MNI ASIA MARKETS ANALYSIS: Midweek Rate Hike Pricing Cools

US TSYS: Rate Hike Path Without Recession

Rates trading stronger after the bell, but trimming gains back to midmorning levels. Notably, yield curves recovered from early flattening to steeper (2s10s +2.024 at 29.763 vs. 22.474 low) as the short end unwinds Wednesday's more aggressive rate hikes from additional three to four 50bps hikes by year end to two over the next two FOMC meetings.

• Chances of additional hikes in the second half of the year receded Thursday. Cumulative hikes for July (9.5bps) are not far off when the US came in but there have been larger slides on the day further out. Both Sep (133bp) and Dec (181bp) are ~5bp lower than prior to US CPI.
• Treasury Secretary Janet Yellen told lawmakers the Federal Reserve has a path to increase interest rates without setting off a recession. "The Fed has a path to bring down inflation, without causing a recession and I know that it will be their objective to try to accomplish that," she said at a hearing before Congress when asked about risks of stagflation.
• Tys gained briefly after $22B 30Y auction (912810TG3) stops through: 2.997% high yield vs. 3.002% WI; 2.38x bid-to-cover vs. 2.30x last month. Indirect take-up climbs to 69.66% vs. 65.23% in Apr; direct bidder take-up slips to 16.60% vs. 18.91% prior; primary dealer take-up 13.74% vs. 15.87%.
• Friday focus: Import/Export Price Indexes, UMich Sentiment while MN Fed Kashkari speaks on energy and inflation at 1100ET, Cleveland Fed Mester on monetary policy at 1200ET. Sidebar: Fed Chairman Powell confirmed by Senate for a second term today.

SHORT TERM RATES

US DOLLAR LIBOR: Latest settlements

• O/N +0.00086 to 0.82686% (+0.00829/wk)
• 1M +0.02057 to 0.87471% (+0.03257/wk)
• 3M -0.01057 to 1.41129% (+0.00943/wk) * / **
• 6M +0.00385 to 1.95886% (-0.00571/wk)
• 12M +0.01315 to 2.62986% (-0.06485/wk)
• * Record Low 0.11413% on 9/12/21; ** New 2Y high: 1.42186% on 5/11/22

STIR: FRBNY EFFR for prior session:

• Daily Effective Fed Funds Rate: 0.83% volume: $78B
• Daily Overnight Bank Funding Rate: 0.82% volume: $256B

US TSYS: Repo Reference Rates

• Secured Overnight Financing Rate (SOFR): 0.78%, $925B
• Broad General Collateral Rate (BGCR): 0.80%, $357B
• Tri-Party General Collateral Rate (TGCR): 0.80%, $344B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

NY Fed reverse repo usage nears late March all-time high, currently 1,900.069B w/ 85 counterparties vs. prior session's 1,876.119B (all-time high of $1,906.802B on Friday, March 29, 2022).

EURODOLLAR/SOFR/TREASURY OPTIONS SUMMARY

• Chances of additional hikes in the second half of the year receded Thursday. Cumulative hikes for July (9.5bps) are not far off when the US came in but there have been larger slides on the day further out. Both Sep (133bp) and Dec (181bp) are ~5bp lower than prior to US CPI.
• Large Block, Outright Call Trades Follow
  • +20,000 TYM 121/122/123 1x2x2 ratio call tree, even net on the 100k option package at 1521:45ET vs. 1,600 TYM2 at 119-30.5
  • Soon after just over 55,000 TYM 123 calls trade at 2
  • 7,000 FVM 112.5/113.25 put spds 9.5 over FVM 114.5 calls
  • Reminder -- June options expire next week Friday

• Block, 6,000 short Aug 96.50/Green Aug 96.75 put spds, 1.0 net bear flattener
• 3,000 Blue Jun 96.87/97.12 2x1 put spds
• Over 77,000 Aug 97.812 calls, 50k Blocked from 5.5-6.0 overnight
• Block, 5,000 short Mar 96.25/96.75 put spds 7.0 over short Jun 96.50 puts
• Block, 15,000 short Mar 96.25/96.75 put spds 17.0
• Additional 5,000 short Jun 96.50 puts trade on screen after blocks
• 9,700 Dec 98.50/99.50 call spds
• 6,000 Dec 98.00 calls, 7.5
• 4,000 Mar 96.37/96.75 put spds vs. Dec 97.56 calls

• -8,000 USN 130 puts, 15
• 4,000 TYM 121/122 call spds, 4
• 2,500 TYN 115.5/119 put spds, 62
• 2,500 TYM 118/119 2x1 put spds
• +10,000 TYM 117.5/118 put spds, 3
• +10,000 TYU 123.5 calls, 33
• 1,000 USU 146/150/154 call flys
• Overnight trade
• 8,100 USN 130 puts, 16
• Over 26,000 TYM 121 calls, mostly at 11, 12 last
• Over 20,000 TYN 117.5/119 put spds vs TYN 121 calls
• +7,000 TYM 117.75/118.5 put spds, 6
• Block 12,000 TYM 121.5 calls, 7
• +7,500 USN 146/147 call spds, 7
• 1,000 TYM 118.25/119.25 2x1 put spds
• 6,000 TYM 120 calls, 32
• 2,300 FVN 114.25 calls, 16.5

EGBs-GILTS CASH CLOSE: Yields Close Near Lows Despite Equity Rebound

Yields closed near session lows Thursday despite a bounce in equities in the afternoon.

