EM LATAM CREDIT: "MEXICO JAN. NOMINAL WAGES RISE 8.0% Y/Y" - BBG

Bunds underperformed Gilts Tuesday, ahead of inflation data Wednesday.

• After a constructive start, regional FI softened amid EGB supply, oil prices and equities moving off lows, and continued questions surrounding French and UK politics and fiscal policy.
• A softer-than-expected US producer price report saw yields briefly hit session lows before retracing higher over the course of the day.
• The German curve leaned bear steeper on the day, with the belly underperforming overall as yields hit fresh multi-month highs across the curve, while the UK curve was mixed.
• Periphery/semi-core spreads were flat/tighter, with OAT/Bund roughly steady through new French Prime Minister Bayrou's policy address.
• Focus early Wednesday is on UK December CPI (MNI's preview here), with consensus eyeing a downtick in Y/Y core and services inflation; later we hear from BoE's Taylor, while US CPI is the main global event later in the session. 

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is up 2.6bps at 2.319%, 5-Yr is up 6.6bps at 2.462%, 10-Yr is up 3.9bps at 2.652%, and 30-Yr is up 4.6bps at 2.856%.
• UK: The 2-Yr yield is up 0.4bps at 4.605%, 5-Yr is up 1.1bps at 4.613%, 10-Yr is up 0.4bps at 4.889%, and 30-Yr is up 1.1bps at 5.449%.
• Italian BTP spread down 2.2bps at 118.8bps / French OAT down 1.4bps at 83.1bps  
   

• Another +38,000 TYH5 108.5 calls, 27 ref 107-09 - puts total volume over 109.7k
• 5,600 TYG5 108 calls, 13 ref 107-09.5, total volume over 26k

Likely to be the single most closely watched individual aspect of Wednesday’s CPI report, rental inflation is expected to accelerate to an average figure that firmly rounds to 0.3% M/M in December. This of course follows the surprisingly sharp moderation to a weighted average of 0.23% M/M in November, the first month this cycle that monthly rental inflation has been below its pre-pandemic average of 0.27% (it last tied with this 0.27% increase back in June before surprisingly surging to 0.47% M/M in Aug). 

• This previous moderation was significant. Housing has previously appeared to us to be the main stumbling block in the return to the inflation target. With the labor market increasingly looking like it won’t be a source of inflationary pressure in the near-term (even more so after productivity revisions), supercore inflation should start to take less precedence.
• However, the housing inflation data are volatile month-to-month, not least because of methodological quirks such as sample rotation, and its hard to read too much into any single month. Some analysts point to seasonal factors flattering SA housing inflation compared to the NSA version.
• A further soft (~0.2% M/M) reading would be a notably dovish outcome in our view. 

Watching Core Goods After Recent Rare Strength Prior To Potential Tariffs

• If housing is our top pick to watch this month then core goods inflation is closely second. It’s 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.
• Analysts look 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.
• The breadth here will be important as well, including what happens to new vehicle prices after rare strength in Nov (0.6% M/M was strongest since Oct 2022) and apparel after a tepid bounce in November.
• The NY Fed’s GSCPI doesn’t point to any notable additional reacceleration in supply-driven price pressures.