Year Tsy supply seeing firmer demand than many feared) pointed to the following net positioning swings:

• Long cover: TU futures.
• Long setting: FV, TY & US futures
• Short cover: UXY and WN futures.
• The apparent rounds of long setting provided the most meaningful impulse on a net DV01-adjusted positioning basis, with the apparent net long setting in TY futures providing the most significant swing in individual contract terms.

	12-Dec-23	11-Dec-23	Daily OI Change	OI DV01 Equivalent Change ($)
TU	3,955,499	3,988,353	-32,854	-1,273,509
FV	5,747,786	5,721,414	+26,372	+1,145,202
TY	4,476,328	4,436,676	+39,652	+2,552,001
UXY	1,981,765	1,982,609	-844	-77,092
US	1,307,739	1,299,904	+7,835	+1,051,887
WN	1,577,852	1,581,019	-3,167	-672,601
		Total	+36,994	+2,725,889

SOFR: Mixed SOFR Positioning Swings Around CPI

The combination of yesterday’s twist flattening of the SOFR strip and preliminary OI data point to the following positioning swings in the wake of the CPI data-/30-Year Tsy supply-induced swings.

• Whites: A mix of apparent short setting and long cover, with relatively notable net positioning swings in 3 of the 4 contracts in the final full pre-Fed decision trading session. Short setting in SFRZ3 and SFRM4 stood out in net terms, while the apparent round of long cover in SFRU3, presumably on the firmer supercore CPI reading, came after a relatively consistent run of fresh long setting on the back of SOFR fixing quirks and dovish Fed repricing.
• Reds: An apparent mix of short setting (SFRU4 & H5), long cover (SFRZ4) and little net change (SFRM5).
• Greens: A mix of apparent short cover (SFRU5 & M6) and long setting (SFRZ5 & H6).
• Blues: Apparent light net long setting in the main, with some apparent short cover in SFRM7 bucking the broader trend.

	12-Dec-23	11-Dec-23	Daily OI Change		Daily OI Change In Packs
SFRU3	1,119,449	1,183,161	-63,712	Whites	+61,535
SFRZ3	1,574,654	1,509,584	+65,070	Reds	-1,114
SFRH4	1,105,805	1,109,003	-3,198	Greens	+4,636
SFRM4	1,051,651	988,276	+63,375	Blues	+1,996
SFRU4	910,068	896,249	+13,819
SFRZ4	958,214	974,539	-16,325
SFRH5	556,543	554,637	+1,906
SFRM5	610,769	611,283	-514
SFRU5	598,574	603,017	-4,443
SFRZ5	576,972	569,286	+7,686
SFRH6	415,497	413,637	+1,860
SFRM6	369,526	369,993	-467
SFRU6	319,980	319,620	+360
SFRZ6	245,843	243,578	+2,265
SFRH7	148,348	147,436	+912
SFRM7	140,251	141,792	-1,541

CPI: Analyst One-Line Takeaways On CPI Report

The eighteen analysts below for the most part see Fed rate cuts starting later than the March (~50/50 odds) and May (fully priced) implied by Fed Funds futures.

ARGENTINA: First Steps of 'Shock' Therapy Detailed by Caputo

Milei's government detailed the first steps of his 'shock' therapy to rejuvenate the Argentine economy, outlining sharp spending cuts and an overhaul of the FX regime - this was broadly as expected. The policy highlights include:

• A ~50% devaluation of the ARS, putting USD/ARS to 800. This will be facilitated by a crawling peg arrangement, meaning the BCRA will allow for 2% devaluation per month. This will remain the 'official' exchange rate, however black market rates have already reached as high as 1,000 in the wake of Milei's election.
• Sharp spending cuts equating to 2.9% of GDP, aimed at eliminating the primary fiscal deficit entirely in 2024. Measures include cutting by half the number of government ministries and suspending public works programs that are yet to break ground.
• In response, the BCRA have lowered their 1-day repo rate to 100% from 126%, but have confirmed the LELIQ key rate is unchanged at 133%, and will evaluate options for international financing.
• Blunting the impact for those on lower incomes, welfare programs get a boost, with the Universal Child Benefit and Food Benefits both increased.
• Inflation data due later today is expected to show national CPI rising to 155% from 143%, a new series high.

FX OPTIONS: NOK, CZK and MXN Look Most Isolated Over Fed Decision

• Front-end USD vols notably bid ahead of the central bank deluge over the next 36 hours - with Scandi currencies, CZK and MXN the most exposed from an options perspective.
• Overnight USD vols have been uniformly marked higher, pushing the break-even on an O/N EUR/USD straddle to ~65 pips, doubling from the beginning of the week and matching the vol premium posted at the September ECB decision and the last 25bps hike of the cycle.
• With the closely-run Norges Bank decision also in contention this week, NOK vols have run higher, hitting the highest levels since August as the contract captures both the Fed decision this evening, as well as the Thursday Norges Bank. USD/NOK has added a ~8 point vol premium since the beginning of the week, among the highest in G10.
• Across emerging markets, the front-end of the vol curve is similarly bid, however CZK and MXN look the most isolated, adding 7.2 points for CZK (buoyed by dovish Prochazka) and 7.5 points for MXN ahead of the Banxico later this week.
• See graphic below:

EUROPE ISSUANCE UPDATE: 

UK Gilt Auction Results - 3.75% Oct-53 Gilt:

• GBP2bln of the 3.75% Oct-53 Gilt. Avg yield 4.43% (bid-to-cover 2.7x, tail 0.5bp)
• Better auction for the 30-year gilt than a couple of weeks ago (the final auction before the new 30-year issue is launched in January). However, note the smaller auction size seen today (GBP2.00bln vs GBP2.75bln previously).
• The price of the 3.75% Oct-53 gilt has moved higher on the auction result - above the average price at auction - as the worst fears surrounding the auction have not been realised. However, even though this auction is an improvement, the lowest accepted price at today's auction was still lower than the pre-auction mid-price, again despite the smaller size.

