MNI ASIA MARKETS ANALYSIS: Fed Bostic Warns of Overtightening

US TSYS Rates Reject Soft Data

• Treasury futures remain weaker - trading in a narrow range after quickly rejecting soft set of data this morning: Construction Spending MoM (0.5% vs 0.6% est); JOLTS Job Openings (9.528M vs. 9.600M est); ISM Mfg (46.4 vs. 46.9 est), Prices Paid (42.6 vs 44.0 est).
• Employment saw another heavy decline, falling -3.7pts to 44.4 after June’s -3.3pts to 44.4 for its lowest since Jul’20 and pre-pandemic the lowest since 2009 having come very close in 2016. The latest decline mirrors the particularly sharp decline in yesterday’s Chicago PMI.
• Front month Sep'23 10Y futures bounced to 111-07 from 111-00 pre-data, traded down to a session low of 110-26.5 (above technical support of 110-25.5 (Low Jul 28). Curves on the other hand bear steepened with short end rates outperforming: 3M10Y +6.344 at -140.915, 2s10s +5.335 at -86.861.
• There were no substantive headline drivers for the post-data reversal in rates, however. Similar to last Friday's sharp rally and reversal, it appears algos reacted too strongly to the data with prop and fast money selling into the move ahead upcoming data.
• Focus turns to ADP private employ data early Wednesday (+188k est vs. 497k prior), and July employment data on Friday, current estimate of +200k job gains vs. +209k in June.
• Late unscheduled Fed speak after Tuesday's close: Atlanta Fed Pres Bostic said "THERE IS SOME RISK NOW OF OVERTIGHTENING" while "SUPPORTING FURTHER HIKES 'HARDER ON SOME LEVEL'"; DOESN'T SEE CUTS UNTIL H2 '24 AT EARLIEST"

SHORT TERM RATES

SOFR Benchmark Settlements:

• 1M +0.00011 to 5.31795 (-.00015/wk)
• 3M +0.00103 to 5.36635 (-0.00556/wk)
• 6M +0.00001 to 5.43314 (-0.01486/wk)
• 12M -0.00924 to 5.37388 (-0.03400/wk)

• Daily Effective Fed Funds Rate: 5.33% volume: $103B
• Daily Overnight Bank Funding Rate: 5.32% volume: $237B

• Secured Overnight Financing Rate (SOFR): 5.31%, $1.551T
• Broad General Collateral Rate (BGCR): 5.29%, $583B
• Tri-Party General Collateral Rate (TGCR): 5.28%, $574B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

The latest operation recedes to $1,739.554B, w/96 counterparties, compared to $1,821.124B in the prior session. The high for 2023 stands at $2,375.171B on Friday March 31, 2023; all-time record high of $2,553.716B reached December 30, 2022.

SOFR/TREASURY OPTION SUMMARY

Much better Treasury option flow on net Tuesday, relatively mixed between out-of-the-money call and put structures as underlying futures quickly shrugged off soft midmorning data, curves bear steepening with intermediate to long end futures underperforming.

• SOFR Options:
  • Block, 3,000 SFRZ3 95.75/96.00 call spds and SFRH4 97.00/97.25 call spds, both at 1.0
  • 2,500 SFRZ3 94.87/95.00 call spds ref 94.625 to -.63
  • Block, 2,500 SFRV3 94.50 puts, 7.0 vs. 94.625/0.33%
• Treasury Options:
  • over 14,000 TYU3 111 calls, 63 down to 50
  • 2,000 TYU3 1008/110 put spds, 23 ref 110-30
  • 4,500 FVU3/FVV3 109.5 call spds
  • 5,000 TYU3 109.5/110.5 2x1 put spds, 0.0
  • over 5,000 TYU3 109/110 put spds, 15 ref 110-30.5
  • 7,000 FVU3 106.5/106.75 put spds, 9.5 ref 106-17.75
  • over 13,000 TYU3 109/110.5 put spds 25 vs. 111-01 to -01.5/0.23%
  • 2,000 TYU3 108/109 call spds, 8
  • 3,000 TYV3 110/111 2x1 put spds
  • 1,500 TYU3 114/115 call spds, 3 ref 111-00
  • Over 20,000 FVU3 109 calls, 3.5-4 ref 106-19.25 to -25.5
  • 8,400 FVU3 107.75/108.5 call spds ref 106-26.25 to -25.75
  • 1,000 TYU3 111.75/112.25/112.75/113.25 call condors, ref 111-14
  • 3,500 TYV3 109/110 put spds, 14 ref 111-28
  • 2,000 USU3 128/131 call spds ref 124-13

EGBs-GILTS CASH CLOSE: Afternoon Retreat

Gilts and Bunds retreated Tuesday, with sideways-to-lower trading in the morning giving way to a more pronounced selloff in the afternoon.

