US: Trump States Auto/Pharma Tariffs Likely 25% From Early April

In post-Tokyo trade on Friday, JGB futures closed slightly higher, +3 compared to settlement levels, after US tsys finished on Friday with a modest bear-flattener. The US 2-year yield finished 5bps higher at 4.29%, while the 10-year nudged 2bps higher to 4.63%. 

• Massive -46k Mar'25 2Y futures sale triggered a broad-based reversal by midmorning, while morning headlines that incoming President Trump held a call with China President Xi elevated volatility. Descriptions of a positive tone for China/US relations boosted the Chinese Yuan.
• Reminder, that the US cash US tsy market and stock exchanges are closed today for Martin L. King Day. Also noteworthy, the Federal Reserve entered their policy Blackout at midnight Friday through January 30.
• US corporate earnings pick up in earnest this week.
• Locally, we have core machine orders on tap today for Nov, along with Nov final IP and capacity utilization. The tertiary index for Nov also prints. This comes ahead of Friday's BoJ meeting outcome, where the economic consensus and market pricing have shifted to strong hike odds.
• Closer focus will rest on Trump's upcoming inauguration, with FX, JGBs and broader market risk sentiment likely most sensitive to any tariff announcements.

Oil prices were down on Friday as a Gaza ceasefire deal approached but they ended the week higher boosted by cold weather and sanctions on Russia impacting buyer behaviour. President-elect Trump’s inauguration is January 20 and his energy policy continues to be a significant uncertainty in oil markets. 

• WTI fell 0.8% to $78.04 after trending lower through the European/US sessions. The benchmark rose almost 2% last week and is up 8.8% this month. Initial resistance is at $80.77 with support at $77.24.
• Brent was 0.7% lower at $80.73 after a low of $80.50. It rose 1.2% over the week and is 8.2% higher in January to date. The benchmark remains in an uptrend with key resistance at $83.79 with initial support at $79.62.
• The US’ targeting of Russia’s shadow fleet has driven shipping costs up sharply resulting in India and China, significant consumers of Russian oil, looking to alternative sources. Prospective tariffs on Canadian oil imports into the US are also supporting oil prices.
• China’s gasoline exports fell 23.8% y/y in December and distillate 89% y/y. Total refining volumes fell 1.6% in 2024. Markets have been concerned about the strength of China’s oil demand given weak domestic consumption but soft product exports are also likely to weigh on crude imports.
• CFTC data showed that new long positions in WTI fell 6.4% last week while they rose 7.2% for gasoline. 

• Treasury yields ended Friday’s session lower with the curve notably flatter. There was a massive block sell trade in 2yr futures early in the US session which accelerated a flattening move that was already under way because of long-end outperformance. TU closed at session lows -02¼ at 102-23+, while TY closed -02 at 108-17+
• In Treasury options, there was demand for downside hedges via February 10yr structures that expire in a week; standout flows included a $10m at-the-money play targeting a 4.6% 10-year yield.
• Cash tsys curves flattened with yields closing flat to 5.5bps higher across the curve. The 2yr underperformed, closing +5.3bps at 4.283%, while the 10yr closed 1.5bps at 4.627%. The 2s10s fell 4bps to 34bps, the curve hit it steepest level since 2022 on Tuesday.
• Generally positive data: Industrial production surprisingly jumped 0.9% M/M (cons 0.3) in Dec after an upward revised 0.2% M/M (initial -0.1%). Utilities may have helped with their 2.1% M/M increase (strongest since May) but manufacturing production was also stronger than expected with 0.6% M/M (cons 0.2%) after an upward revised 0.4% M/M (initial 0.2%).
• Building permits were a little higher than expected in December at 1483k (cons 1460k) for little change from 1493k in Nov. Housing starts meanwhile, which are more prone to weather disruption, surprisingly jumped to 1499k (cons 1327k) after 1294k in Nov.
• It is Martin Luther King day today, so no cash tsys trading or data. Focus will be squaring on the Inauguration of President Trump and any executive orders he signs on day 1, while corporate earnings are to kick off on Tuesday.