Mind the Gap!
Simple thumb rule: The Gap between reality and expectations determines price.
5yr note auction fell in the space between not good and ugly. Expectations went unmet, with a 4.055% yield vs 4.035% WI, leaving a 2bp tail. BTC of 2.31, lowest in over a year.
Yellen saved the day in 2023 by issuing the second largest net amount of T-bills on record. With the RRP almost drained out, Treasury has no other option except to extend duration. It’s obvious that More and more auctions would get sloppy as the Net debt issuance continues to grow - obvious pressure on yields to go higher, especially during auctions. US refunding announcement on Monday - one more reason.
Today US 4Q23 GDP, which is expected to slow from 4.9% in 3Q23 to 2.0%. Not much relevance - coincidental data - flash US PMIs- beat expectations reinforcing the message that the economy is in good shape, even getting better.
One staff member wrote recently - Mario Draghi was there for the ECB while the ECB seems to be there for Christine Lagarde -
(little in the way of growth since Q3 of 2022) - sums up what will be in store in ECB and Presser today -nothing but a yawn - typical EURUSD price action - ups& downs whipping price in 1.0850-1.0900.
What markets miss to see is the mounting frustration in Brussels & political intransigence in Beijing - nudging EU & China closer to a trade war- EUR a sell ...
Make China great again? - first time China announced RRR cut at a live conference while market was open -probably shows the sense of urgency -read as panic - PBoC understands this is not a problem that can be solved with technocratic tricks.
There remains a question of whether there is sufficient high-quality loan demand to fully benefit from this theoretical liquidity injection. Anyway a "master stroke"
Composite PMI at 7-month high- impact of Red Sea is starting to hit firms- supply chains hit by longer wait times- vendor delivery times rising for the first time since Sep 2022. Tied to 1.2700.
USDJPY Long trade survived the second big dip of the week- Close above 76.4% of 151.92-140.27 at 149.17 is key for 151.93.