Italy 3/7-year BTPs Auction Results:

• E3bln of the 3.85% Sep-26 BTP. Avg yield 3.24% (bid-to-cover 1.56x)
• E3bln of the 4.00% Nov-30 BTP. Avg yield 3.63% (bid-to-cover 1.54x)

France 2024 Funding Plan Details:

• E285bln of MT/LT OAT issuance net of buybacks (in line with the provisional September plan; target for 2023 was E270bln - up from E260bln in 2021/22).The total financing requirement will stand at E295.8bln (E299.7bln in the provisional plan, down from E310.3bln in 2023): E144.4bln to cover the deficit (E144.5bln in the provisional plan; down E27.7bln vs 2023) and E156.4bln of MT/LT debt redemptions (E160.2bln in provisional plan). There will be a planned net increase of E3.8bln BTFs (E7.7bln in the provisional plan)
• Auctions to be held in line with 2023 (OATs above 8.5 years maturity on first Thursday of month, OATs with 2-8.5 year maturities and linkers on third Thursday of month). December will see one single auction with nominal and/or linkers on first Thursday of month. Green bonds to be continued to be tapped.

FOREX: USD Backdrop Improves Ahead of the Fed

• The greenback trades furtively firmer, however the USD Index sits inside the week's range amid more muted trade, as markets tread water ahead of the FOMC rate decision. Markets watch the range of 103.272 - 104.263 - a break of which in either direction will confirm a range breakout and prompt markets to consider the broader trend headed into year-end.
• NZD is among the session's poorest performers, pushing spot briefly through the 200-dma support at 0.6089. Commodities prices are modestly softer and a lower close for China and Hong Kong equity markets will also be adding weight. A firmer break and close below the 200-dma mark will open the next notable downside level at 0.6051, the 38.2% retracement for the Oct - Dec upleg.
• EUR/GBP remains a cross of note, with prices refuting the potential formation of a bear flag after the early December consolidation phase. The cross is higher again early Wednesday, narrowing the gap with both the Dec01 high 0.8635 as well as the 100-dma of 0.8637.
• Focus ahead rests on the Fed decision, at which markets watch for the Fed to maintain a cautious approach to policy. Little material change in guidance is expected, with this week's CPI print unlikely to have shifted phrasing around prices - seen being retained at "inflation remains elevated".

FX OPTIONS: Expiries for Dec13 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0775-90(E1.9bln), $1.0840-50(E1.6bln)
• USD/JPY: Y145.00-15($1.6bln), Y146.00($1.2bln), Y147.00($969mln)
• USD/CAD: C$1.3690-00($558mln), C$1.3750($841mln)

EGBS: Firmer But Underperform Gilts; Peripheries Mixed

Core/semi-core EGBs are firmer on the day but underperform Gilts following the weaker-than-expected run of UK economic activity data this morning.

• That data and a relatively well-received round of 30-Year supply out of the U.S. yesterday leaves Bunds up 33 ticks at 135.41 with the Dec 7 high of 138.81 remaining the first key resistance.
• Eurozone industrial production for October was weaker than expected and prompted a 10 tick selloff in Bund before recovering - the soft data was largely driven by Irish figures.
• Elsewhere, news that the German coalition has reached a deal to end the ongoing budget crisis has seemingly helped to cap rallies in Bunds, although no details released re: the accord are apparent at present. A press conference is expected later today.
• German and French cash curves bull flatten, with yields flat to -4.0bps lower.
• Periphery spreads to Bunds are generally little changed (+/- 1bp on the day), with Italian and Spanish spreads tighter and Greek/Portuguese wider. Italian 3/7-year supply at 1000GMT will have weighed in the run-up to the bidding deadline.
• Today's Fed meeting dominates the broader macro calendar ahead of tomorrow’s ECB decision.

EQUITIES: E-Mini S&P Trading at Fresh Multi-Month High

• A bullish theme in Eurostoxx 50 futures remains intact and the contract traded to a fresh trend high Tuesday. This confirms once again a resumption of the uptrend and maintains a bullish price sequence of higher highs and higher lows. Moving average studies are in a bull-mode position too, signalling a rising cycle. The focus is on 4608.00, the Jun 2007 high and a key resistance. Support to watch is at 4411.50, the 20-day EMA.
• A bullish theme in S&P e-minis remains intact and the contract has traded to a fresh high this week. The break higher confirms once again a resumption of the uptrend and maintains the bullish price sequence of higher highs and higher lows. Note too that moving average studies are in a bull-mode position, highlighting positive market sentiment. Sights are on 4738.50, the Jul 27 high and a key resistance. Initial support is 4602.23, the 20-day EMA.

COMMODITIES: Tuesday's Sell-Off Reinforces Bearish Theme in WTI Futures

• Bearish conditions in WTI futures remain intact and Tuesday’s sell-off has reinforced this condition. The contract has cleared $68.80, the Dec 7 low, to confirm a resumption of the downtrend. This maintains the price sequence of lower lows and lower highs and note that moving average studies are in a bear-mode position, highlighting a downtrend. The focus is on $67.28, the Jun 23 low. Key short-term resistance is at $71.96, the Dec 12 high.
• The latest pullback in Gold is considered corrective and this is allowing an overbought trend condition to unwind. Attention is on $1978.4, the 50-day EMA. It has been pierced. A clear break would signal scope for a deeper retracement. Last week’s early gains reinforce the primary bullish condition. The yellow metal traded to a fresh all-time high of $2135.4 and this signals potential for a climb towards $2177.6 next, a Fibonacci projection.