MNI ASIA MARKETS ANALYSIS - Curve Inversion Hits Deepest Since SVB

US TSYS: Curve Inversion Hits Deepest Since SVB

• The US Treasury curve heads into the Friday close flatter, with the long-end outperforming thanks to a solid pullback in the 30y yield. The MNI Chicago PMI came in below expectations (41.5 vs. Exp. 43.8) to mark the tenth consecutive month of contraction for the measure, helping trigger a sustained pullback across the curve, with the longer-end coming under the most considerable pressure.
• The very short-end saw more stability after the final University of Michigan Confidence Survey, which showed an improvement in sentiment relative to the flash figure - although inflation expectations were unchanged.
• As a result, curve inversion tipped the 2y30y and 5y10y curves to their most inverted level since March and the SVB fallout, with evidence of flattener trades via blocks adding extra weight to the measures.
• Market-implied Fed Fund Rate expectations were more responsive to a softer-than-expected PCE release, keeping the terminal rate at the Nov meeting (pricing a cumulative +33.5bp of hikes).
• Focus ahead turns to the June ISM Manufacturing and services releases, as well as nonfarm payrolls on Friday. Markets expect the US to have added 225k jobs across the month, with the unemployment rate expected to step lower by 0.1ppts to 3.6%.

STIRS: Intraday Drop On PCE/Chicago PMI Weighs On Fed Rates

• Fed Funds implied rates out the next twelve months have moved lower today after softer PCE data and a miss for the Chicago PMI, but with moves limited on the day by an earlier increase through European hours.
• It keeps a terminal rate seen with the Nov meeting from a cumulative +33.5bp hike (-1bp on the day), with any additional hikes from the current 5.07% effective reversed by the May decision and an unchanged 60bp of cuts from the Nov terminal to 4.81% in Jun’24.
• Chicago Fed’s Goolsbee (’23 voter) didn’t move the needle earlier, noting that the Fed will get a lot more data for July – a meeting he still hasn’t decided on – albeit without much of a dovish tilt as he noted that goods inflation hasn’t come down as fast as expected.
• SOFR futures are mixed, trading up to 4.5 ticks for the Dec’23 (with the day’s most active volumes at a cumulative 335k) before fading to a 2 tick sell-off out in the Dec’24 with the pivot coming in Sep’24.

US: RRP Uptake Lifts On Month/Qrtr End Flow But Dwarfed By Prior Highs

• Reverse repo operation usage lifted $100B to $2034B today, although to a small level by month/quarter-end standards as plentiful T-bill supply has helped steadily whittle RRP volumes down.
• It compares with the $2375B from Mar 31 and the high of $2554B from Dec 30.
• The number of counterparties was unsurprisingly at the high end of its recent range at 109.

CANADA: BAX Futures Hold Up To 7 Tick Rally As Important BoC Inputs Digested

• BAX futures have rallied solidly today, mostly with the monthly GDP data released along with softer details behind US PCE, before extending the move in later dated contracts with the BOC surveys.
• The front Sep’23 holds 2.5 ticks higher, before 7-7.5 tick gains for subsequent contracts as the BAU3/Z3 spread flattens 4bps to +1.5bp and is currently set for its lowest close since Jun 12.
• CORRA OIS has dipped 2bps on the day to +17bp for the Jul 12 decision, with Friday’s employment report the next key release before the decision.

EGBs-GILTS CASH CLOSE: Yields End Week/Month/Quarter Higher

Bunds outperformed Gilts Friday, with periphery EGBs trading mixed, and core FI yields ending the week (and month and quarter) higher overall.

• Yields rose early in the session with no specific catalysts evident, though the week's generally hawkish central bank rhetoric continued to weigh ahead of month-end dynamics.
• There was basically no reaction to the Eurozone's June flash inflation print which was well priced on prior national inflation readings (including a softer-than-expected France number).
• However, with core and services inflation remaining sticky, the ECB remains on course to hike at the next two meetings (our review is here). And as MNI reported citing Eurosystem sources, the Governing Council must see the slew of data through early September before deciding its move at that juncture.
• Yields descended in the afternoon though after US PCE inflation and MNI Chicago PMI came in on the soft side of expectations.
• The German curve ended bull flatter, with the UK's bear flattening.
• Next week begins fairly quietly (with a US holiday on Tuesday and early market close Monday), with the US employment report Friday the focus.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is unchanged at 3.196%, 5-Yr is down 1.8bps at 2.55%, 10-Yr is down 2.4bps at 2.392%, and 30-Yr is down 3.8bps at 2.389%.
• UK: The 2-Yr yield is up 4.6bps at 5.274%, 5-Yr is up 3.9bps at 4.663%, 10-Yr is up 0.6bps at 4.388%, and 30-Yr is down 1bps at 4.423%.
• Italian BTP spread down 0.3bps at 168bps / Greek up 1.3bps at 127.9bps

