US TSYS: Rebound Continues As Oil, Equities Falter
The Treasury curve bull flattened Tuesday in the return of post-holiday cash trading, with futures extending the rebound from Monday's lows.
- A sharp drop in oil prices starting late Monday on an apparent de-escalation in Iran-Israel tensions helped underpin a 20+ tick rally in front TYs through mid-morning trade Tuesday. WTI front futures fell 3.8% Tuesday.
- Supporting factors included a softer-than-expected Canadian CPI report and a miss in the latest Empire Manufacturing Survey (albeit offset by stronger details under the hood), equities surrendered Monday's gains after multiple earnings reports globally disappointed (chipmaker ASML, luxury goods' LVMH, UnitedHealth) with S&P eminis off 0.8%.
- The risk-off tone in equities helped underpin November Fed rate cut pricing, for which Fed Funds futures extended to a post-Oct 7 high (implying ~98% of a 25bp cut, vs ~88% Monday).
- On that note, SF Fed's Daly reiterated it was a "reasonable thing" to cut one or two more times by the end of the year - overall a relatively cautious tone, in keeping with Monday's appearance by Gov Waller.
- The Tsy curve bull flattened on the day, with TY futures touching the highest levels since Oct 9 - last up 19.5/32 at 112-15 (L: 111-31 / H: 112-15.5) - initial resistance comes in at the Oct 9 high of 112-21.
- In cash, vs Friday's close: 2-Yr yield is down 0.8bps at 3.9475%, 5-Yr is down 4.9bps at 3.8525%, 10-Yr is down 7.5bps at 4.0258%, and 30-Yr is down 9.6bps at 4.3143%.
- Atlanta Fed Pres Bostic speaks after the close (1900ET). Wednesday's schedule includes September import/export prices - which feed into the Fed's preferred PCE inflation gauge - and a Fox interview of Vice President Harris.
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
Repo and effective Fed funds rates were little changed Friday (no data released Monday due to holiday). For Tuesday, SOFR is set to pick up 2bp to 4.83% due to "the settlement of the Treasury’s mid-month coupon auctions along with the regular Tuesday bill issues", per Wrightson ICAP - though on Wednesday they should subside again.
REPO REFERENCE RATES (rate, change from prev. day, volume - for Oct 11)
- Secured Overnight Financing Rate (SOFR): 4.81%, -0.01%, $2058B
- Broad General Collateral Rate (BGCR): 4.81%, no change, $805B
- Tri-Party General Collateral Rate (TGCR): 4.81%, no change, $772B
New York Fed EFFR for prior session (rate for Oct 11, chg from prev day):
- Daily Effective Fed Funds Rate: 4.83%, no change, volume: $94B
- Daily Overnight Bank Funding Rate: 4.83%, no change, volume: $246B
US TSYS/OVERNIGHT REPO: Reverse Repo Takeup Below $300B For First Time In Month
ON Reverse Repo facility takeup fell to $286.4B today, vs $331.7B on Friday (the number of counterparties fell to 50 from 59 prior).
- This marks the first time since September 17 that ON RRP takeup has fallen below $300B - this had been anticipated due to higher coupon settlements (3-/10-30Y Tsy auctions) increasing demand for overnight financing.
- It's plausible ON RRP takeup will remain below $300B until month-end though is largely anticipated to remain at/above low September levels throughout (~$230B).
- Note that ON RRP is seen as something of a complement to broader bank reserves by the Fed, and its trajectory will be a factor in the determination of when to end QT. Added to reserves coming in at $3.2T last week, there is no urgency to reconsider balance sheet reduction at this stage.
STIR: SOFR FIX - 15/10/24
| SOFR FIX - Source BBG/CME | ||
| 1M | 4.78385 | -0.00207 |
| 3M | 4.64745 | 0.00015 |
| 6M | 4.44266 | -0.00092 |
| 12M | 4.12030 | -0.01944 |
US SOFR/TREASURY OPTION SUMMARY
Tuesday's US rates/bond options flow included:
- TYZ4 114.50/115.50 cs Bot for 10 in 10.5k
- TYZ4 112/111.50 put spread vs. 112-06 20K given at 0-13
BONDS: EGBs-GILTS CASH CLOSE: BTPs Shine Amid Broader Rally
European yields fell sharply Tuesday, as oil prices and equities pulled back.
