MNI ASIA MARKETS ANALYSIS: Fed Gov Waller Dovish vs. Mester

US TSYS Yields Higher on Heavy Corporate Issuance, Mixed Fed Speaker Tones

• Treasury futures are a little off late session lows at the moment, likely tied to rate lock/hedge unwinds tied to nearly $37B high grade corporate issuance on the day. Partly seasonal, a return from summer market malaise, coupled with expectation the Federal Reserve is at or at least near the end of it's tightening cycle has reignited expectation of heavy supply.
• Early dovish headlines from Fed Gov Waller, that last week's data "allows the Fed to proceed carefully .. no need to do anything imminently", saw Dec'23 10Y futures jump to 110-17 session high (yield 4.0284% low).
• Support evaporated after Cleveland Fed Mester said the Fed might need to lift interest rates "a bit higher" on the back of stronger-than-expected economic data and upside inflation risks in an interview with German newspaper Boersen-Zeitung Tuesday.
• "The latest indicators suggest that demand is somewhat stronger than expected, that the momentum in the economy is greater than thought," she said. "I can well imagine, from what I see so far, that we might have to go a bit higher, that we might have to raise the policy rate a bit more."
• After a brief delay, FI futures are extended session lows after July Factory orders comes out better (less negative) than expected at -2.1% vs. -2.5% est (+2.3% prior), ex-trans +0.8% vs. +0.1% est (0.3% prior/revised).
• Dec'23 10Y futures held above initial support at 109-28+ (Low Aug 29). Next support at 109-18+/09+ Low Aug 25 / 22 and the bear trigger.

SHORT TERM RATES

SOFR Benchmark Settlements:

• 1M -0.00125 to 5.32762 (+.00004 total last wk)
• 3M -0.01122 to 5.39108 (+0.02072 total last wk)
• 6M -0.02112 to 5.43212 (+0.01407 total last wk)
• 12M -0.04295 to 5.32571 (+0.04300 total last wk)

• Daily Effective Fed Funds Rate: 5.33% volume: $104B
• Daily Overnight Bank Funding Rate: 5.32% volume: $266B

• Secured Overnight Financing Rate (SOFR): 5.31%, $1.458T
• Broad General Collateral Rate (BGCR): 5.30%, $559B
• Tri-Party General Collateral Rate (TGCR): 5.30%, $554B
• (rate, volume levels reflect prior session)

FED REVERSE REPO OPERATION

Repo operation falls to $1,568.490B (lowest since early March 2022) w/94 counterparties, compared to $1,574.065B 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

Early put trade segued to upside call structure trade Tuesday, despite underlying futures continued decline to new lows in late trade. TYZ3 back near last Tuesday levels at 109-31 (-19.5). Rate hike projections through year end soft, Sep 20 FOMC is 6.8% w/ implied rate change of +1.7bp to 5.347%. November cumulative of +12bp at 5.451, December cumulative of 11.3bp at 5.444%. Fed terminal at 5.45% in Nov'23.

• SOFR Options:
  • +2,000 SFRM4 95.00/96.50/98.00 call flys 4.25 over 2QM4 96.25/97.00/97.75 call flys
  • 8,100 0QU3 95.31/95.50/95.56/96.12 broken call condors
  • Block, total 10,000 SFRH4 94.50/95.50 call over risk reversal, 0.0 ref 94.76/0.53%
  • 4,500 SFRM4 96.00 calls, ref 95.04
  • Block, 2,500 SFRU3 94.25/94.50 put spds, cab ref 94.5875
  • 1,250 SFRU3 94.50/94.75/95.00/95.25 put condors ref 94.59
  • 10,000 SFRH4 95.00/95.12 call spds ref 94.755
  • 6,500 SFRX3 94.62/94.81/94.87/95.37 broken call condors
  • 6,000 0QZ3 95.75/96.00 put spds ref 95.75
  • Block, 4,000 SFRV3 94.12 puts, .5
  • 3,500 SFRM4 94.37/94.75/95.00 broken put trees, ref 95.065
• Treasury Options:
  • 5,500 TYX3 113 calls, 17 ref 110-02
  • 1,500 TYV3 113/115 call spds ref 110-07
  • 5,200 TYV3 108.5 puts ref 110-09.5
  • 4,000 TUV3 101.5 puts, 6.5
  • 2,000 TUV3 101.75 puts, 12.5
  • over 5,000 USV3 115/116.5 put spds

EGBs-GILTS CASH CLOSE: BTPs And Gilts Underperform

Gilts underperformed Bunds Tuesday, with European yields following Treasuries in reversing an early drop over the course of the day.