FOREX: Strength In Equities Feeds Into Weaker Greenback

• The USD index (-0.44%) snapped a two-day winning streak on Friday and looks set to finish the week broadly unchanged. Firmer risk sentiment, evidenced by the strong price action across major equity benchmarks fed through to broad greenback weakness across currency markets. A slightly softer US PCE core deflator and a weaker Chicago PMI release were additional factors that weighed on the dollar.
• Bolstered sentiment saw the usual suspects leap to the top of the G10 leaderboard with NZD, GBP and AUD all outperforming to finish the week. The Aussie bounce comes ahead of Tuesday’s RBA meeting where surveyed analysts remain split between the RBA standing pat or hiking by 25bp again to 4.35%.
• Despite the bounce, the overarching outlook for AUDUSD remains soft following recent weakness and the extension of the reversal that started Jun 16. The downleg has resulted in a break of the 20- and 50-day EMAs, suggesting scope for a deeper retracement. Initial firm resistance is at 0.6701, the 20-day EMA.
• A quick note on USDJPY, which after very briefly printing above the 145.00 handle overnight, has consolidated lower, slipping back below 144.50 approaching the close. 145.00/11 marks an important pivotal resistance point. Dating back to last year and it is worth noting that USDJPY is the most overbought (as per the 14-day RSI) since mid-October.
• Next week, US ISM Manufacturing PMI will cross Monday before the July 04 US Holiday. The focus then turns to the FOMC minutes Wednesday before Friday’s release of non-farm payrolls for June.

Expiries for Jul03 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0720-30(E1.1bln), $1.0779-85(E1.3bln), $1.0900(E814mln), $1.0970-75(E570mln), $1.1000-15(E556mln), $1.1070-85(E1.2bln)
• AUD/NZD: N$1.0850-60(A$897mln), N$1.0900(A$700mln), N$1.0950(A$1.0bln), N$1.1000(A$1.2bln)

EQUITIES: Stocks Close to Daily Highs Headed into Last Few Hours of Trade

Equities headed through the second half of trade close to session highs, and well within striking distance of the contract high for ESU3 at 4493.75. Positive momentum triggered by a strong buying bias at the open, with the NYSE Tick Index showing a net of 1695 names bought at the bell - that's the highest level since May 10th. Month-, quarter- and half-year-end themes appear to be fading, with equity strength coming despite month-end models indicating a need for a rotation into bonds, from equities, for June.

• The NASDAQ outperforms thanks to a solid contribution from tech bluechips: Apple has extended the year's rally to touch an alltime high and tip market cap above $3trl. The Dow Jones underperforms, higher by just 0.8% as a drop in Nike share hinders any advance.
• Tech names are the outperformers across the S&P500, with consumer discretionary not far behind. Real estate names are the sole laggards alongside a general flattening bias in the US sovereign curve.
• 6 stocks are higher for every 1 lower so far in the S&P 500. Single name standouts include NVIDIA (+3.9%) as the AI trade extends: company was subject to a broker upgrade pre-market, and the strong subscription to Inflection AI's fund-raising boosts the profile of the sector.
• NIKE are one of the poorest performers, down over 2.5% post-earnings late yesterday. The company reported a miss on EPS and disappointed on revenue guidance.

COMMODITIES: Oil Flattered by Softer Greenback, But 50-dma Contains Brent for Now

• Oil headed into the Friday close on firmer footing, with both WTI and Brent crude futures firmer following a tumultuous Friday session. USD-denominated oil benchmarks sit firmer, flattered by a pullback in the dollar after softer than expected PCE and MNI Chicago PMI releases. A flatter US curve flagged concerns surrounding the US growth picture, limiting the gains for WTI over Brent, and pressuring the spread between the two contracts.
• Precious metals trade well, with gold and silver off recent lows and looking to snap a stronger losing streak for the yellow metal. A positive close Friday would snap a ten session losing streak for gold, but the bounce looks shallow at current levels. The outlook remains negative absent any break of $1930.61 - the June 27 high - and the 100-dma of $1944.47.
• Industrial metals traded more poorly, mirroring the pullback in the longer-end of the US Treasury curve.