• Both the German and UK curves bull flattened, but UK instruments outperformed. 10Y yields dropped over 16bp, as real yields fell 27bp (implied inflation breakevens rose 10bp).
• BTP spreads vs Bunds continued to narrow from levels above 200bp.
• They continue to mirror ECB policy rate expectations, which fell to a May low of 19bp at end-2022 (77bp of hikes) from above 35bp last week. That's despite several ECB officials seemingly endorsing a July hike this week, including Makhlouf today.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany:

• Germany: The 2-Yr yield is down 8.8bps at 0.052%, 5-Yr is down 14bps at 0.519%, 10-Yr is down 14bps at 0.846%, and 30-Yr is down 11.5bps at 1.024%.
• UK: The 2-Yr yield is down 10.8bps at 1.179%, 5-Yr is down 14.6bps at 1.305%, 10-Yr is down 16.1bps at 1.665%, and 30-Yr is down 13.9bps at 1.926%.
• Italian BTP spread down 3.9bps at 187bps / Greek up 4.8bps at 251.5bps

EGB Options: Put And Call Spreads, Mostly Sold

Thursday's Europe rates / bond options flow included:

• RXM2 158/159.5cs, bought for 9.5 in 10k
• RXN2 153/152ps, sold at 26 in 2k
• OEM2 128.75/129.75cs, bought for 11.5 in 3k
• OEM2/OEN2 125.75p sold at 29 in 8.5k
• 0RM2 98.25/97.75ps sold at 1.5 in 10k
• SFIZ2 98.25/98.50/98.75c fly, sold at 3.5 in 2k

JPYKRW Consolidates Back Above 10 Amid Global Risk off

• We have seen that the sharp CNY depreciation in recent weeks has been weighing on EM FX, including KRW, which is approaching the 1,300 level (2009 highs vs. USD).
• In addition, JPY has been appreciating sharply this week as global risk off environment has led to a significant consolidation in LT bond yields.
• JPYKRW, which has historically been very sensitive to a sudden rise in price volatility, has been consolidating higher after reaching a local low at 9.57 in the end of April.
• The pair found resistance at 10.1130 earlier today, which corresponds to the 23.6% Fibo retracement of the 9.57 – 11.87 range.
• Next level to watch on the topside stands at 10.1860 (100DMA).

FX: Expiries for May13 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0835-50(E865mln)
• GBP/USD: $1.2100(Gbp647mln), $1.2200(Gbp674mln)
• USD/JPY: Y129.95-00($520mln)
• AUD/USD: $0.6725(A$1.3bln), $0.7200-05(A$946mln), $0.7400(A$1.1bln)

Late Equity Roundup: Another Attempt To Bounce Of Lows

Major indexes still weaker are bouncing off late session lows after the FI close.
SPX emini futures currently -12.5 (-0.32%) at 3917.5, Dow Industrials -163.75 points (-0.51%) at 31671.33, Nasdaq -26.3 points (-0.2%) at 11338.17.

• Current bear cycle continues: 20- and 50D EMA set-up - is in a bear mode condition and this clearly highlights current market sentiment. Initial key support for SPX is 3815.20 - 38.2% retracement of the Mar ‘20 - Jan ‘22 bull leg. On the upside, key resistance has been defined at 4303.50, the Apr 26/28 high.
• SPX leading/lagging sectors: Health Care and Real Estate sectors, both appr +.40%, outpaced Consumer Discretionary (+37%). Communication Services receded (-0.12%) as interactive media sagged (Twitter, Google, Activision weaker)
• Laggers: Information Technology sector (-1.99%) weighed down by hardware makers/servicers, followed by Utilities (-1.20%) and Financials (-1.16%).
• Dow Industrials Leaders/Laggers: After trading weaker Home Depot (HD) finally catches a bid (+4.67 at 287.63), Amgen +3.20 at 243.83. United Health Care (UNH) reverses Wed's gains, currently -11.15 at 475.00, American Express (AXP) -7.36 at 152.03, Boeing (BA) -7.56 at 151.82.

• RES 4: 4509.00 High Apr 21 and a key short-term resistance
• RES 3: 4393.25 High Apr 22
• RES 2: 4328.66 50-day EMA
• RES 1: 4099.00/4303.50 High May 9 / High Apr 26/28
• PRICE: 3925.0 @ 1615ET May 12
• SUP 1: 3843.25 Low Mar 25 2021 (cont)
• SUP 2: 3820.25 2.50 proj of the Mar 29 - Apr 18 - 21 price swing
• SUP 3: 3787.74 2.618 proj of the Mar 29 - Apr 18 - 21 price swing
• SUP 4: 3747.52 2.764 proj of the Mar 29 - Apr 18 - 21 price swing

COMMODITIES: Oil Loses Gains On EU Sanction Delay, Gold Slumps

• A mixed day for crude oil, with prices currently largely flat having most recently been trimmed on the EU starting to mull delaying Russian oil sanctions as Hungary refuses to back the plan.
• Domestically in the US, Congress will vote next week on legislation barring “excessive” or “exploitative” fuel prices.
• WTI is +0.3% at $106.04 having briefly cleared yesterday’s high of $106.44 which could open resistance at $111.37 (May 5 high). Support remains sub-$100 at $98.2 (May 11 low).
• WTI contracts are only up in front contracts though, with declines from the Sep’22 contract onwards.
• Brent is -0.2% at $107.28, also just about clearing $108.29 (May 11 high) to open $114.00 (May 5 high).
• Gold has slid throughout the day and sits -1.6% at $1823.07 with further risk-off sentiment seeing a surge in demand for USD and inflation expectations continuing to moderate.
• It has already cleared one support level at $1832.1 (May 11 low) and next eyes $1821.1 (Feb 11 low) after which it would open key support at $1780.4 (Jan 28 low).
• Some additional focus on grains, with Kansas City wheat rising by the exchange limit on low production estimates.

Friday Data Calendar