• The weakness in core FI (led in the afternoon by US Treasuries) seemed to defy the data, with Italian and Spanish PMIs in the morning mostly reaffirming the weaker growth and inflation narrative (French / UK upward PMI revision and solid Eurozone jobs data were exceptions), and US JOLTS and ISM prices/employment data looking soft.
• Both the UK and German curves bear steepened, with Gilts underperforming.
• Periphery EGB spreads widened, reflecting a risk-off tone (Eurostoxx futures dropped 1.6% on the day).
• With most focus on risk events later in the week, including the BoE decision Thursday and the US employment report Friday, attention in a relatively quiet Wednesday schedule will be on the US Treasury's quarterly issuance announcement with potential for large supply increases.
• We published our Eurozone July inflation review today, and our BoE preview will be out tomorrow.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 2.6bps at 3.064%, 5-Yr is up 5bps at 2.586%, 10-Yr is up 6.5bps at 2.557%, and 30-Yr is up 7.1bps at 2.641%.
• UK: The 2-Yr yield is up 5.8bps at 5.058%, 5-Yr is up 8.4bps at 4.478%, 10-Yr is up 9bps at 4.399%, and 30-Yr is up 6.7bps at 4.529%.
• Italian BTP spread up 2.2bps at 163.2bps / Greek up 4.1bps at 131bps

EGB Options: Mostly Call Condors And Flies Again Tuesday

Tuesday's Europe rates / bond options flow included:

• ERZ3 96.00/95.87/95.37 broken put ladder, bought for 3 in 20k
• ERZ3 96.125/96.25/96.375 1x3x2 call fly trades -0.5 in 2k, buys the wings (receiving net credit)
• 3RU3 96.75/97.00/97.62/97.87c condor, bought for 19.5 in 2k (this was bought for 19 and 19.25 in 6.5k Monday).
• SFIQ3 94.55 call bought for 1 in 4k
• SFIU3 94.15/94.35/94.55 call fly bought for 5.5 in 5k

FOREX: AUD Extends Intra-Day Decline To 1.6%, USD Index Testing Resistance

• The US dollar advance has settled in late Tuesday trade with the USD index (+0.45%) around 10 pips off session highs as we approach the APAC crossover with the 100- and 50-dma resistance levels in close proximity, intersecting at 102.39 and 102.49 respectively. Alongside higher US yields and a steeper curve, there greenback strength has been broad based, rising against all others in G10 and showing a particular outperformance against the emerging market basket.
• The Australian dollar remains the weakest of the majors, declining 1.6% following the August RBA meeting. Importantly it appears that the RBA’s forecasts were broadly unchanged from May, suggesting that there will need to be an increase in upside inflation risks from here for rates to rise further. Combining this with the negative sentiment across equity markets on Tuesday has resulted in a sharp reversal lower for the AUDUSD. Attention is firmly on the next key support at 0.6596, the Jun 29 low.
• Despite a very brief dip on the US ISM data, USDJPY has maintained a steady trajectory higher on Tuesday and continues to eat into the sharp decline from 145.00 seen in early July. Today’s price action strengthens current bullish conditions and signals scope for a continuation higher. This has opened 144.20, the Jul 7 high, and key resistance at 145.07, the Jun 30 high.
• CNH slipped overnight on the poorer-than-expected Caixin PMI release, which unexpectedly signalled contraction of 49.2 against 50.1 forecast. New home sales data were also a soft spot, with the value of new home sales down over 33% on the year. USDCNH is still hugging daily highs, with spot having earlier broke above horizontal congestion resistance around 7.1774-78. Today's move higher has also topped the 50-dma of 7.1714 and a close above this mark today would be a bullish development.
• Negative sentiment also weighed heavily on some emerging market currencies with ZAR (-2.4%), PLN (-1.2%), BRL (-1.4%) and COP (-1.6%) all feeling the pinch.
• Wednesday will bring New Zealand employment figures as well as US ADP with the market now focusing on Thursday’s BOE decision and Friday’s release of US non-farm payrolls.