- Early gains came largely after an overnight drop in crude oil on Israel-Iran de-escalation.
- UK labour market data didn't suggest any firm conclusions for BoE policy (regular pay moderated while the quantity side of the data held up), while the German ZEW investor survey beat on expectations, but missed on current situation.
- Multiple negative earnings headlines across tech (ASML) and European luxury (LVMH) weighed heavily on European equities in the session, help driving a bid for EGBs, with soft Canadian CPI and a solid 30Y Gilt auction also tailwinds.
- EGB periphery spreads narrowed, led by 10Y BTP/Bund which posted its tightest close since mid-March amid multiple reports detailing the Italian government's fiscal consolidation plans.
- UK instruments outperformed German counterparts across most of their respective curves, with 10Y outperforming on the UK curve in a bull flattening move, and 5Y on the German curve.
- Thursday's ECB meeting remains the key event of the week, but Wednesday's early highlight is UK CPI - MNI's preview is here (PDF).
Closing Yields / 10-Yr Periphery EGB Spreads To Germany
- Germany: The 2-Yr yield is down 4.6bps at 2.211%, 5-Yr is down 5.4bps at 2.083%, 10-Yr is down 5.3bps at 2.222%, and 30-Yr is down 4.7bps at 2.514%.
- UK: The 2-Yr yield is down 4.9bps at 4.13%, 5-Yr is down 5.1bps at 4.033%, 10-Yr is down 7.6bps at 4.162%, and 30-Yr is down 10bps at 4.678%.
- Italian BTP spread down 3.2bps at 123.9bps / Greek down 1.9bps at 90.3bps
EUROPE OPTIONS: Repeated Rate Structures Tuesday
Tuesday's Europe rates/bond options flow included:
- ERH5 97.25/97.125/97.00 put fly paper paid 1 on 6K all day
- SFIZ4 95.45/95.50/95.55/95.60 call condor paper paid 0.75 on 9K all day
FOREX: EURUSD Remains on Back Foot, EM FX Under Pressure
- Despite a subdued session for G10 FX on Tuesday, USDJPY (-0.18%) has exhibited another 100-pip range. Early weakness down to 148.85 has been significantly pared, with the dollar broadly supported across US hours by a downtick for major equity benchmarks. USDJPY now trades back to 149.50 as we approach the APAC crossover.
- Accordingly, EURUSD has gradually edged back below the 1.0900 handle, and trades just above its two-month low of 1.0885 ahead of the ECB decision Thursday. Moving average studies are in a bear-mode position and a breach of 1.0880 (both Fibonacci retracement level and the Aug 08 low) would strengthen the likelihood of a deeper retracement towards 1.0778, the Aug 1 low and a key support.
- Canadian CPI came in a touch below expectations, prompting some analysts to adjust their BOC calls to a 50BP cut in October. Initially, USDCAD extended gains to a high of 1.3839, although this momentum faded throughout the session. Spot remains marginally in the green, and a positive close would represent a tenth consecutive session of gains. We currently stand 2.5% above the October lows and any pullback would be considered corrective and allow an overbought condition to unwind.
- EM FX weakness has been a focus point and accordingly the Chinese Yuan has been under pressure, with USD/CNH pushing back above 7.1250, weaker by around 0.60% in CNH terms as onshore speculation continues around stimulus size and needs.
- Amid this dynamic and combined with the pressure on oil prices Tuesday, particular weakness has been seen for the Mexican peso and for the entire Latin American FX complex. USDMXN has risen 1.40% and is extending its recovery from the 50-day EMA support. First resistance and a key short-term hurdle for bulls, is at 19.8295, the Oct 1 high.
- UK Inflation data for September highlights the economic calendar on Wednesday.
