US TSYS: Tsys Futures Edge Lower, Curve Bear-Steepens

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.

On Friday, CNH was in focus following headlines of a Trump/Xi phone call. Descriptions of a positive tone for China/US relations provided a boost for the Chinese Yuan. USD/CNH fell from around 7.3580 to 7.3330 very quickly, before then stabilizing. The pair closed around 7.3415 on Friday, but we track a touch lower in early Monday dealings, last near 7.3360. For USD/CNH, we are close to the 20-day EMA support point, which rests at 7.3330. 

• Onshore USD/CNY spot ended near 7.3250 on Friday, while the CNY CFETS basket tracker was close to unchanged, ending last week at 101.35 (per BBG).
• CNH, and broader market sentiment, will remain very sensitive to any tariff related developments out of the US, with Trump's inauguration later. Focus will be on early Trump executive orders, with reports he will sign up to 100 orders on Day 1, by far the largest raft of actions ever taken by a new president. Trump could feasibly impose new tariffs on Day 1, by invoking authority under the International Emergency Economic Powers Act (IEEPA) of 1977.  Still, border security and immigration-related orders are likely to make up the bulk of Day 1 actions.
• Weekend reports also noted that Trump has told his advisors he would like to travel to China after taking office, although no final decision has been made on such a trip (per the WSJ). This will be a focus point over coming weeks, although yuan could still weaken in the interim on any fresh US tariff action.
• Outside of US developments, locally in China today we have the 1yr and 5yr loan prime rates. No change is expected in either rate, with the 1yr currently at 3.10%, the 5yr at 3.60%.