FX: Expiries for Aug02 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0975-90(E1.4bln), $1.1050-65(E810mln)
• USD/JPY: Y141.50($875mln), Y142.40-50($588mln), Y143.00($590mln), Y145.50($601mln)
• AUD/USD: $0.6660(A$580mln), $0.6850-70(A$1.0bln)

LATE EQUITIES SUMMARY: Climbing Off Midday Lows

• Stocks remain mixed but off midday lows as with Dow components outpace weaker SPX and Nasdaq indexes. Currently, DJIA is up 59.82 points (0.17%) at 35620.08, S&P E-Mini future down 12 points (-0.26%) at 4603, Nasdaq down 49.1 points (-0.3%) at 14297.03.
• Laggers: Consumer Discretionary, Utilities and Health Care sectors remain weak in late trade. Autos weighed on discretionary stocks, Tesla -2.00%, GM -0.75%, followed by services subsector with hotel, resort and cruise line shares lower: Norwegian Cruise Lines -13.05% (reports strong second quarter but gives poor forward guidance) compared to the next lowest Carnival -4.75% (retiring $1.2B high-ost debt while issuing $500M secured junk bonds).
• Leading gainers: Information Technology, Industrials and Real estate sectors outperforming (communication services pared earlier gains). Software and services buoyed IT: Palo Alto Network +1.6%, Now Services +1.35%, Accenture +1.15%. Industrials pushed higher late with capital goods lead by gains in machinery and electrical equipment share: Caterpillar +8.56% after strong earning this morning, Stanley Black & Decker +4.42%.

E-MINI S&P TECHS: (U3) Channel Resistance Remains Intact

• RES 4: 4725.13 3.0% 10-dma envelope
• RES 3: 4670.25 2.00 proj of the Jun 26 - 20 - Jul 7 price swing
• RES 2: 4649.04 Bull channel top
• RES 1: 4634.50 High Jul 27
• PRICE: 4602.25 @ 14:39 BST Aug 1
• SUP 1: 4541.71 20-day EMA
• SUP 2: 4470.00 Low Jul 12
• SUP 3: 4439.35 50-day EMA
• SUP 4: 4402.44 Bull channel base drawn from the Mar 13 low

The E-mini S&P contract remains below 4634.50, last Thursday’s high. The pullback from this level highlights a possible short-term bearish signal. Price has found resistance at the top of a bull channel drawn from the Mar 13 low - the channel top is at 4649.04 today. An extension lower would expose the 20-day EMA - at 4541.71 and a break of it would strengthen bearish conditions. Clearance of the channel top is required to resume the uptrend.

COMMODITIES: Crude Eases Back Amidst USD Headwind

• Fresh from yesterday’s push higher including YTD highs for WTI, crude futures and time spreads have lifted off lows but hold onto small losses with a headwind from a stronger USD despite slightly weaker than expected US ISM and JOLTS.
• Those earlier gains were helped by a Bloomberg survey showing OPEC output plunged by 900kbpd last month to an average of 27.79mpd, it’s the biggest reduction since the group and its allies slashed supplies during the depths of the Covid pandemic in 2020.
• Saudi Arabia may raise its price for Arab Light crude for sale to Asian refiners by 45 cents for a third month as the voluntary output cuts are expected to be extended into September according to a Reuters survey.
• Elsewhere, the repair work at Forcados crude oil terminal is expected to be completed by early next week, whilst Iraq’s crude oil exports stood at 3.44mbpd in July, up from 3.335mbpd in June and the highest monthly level since March.
• WTI is -0.55% at $81.35 as it pulls back from resistance at $82.00 (Jul 31 high). Support remains at $76.64 (20-day EMA).
• Brent is -0.65% at $84.87 as it pulls back from resistance at $85.60 (Jan 27 high) but keeps key resistance at $86.18 (Jan 23 high) in its sights.
• Gold is -1.0% at $1944.62, sliding with USD strength and higher Treasury yields. It is off a low of $1941.3 that cleared support at $1942.7 (Jul 27 low) to open $1924.5 (Jul 11 low).

WEDNESDAY DATA CALENDAR

Date	GMT/Local	Impact	Flag	Country	Event
02/08/2023	1100/0700	**		US	MBA Weekly Applications Index
02/08/2023	1215/0815	***		US	ADP Employment Report
02/08/2023	1230/0830	**		US	Treasury Quarterly Refunding
02/08/2023	1400/1000	**		US	housing vacancies
02/08/2023	1430/1030	**		US	DOE Weekly Crude Oil Stocks
03/08/2023	2300/0900	*		AU	IHS Markit Final Australia Services PMI