FX OPTIONS: Expiries for Oct16 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.0880-00(E1.0bln), $1.0945-55(E2.8bln), $1.0975(E1.1bln)
- USD/JPY: Y150.00($757mln)
- AUD/USD: $0.6750(A$705mln), $0.6775-80(A$520mln)
EQUITY TECHS: E-MINI S&P: (Z4) Bulls Remain In The Driver’s Seat
- RES 4: 6012.75 1.00 projection of the Aug 5 - Sep 3 - 6 price swing
- RES 3: 6000.00 Psychological handle
- RES 2: 5961.00 1.00 projection of the Sep 6 - 17 - 18
- RES 1: 5918.50 High Oct 14
- PRICE: 5909.50 @ 14:33 BST Oct 15
- SUP 1: 5782.19/5724.00 20-day EMA / Low Oct 2
- SUP 2: 5701.99 50-day EMA
- SUP 3: 5675.25 Low Sep 18
- SUP 4: 5658.00 Low Sep 13
A bull cycle in S&P E-Minis remains intact and Monday’s gains reinforce the current trend condition. The move higher confirms a resumption of the primary uptrend and maintains the bullish price sequence of higher highs and higher lows. Note that moving average studies are in a bull-mode setup, highlighting a dominant uptrend. Sights are on 5961.00, a Fibonacci projection. Initial support to watch is 5782.19, the 20-day EMA.
COMMODITIES: Crude Plummets As Geopolitical Risk Premium Unwinds
- WTI is headed for losses of over 4% today as crude shakes off its geopolitical risk premium. This followed a report from the Washington Post late yesterday evening that Israel would not target Iran’s oil and nuclear infrastructure.
- WTI Nov 24 is down by 4.3% at $70.6/bbl.
- Israeli broadcaster KAN reports that PM Netanyahu and Defence Minister Yoav Gallant have agreed on a response to the 1 October Iranian missile strikes on Israel.
- The gap lower in WTI futures today has resulted in a break of the Oct 9 low. An extension lower would threaten the recent bullish theme and expose support at $66.33, the Oct 1 low, and $64.61, the Sep 10 low and a key support.
- Meanwhile, spot gold has risen by 0.6% to $2,665/oz today.
- The recent short-term retracement in gold appears to have been a correction. The trend condition is unchanged and remains bullish. A continuation of gains would refocus attention on $2,690.2, a Fibonacci projection.
- Firm support lies at $2,626.9, the 20-day EMA.
- Copper has fallen by another 1.5% to $434/lb, leaving the red metal 9.5% below its Sep 30 high.
- Copper futures remain in a short-term retracement mode, with the contract trading through $436.80, the 50-day EMA, today.
- A clear breach of this average would signal scope for a deeper retracement and open $415.93, a Fibonacci retracement point.
| Date | GMT/Local | Impact | Country | Event |
| 16/10/2024 | 2145/1045 | *** |  NZ | CPI inflation quarterly |
| 15/10/2024 | 2300/1900 |  US | Atlanta Fed's Raphael Bostic | |
| 16/10/2024 | 2350/0850 | * |  JP | Machinery orders |
| 16/10/2024 | 0600/0700 | *** |  GB | Consumer inflation report |
| 16/10/2024 | 0600/0700 | *** | GB | Producer Prices |
| 16/10/2024 | 0800/1000 | ** |  IT | Italy Final HICP |
| 16/10/2024 | 0900/1000 | ** | GB | Gilt Outright Auction Result |
| 16/10/2024 | 1100/0700 | ** | US | MBA Weekly Applications Index |
| 16/10/2024 | 1215/0815 | ** |  CA | CMHC Housing Starts |
| 16/10/2024 | 1230/0830 | ** | US | Import/Export Price Index |
| 16/10/2024 | 1230/0830 | ** | CA | Monthly Survey of Manufacturing |
| 16/10/2024 | 1840/2040 |  EU | ECB's Lagarde Speech at Banka Slovenije Dinner | |
| 17/10/2024 | - | EU | European Central Bank Meeting | |
| 17/10/2024 | 2350/0850 | ** | JP | Trade |
| 17/10/2024 | 0030/1130 | *** |  AU | Labor Force Survey |
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