OIL: Trump orders termination of oil deal with Venezuela: Reuters

• BofA expect the BoC to cut the overnight rate target 25bps to 3.00% although the risk for the meeting is that it keeps rates unchanged.
• “With inflation mostly under control, we believe the BoC will choose to cut the rate to boost the economy and to use the CAD as a shock-absorber in the case tariffs are imposed.”
• “We expect the forward guidance to signal a pause as the BoC waits to see how both domestic activity and US trade policy play out.”
• “With inflation mostly under control and under our expectation that activity will keep improving we see 3.00% as the terminal rate. In addition, our US economists have the US Fed on hold throughout the year.”
• “Our economist's base case is for no tariffs against Canada. However, if tariffs were imposed, the BoC would likely cut rates in response, which risks further widening of the US-CA terminal rate differential.” Specifically, “the BoC may respond by cutting below neutral to use the CAD as a buffer.”
• Rates: “We have revised our CA rate forecast in response to our revised expectations for one more cut in 2025. We now forecast a 10y rate of 3.4%, which is roughly in line with forwards. […] BoC QT is now expected to end in Aug '25 with settlement balances around CAD$50-$70bn.”
• FX: "We see 1.42 as first-order target level for USDCAD. But USDCAD would break the 1.45 resistance level if tariffs are confirmed, reaching 1.50-1.55 if BoC turns dovish.”

Heavier two-way SOFR & Treasury options traded Monday, large risk Mar'25 10Y reversal taking advantage of the rally in underlying futures to hedge massive 108.5 call position build over the last couple weeks. Rally in underlying futures spurred by sell-off in tech sector on China's DeepSeek AI startup as competitor to various US AIs. The rally saw projected rate cuts through mid-2025 regain traction vs. late Friday (*) levels as follows: Jan'25 at -0.7bp (-0.1bp), Mar'25 at -8.3bp (-6.9bp), May'25 at -15.9bp (-13.6bp), Jun'25 at -27.9bp (-24.7bp), Jul'25 at -33.7bp (-28.6bp).

• SOFR Options:
  • +4,000 SFRN5 96.37/96.75 call spds 5.5 ref 96.08
  • -10,000 SFRH5 95.87/96.00 call spds 2.25 ref 95.805
  • +5,000 SFRM5/SRFU5 95.75/96.00 call spd spds 1 net/Sep over
  • +5,000 SFRG5 95.75 puts 1.75 ref 95.80
  • -2,500 SFRN5 95.75/96.37 strangle 14.75 ref 96.08
  • -2,000 SFRN5 95.62/96.37 strangle 15.0 ref 96.075
  • +2,500 SFRK5 95.62/95.75 2x1 put spds 1.0 ref 95.965
  • +5,000 SFRM5 95.68/95.81 2x1 put flys, 4.5
  • +20,000 SFRJ5 95.75 puts 2.25 ref 95.96
  • Block/screen, +30,000 SFRU5 96.37/96.62 call spds 4.5 ref 96.06
  • 5,700 SFRG5 95.68/95.75/95.81 put flys ref 95.805
  • 13,000 0QH5 95.50 puts ref 96.16
  • 2,000 0QH5 96.06/96.18/96.50 broken put flys ref 96.155
  • 4,000 SFRH5 95.87/95.93 call spds ref 95.815
  • Block/screen 6,000 SFRG5 95.68/95.75/95.81/95.87 put condors, 2.75-3.0
  • 3,000 SFRH5 95.68/95.75/95.81 put trees
  • +6,250 SFRH5 95.62/95.68/95.75 put flys, 2.25 ref 95.805
  • +5,000 SFRU5 96.25/96.62 call spds, 7.5 ref 96.065
  • 1,500 SFRZ5 96.00 puts ref 96.115
  • 1,500 SFRM5 96.12/96.37/96.68 broken call trees ref 95.955
• Treasury Options:
  • +20,000 wk5 TY 107.25 puts, cab-7
  • Update, over 49,000 TYH5 107 puts, 8-9 ref 108-31.5 to -30
  • Block/screen, +70,000 TYH5 108.5/110.5 put over risk reversals, 17 net vs.109-03/0.60% (+33k at 15/screen) ** reminder - nice hedge for some acct that bought some +75,000 TYH5 108.5 calls Friday at 41 ref 108-14.5, adding to +100k+ from 27-29 on Jan 14, just prior to CPI-tied bounce in underlying).
  • 1,500 USH5 107/109/111 put flys ref 114-17
  • 4,000 FVJ5 108 calls, 11.5 ref 106-22
  • 4,000 FVH5 106.5/107.5 call spds
  • 10,000 FVH5 107.5/108.5/109.5 call flys ref 106-17.5
  • +17,500 wk5 TY 110 calls, 6-10
  • 3,350 wk1 TY 107/107.5 put spds ref 109-03

The Dallas Fed's regional survey of manufacturing activity easily beat expectations in January, rising to 14.1 vs 0.0 expected (up from 4.5 prior, revised up from 3.4). This was a 39-month high, and the 2nd month in positive territory after 31 consecutive negative readings.

• New orders reached a 33-month high 7.7 (1.5 prior), while the production index rose 7 points to 12.2, with capacity utilization and shipments also improving. The survey also showed higher inflationary pressures (raw materials up 5 points to 17.5, finished goods prices up 9 points to 6.2), with wages and benefits, employment, and workweek length rising slightly.
• The regional Fed manufacturing surveys for January have been slightly mixed: the Empire index fell back in December and January after a strong improvement in November, while the Philly Fed soared in January (with a jump in new orders) and the January Kansas City survey was flat vs December.
• Overall though there is increasing evidence of a nascent recovery in overall manufacturing activity, with the steady improvement in the Dallas Fed's activity index since late 2023 looking increasingly sustainable, with confidence appearing to improve after the November elections.
• Indeed it accords with a slow but steady improvement in the ISM and S&P PMI manufacturing readings to multi-month highs in December/January, respectively.
• We await the Richmond Fed survey Tuesday to round out the surveys, but if it comes in line with expectations, the 5-survey average would come in at the highest in 32 months (largely due to the Philly index soaring).