EGB OPTIONS: Bund Put Spread

Bank of America note that “amid the focus on AI/Tech and the flurry of executive orders, the FX market remains primarily focused on tariff uncertainty.”

• “While tariffs were notably left out of the administration's "day 1" agenda, all indications point to some formal announcement on February 1. Nevertheless, the absence of something immediately concrete has sparked a mini-relief rally in G10 currencies, as the DXY has traded off its pre-inauguration highs.”
• “The USD's move has corresponded with signs of positioning unwinds. The faster-money CTA community appears to have moved more towards neutral USD positioning vs. EUR, GBP, AUD and JPY, though still net-long vs. the more tariff exposed CAD and MXN.”
• Meanwhile, their hedge fund data suggests “unwinds of long USD positions are underway, but overall net-long USD positioning remains. Investors view positioning as the top USD risk to start the year.”

The US goods trade deficit widened much more than expected in December, to $122.1B ($105.5B expected), from $103.5B in November. That came on both a large drop in exports ($7.8B to $167.5B) and a rise in imports ($289.6B, up $10.8B). 

• The standout items in the imports column are industrial supplies (up 18.9% M/M SA and 22.9% Y/Y NSA), with other categories growing by less than the 3.9% M/M SA headline imports growth (including outright contractions in food, autos, and "other" goods, and just 1.7% M/M growth in capital goods and 3.1% in consumer goods).
• It's hard to gauge to what degree that is commodities price related, as these figures are expressed nominally. Industrial supplies include petroleum and petroleum products and we only get further detail in the final release, but the industrial supply imports figure is the highest in 29 months, and is the 2nd consecutive acceleration. And petroleum import prices were only +0.7% Y/Y (NSA) in December
• It's possible this reflects front-running imports ahead of possible tariffs, as US producers attempt to mitigate disruptions and higher costs in their supply chains.
• Bigger picture, exports are down 1.8% Y/Y (NSA), with imports up 15% Y/Y (NSA), with the trade balance ballooning on a seasonally-adjusted basis from $87.6B in December 2023 to the aforementioned $122.1B in December 2024. The 3MMA as a % of GDP is running at around 4.3-4.4%, with the 12MMA at 4%. (The Services surplus is running at a fairly consistent 1% of GDP, so the goods+services balance is set to come in the low-3s % of GDP in the final trade report, the highest since at least October 2022).
• The surprising increase in the trade deficit will be negative for Q4 GDP, despite our contention that stronger capital and consumer imports reflect strong domestic demand and investment prospects.
• And in some senses such data couldn't come at a more sensitive time, given the Trump administration's focus on the trade gap. 

Today’s extension higher in TTF futures (albeit off highs at typing) sees shorter-dated Euro inflation swaps move to unchanged on the session, though the 5y5y inflation swap remains close to intraday lows of ~2.08%.

• The January increase in natural gas prices is unlikely to sway near-term ECB policy rate expectations, with policymakers largely endorsing market pricing for 25bp cuts in January and March ahead of tomorrow’s decision.
• The ECB will likely be able to look through increases in energy prices if they are (1) small enough and/or (2) deemed to be temporary. However, more persistent rises would raise concerns around second-round effects, which could bleed into core inflation metrics.
• The current TTF futures price of over E50/MWh is well above the E42.9/MWh assumption for 2025 overall in the ECB’s December projections, so current levels would imply an upward revision to the bank’s headline inflation projections, all else equal.
• Recent energy moves may be assessed in more detail at tomorrow’s press conference. On January 22, President Lagarde noted that “data [in H1 2025] is going to be fascinating, as I said, the price of energy is going to be something that might have a real impact".
• See here for MNI’s ECB preview