OIL: Crude Higher On Better Risk Appetite But Still Worried About Trade Policy

As we noted in the earlier bullet, the elevated level of US real yields is still providing support for the broader USD backdrop, even if tariffs are a key near term sentiment driver. The elevated US real yield backdrop, and uncertainty around degree of US easing this year is supported, at the current juncture by relative data outcomes and the US growth outlook. 

• The first chart below presents the Citi EASIs for major economies/regions. The US, which is the orange line has mostly been positive and at higher levels relative to other the major economies over this period. 

Fig 1: Major Economy Economic Activity Surprise Indices (Citi)

Source: Citi/MNI - Market News/Bloomberg   

• The second below plots the J.P Morgan economic growth forecast revision indices, again for major economies/regions. These indices measure the extent to which J.P. Morgan economists are either revising up or down their growth projections for a particularly economy or region (this can be for the short term or the longer term).
• In the past 12 months, the bias has been for US economic growth forecast upgrades, while other major economies/regions have largely flatlined. The exception was the UK, although since October its forecast revision line has been pushed lower.
• To the extent growth expectation revisions will reflect upside/downside data surprises, these metrics are likely to be watched in terms broader USD risks as we progress through the first half of 2025. 

Fig 2: J.P. Morgan Economic Forecast Revision Indices, By Major Economy/Region 

Source: J.P. Morgan/MNI - Market News/Bloomberg   

Broader USD sentiment remains closely aligned to the near term tariff outlook, particularly as the China deadline approaches as we tick into US time Tuesday (currently close to 10:55pm Monday time in Washington).

• A delay in tariff implementation for China is likely to weigh on near term USD sentiment, all else equal. The USD BBDXY index, current above the 20-day EMA, albeit just, while further south is the 50-day day around the 1297 level. The chart below presents the index against all key EMAs. 

Fig 1: USD BBDXY Index Versus Key EMAs 

Source: MNI - Market News/Bloomberg 

• The drift lower in US real yields is another near term USD headwind. The real 10yr has moved off Jan highs of 2.34% to be back at 2.09%. Still, if we look at the US-EU real yield differential (proxied by the German real 10yr rate), it is hardly giving a bearish USD backdrop, see the second chart below.
• At +175bps in favour of the USD (relative to Germany), this is not suggesting a sustained turn higher in EUR, at least based off this metric
• The elevated US real yield backdrop is still a source of support for the USD, and as we argue in the next bullet remains supported by the broader macro backdrop. 

Fig 2: EUR/USD Versus US-GE Real 10yr Yield Differential. 

Source: MNI - Market News/Bloomberg 

The 10-year JGB auction delivered mixed results, with the low price beating expectations at 99.42, according to the Bloomberg dealer poll. However, the cover ratio declined to 3.1809x from 3.3570x in the previous auction and the tail lengthened slightly to 0.03 from 0.01.

• This performance came with the auction offering an outright yield at a fresh cyclical peak of 1.26%, 10-15bps higher than last month. Additionally, the yield curve between 2- and 10-year bonds was slightly steeper compared to the prior month.
• Improving sentiment toward global long-end bonds and slightly less aggressive expectations of further near-term tightening by the BoJ didn’t appear to support demand significantly.
• In early afternoon Tokyo trading, the cash 10-year JGB is little changed from pre-auction levels, while JGB futures have gapped cheaper to session lows.