OIL: Shandong Teapot Inventory Rate Falls on Week: OilChem

• US TSY 3Y AUCTION: NON-COMP BIDS $341 MLN FROM $58.000 BLN TOTAL

Gilts outperformed Bunds Tuesday, with curves leaning bear steeper.

• Multiple factors weighed on European instruments starting in early trade. They included lingering US tariff concerns, higher oil and gas prices, and heavy sovereign supply (Italy the EU, the Netherlands, and Germany.)
• Not to be outdone on the latter, the UK saw a record-sized 10Y Gilt syndication and orderbook.
• BoE's Mann set a hawkish tone in the UK rates space by noting that her vote for a 50bp cut in February doesn't necessarily mean that she will vote for a 50bp cut in the upcoming meetings.
• The German curve bear steepened, with the UK's seeing underperformance in the 5-10Y segment.
• Periphery EGB spreads widened slightly in defiance of stronger equities, with BTPs underperforming.
• Wednesday's calendar includes Italian industrial production data, with appearances by BOE's Greene and ECB's Nagel - reminder that ECB's Elderson participates in an MNI Webcast. Global attention will be on US inflation data released in the European afternoon.

Closing Yields / 10-Yr EGB Spreads To Germany

• Germany: The 2-Yr yield is up 5.8bps at 2.084%, 5-Yr is up 7bps at 2.212%, 10-Yr is up 6.8bps at 2.43%, and 30-Yr is up 7.7bps at 2.692%.
• UK: The 2-Yr yield is up 3.8bps at 4.184%, 5-Yr is up 5.1bps at 4.198%, 10-Yr is up 5.1bps at 4.508%, and 30-Yr is up 4.3bps at 5.099%.
• Italian BTP spread up 1.2bps at 110bps / French OAT up 0.6bps at 77.8bps  

• Pressure on core fixed income and the associated higher yields on Tuesday have supported a recovery for Cross/JPY, with USDJPY briefly rising to a high of 152.60 roughly 1% off the Monday lows. Spot has since moderated to ~152.30 amid a broader dollar offer, but is consolidating 0.3% gains as we approach the APAC crossover
• Plenty of room for USDJPY to correct further to the topside, given the powerful move lower last week and additional profit taking dynamics potentially in play ahead of tomorrow’s US CPI release. 152.89 (Jan 6 high) and 153.72 (Jan 27 low) are levels to watch on the topside.
• In similar vein, EURJPY has traded on the front foot following last week’s near 3% plunge. We have noted that the short-term trend is oversold, and today’s 0.6% advance is allowing this condition to unwind. Initial resistances are located at 157.97 (Feb 3 low) and 158.86 (Feb 6 high), however firm resistance is not seen until the 20-day EMA and the significant pivot level of 160.00.
• Firmer equity indices have weighed broadly on the US dollar, allowing the DXY to erode the moderate rally seen Monday - as markets shrug off the most recent announcement of US tariffs on steel and aluminium.
• Both the EUR and GBP are outperforming, rising roughly 0.4% against the dollar. Sterling has been buoyed by comments from BOE’s Mann whose relatively hawkish lean may have assisted GBP at the margin. More constructive AUD price action is seeing AUDUSD flirt with resistance at 0.6302, the 50-day EMA, of which a break would be a bullish development and place the immediate focus on 0.6331, the Jan 24 high and a key resistance.
• All attention turns to US CPI on Wednesday, where consensus sees core CPI inflation accelerating to a seasonally adjusted 0.3% M/M (unrounded 0.29%) in January.