A hot U.S. CPI report for January (up 0.5 m/m) caused a distrubance in the Force, equities initially stumbled but found their footing, while Treasuries bore the brunt of it, yields 7-10 basis points higher. The curve steepened, 2yrs yields closed at 4.36%, while 10yr yields climbed to 4.63%, both up more than 20 basis points from last week's lows.
Fed officials provided little in the way of reassurance, reiterating concerns over inflation but maintaining a patient stance on policy. Market expectations swiftly adjusted, pricing in just 28 basis points of cuts for the year—down from 35 basis points yesterday—while a June rate cut, previously seen as a coin toss, now appears less likely. The first full cut is now not fully priced in until December.
A weaker-than-expected 10yr auction, which tailed by 1bp at 4.632%, saw mixed demand, while the long-end found some relief ahead of the second leg of the week’s refunding tonight. Inflation-protected securities (TIPS) were bid, pushing 10-year breakevens above 250 basis points. Meanwhile, swap spreads widened amid speculation of bank regulatory relief via SLR adjustments.
(SLR stands for Statutory Liquidity Ratio, is the minimum percentage of a commercial bank's net demand and time liabilities it must maintain in liquid assets, such as cash, gold, or government-approved securities, before offering credit to customers)
Oil prices tumbled, with WTI crude sliding 2.84% on Russia/ Ukraine news. The dollar was volatile, but closed almost unchanged on the day.
The White House suggested that reciprocal tariffs could be announced ahead of Trump’s scheduled meeting with India’s PM Modi. This heightened concerns over global trade tensions, particularly as the EU signalled it would respond firmly to any new U.S. tariffs on metals.
EM credit was relatively active ahead of the U.S. CPI. Mexico outperformed, tightening as much as 5bps, following the Sheinbaum administration's long-awaited PEMEX plan. PEMEX bonds rallied around half a point as a rather misleading headline hit the tapes - PEMEX DEBT PAYMENTS FULLY GUARANTEED BY MEXICO: ENERGY MINISTER. Take care in taking this literally as a formal government guarantee, which would entail congressional approval. Instead, this appears to be another implicit commitment to ensure PEMEX continues meeting its debt obligations. The plan failed to introduce significant new business developments, and the lack of measures to address operational challenges is seen as a negative.
Ukrainian bonds rallied strongly, up as much as 1 5/8 pt after reports that Trump had picked up the phone to Putin, with both agreeing to peace talks. Trump also confirmed discussions with Ukrainian President Zelensky, stating that both leaders expressed a desire for peace.
Argentina reversed its recent trend, bouncing as much as 1.25 points as Finance Minister Toto Caputo suggested that an IMF deal could be secured within the first four months of 2025, potentially including new money but no new debt, instead exchanging peso liabilities for US$ obligations.
More IMF focus as Senegal audit court revealed that public debt and budget deficits are significantly higher than previously reported, with discrepancies in IMF-reported figures which smashed bond prices down 3.5 points, they later clawed back half of the drop.
Comments