CNH: Posts Firmest Gain In A few Weeks, But Lags Broader USD Weakness

• Tsys saw a steepening move occur overnight with the front-end supported following a softer-than-expected December PPI in both headline and core readings, while the grind higher in yields resumed further out the curve, focus has now turned to CPI which is due out later tonight. Tsys futures closed higher with TU +0-02 at 102-18⅛, while TY closed +0-04 at 107-11+.
• Cash tsys yields closed -1.5bps to +2bps with teh curve twist steepening. The 2yr closed -1.4bps at 4.367%, while teh 10yr closed +1.4bps at 4.792%, the 30yr briefly traded above 5% for the first time since Nov 2023. The 2s10s rose 2.5bps to 42.139.
• In Treasury options there was heavy demand for downside protection, targeting a drop in 10yr yields to roughly 4.6% ahead of the Feb. 21 expiry. Roughly 100,000 of the March 108.50 calls were bought over the session, amassing a premium of over $40m.
• Focus turns to tonights headline CPI inflation data for December where rental inflation is expected to accelerate to an average figure that firmly rounds to 0.3% M/M in December. Core goods inflation will be closely looked at amidst heavy focus on potential tariffs under the second Trump administration but also with a further near-term dampening factor from continued US dollar appreciation.
• Scheduled Fed speakers for Wednesday include Richmond Fed Barkin at 0920ET (text, Q&A), MN Fed Kashkari fireside chat at 1000ET (no text, Q&A), NY Fed Williams keynote address CBIA eco-summit at 1100ET (text, Q&A) and Chicago Fed Goolsbee Midwest economics forum at 1200ET (no text, Q&A). Fed Beige Book is released at 1400ET.

ACGBs (YM -2.0 & XM -3.5) are cheaper after a directionless NY session ahead of the December CPI report and the start of the earnings season today. 

• Tame PPI gave US tsys a bid but the market ranged either side of unchanged on the day and closed mixed with the curve steepening 3bps to 42 bps.
• The focus turns to today's headline CPI inflation data for December.  Analysts are looking for core goods inflation between 0.2-0.3% M/M after it accelerated to 0.31% M/M in Nov for a 19-month high. That was the third consecutive monthly increase in core goods prices after sequential deflation in 14 of the previous 15 months.
• Cash ACGBs are 2-3bps cheaper with the AU-US 10-year yield differential at -15bps.
• Swap rates are 3-4bps higher.
• The bills strip -1 to -3, with a steepening bias.
• RBA-dated OIS pricing is flat to 3bps firmer across meetings today. A 25bp rate cut is less than fully priced for April (98%) now, with the probability of a February cut at 66% (based on an effective cash rate of 4.34%).
• Today, the local calendar is empty.
• AOFM Bond issuance will issue A$800mn of the 3.50% 21 December 2034 bond today. A$700mn of the 2.75% 21 November 2027 bond will be sold on Friday. 

USD/CNH didn't deviate too far out of the 7.3400/7.3500 range post the Asia close on Tuesday. The pair tracks around 7.3450 in early Wednesday dealings (little net change was seen on Tuesday). Spot USD/CNY held above 7.3300, but sits slightly off recent highs. The CNY CFETS basket tracker was also little changed Tuesday, ending at 101.63 (per BBG). 

• For USD/CNH we remain above the 20-day EMA support point, which was last near 7.3290. Recent highs near 7.3650 remain intact on the topside.
• We had Dec new loans and aggregate finance data print late yesterday. The headlines were better than expected, although the details show the result was driven by stronger government bond issuance. Loan demand from the private sector was weak through 2024 as a whole though.
• Other data showed capital outflow pressures were evident late in 2024 in terms of the FX settlement data for Dec. The settlement ratio fell back to 60% from recent highs of 70% in Sep last year.
• Elsewhere, the People’s Bank of China will take further measures to ensure a stable yuan exchange rate while strengthening counter-cyclical moves to support the economy, deputy-governor Xuan Changneng told a press conference on Tuesday. This is line with rhetoric from earlier in the week.
• Incoming US President Trump stated an External Revenue Service would be created to collect tariff duties (although details were light, see this BBG link). This comes after yesterday's BBG report that gradual tariff hikes were being considered by Trump's key economic advisors.
• The China data calendar is empty today.