• Morning data was mixed: Spanish and Italian services PMI disappointed with contractionary readings, though the UK's was revised higher, and the ECB's consumer survey showed a tick higher in inflation expectations.
• ECB's Lane noted optimism on core inflation continuing to come down in the autumn, though Wunsch suggested that "we maybe need to do a little bit more" on rates.
• After drifting weaker most of the session, Gilts and Bunds ticked higher in early afternoon largely on more-dovish-than-expected comments by Fed Gov Waller - only for yields to later hit session highs on above-consensus US factory orders data and Fed's Mester eyeing potential for more hikes.
• The UK curve bear flattened, with Germany's bear steepening ahead of 10Y supply Wednesday.
• BTP spreads hit their widest since mid-July; Greece outperformed in a reversal of Monday's widening.
• German factory orders feature first thing Wednesday, with BoE's Bailey speaking later.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 2.2bps at 3.045%, 5-Yr is up 2.6bps at 2.596%, 10-Yr is up 3.3bps at 2.612%, and 30-Yr is up 5.5bps at 2.757%.
• UK: The 2-Yr yield is up 6.5bps at 5.271%, 5-Yr is up 6.4bps at 4.803%, 10-Yr is up 6.2bps at 4.525%, and 30-Yr is up 3.8bps at 4.793%.
• Italian BTP spread up 1.7bps at 172.8bps / Greek down 3.4bps at 131.6bps

EGB Options: Dovish ECB Policy Structures Dominate Tuesday

Tuesday's Europe rates / bond options flow included:

• ERZ3 96.12/96.25cs, bought for 6.5 and 6.75 in 32k vs 4.59k at 96.125 in ERZ3.
• ERZ3 96.00/96.12/96.25c fly bought for 1.25 in 8k.
• ERZ3 95.62/96.62 RR, bought the call for half in 6k.
• ERH4 96.50/96.75cs vs 95.75/95.50ps, bought the cs for 1.5 in 2k
• RXV3 133/134cs, bought for 16.5 in 2k

FOREX: Greenback Rally Extends, AUDUSD Prints Fresh 2023 Low

• The USD index has risen half a percent on Tuesday, with the greenback favoured as US participants return from their Labor Day bank holiday amid a climb higher in US yields, notably the 10-year yield stands back above 4.25%.
• The resulting USD strength is pressing major pairs lower, with the more risk sensitive currencies across the majors feeling the brunt of the moves.
• As such, the Australian dollar sits at the bottom of the G10 leaderboard, with AUD weaker against all others following the RBA rate decision overnight. The bank kept policy unchanged, with markets reading into the bank's view that the peak in inflation has now passed. Persistent weakness in Chinese markets also undermined the currency, briefly placing AUDUSD (-1.22%) below key support and the bear trigger of 0.6365, the lowest level for the pair this year. Similar weakness was seen in NZD, dropping 1.00%.
• Another notable move was in USDJPY, with the higher yields continuing to amplify the yield differentials between the US and Japan, weighing on the Yen all session. USDJPY has now risen 0.88% to 147.75 shortly before the APAC crossover. This keeps the trend outlook bullish, with spot rallying through resistance at 147.37, the Aug 29 high and the bull trigger. A clear break here confirms a resumption of the uptrend and opens 148.40, the Nov 4 2022 high.
• The greenback’s strength was even more noticeable in emerging markets, highlighting the cautious sentiment prevailing through global markets. The Hungarian Forint fell as much as 2% against the dollar, with both the Polish Zloty and the Mexican peso also sliding as much as 1.25%.
• Wednesday’s docket includes Aussie GDP, German Factory order and Eurozone retail sales. The focus will then turn to the Bank of Canada rate decision and US ISM Services PMI for August.

FX Expiries for Sep06 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0740-50(E2.7bln), $1.0800-05(E684mln), $1.0900(E629mln)
• USD/JPY: Y144.50($1.4bln), Y145.50($1bln), Y146.50($1.0bln)
• GBP/USD: $1.2500(Gbp1.4bln), $1.2650(Gbp806mln)
• AUD/USD: $0.6395(A$518mln), $0.6447(A$540mln), $0.6485-00(A$515mln), $0.6550(A$606mln), $0.6600(A$1.5bln)
• USD/CAD: C$1.3600($1.5bln)
• USD/CNY: Cny7.3000($3.2bln)

Late Equity Roundup, Energy Pares Crude Related Support

• Stocks remain mixed in late, Energy and Information technology sectors firmer but off first half highs. Currently, S&P E-Mini futures are down 8.5 points (-0.19%) at 4512.5, DJIA down 108.86 points (-0.31%) at 34727.01, Nasdaq up 18.2 points (0.1%) at 14048.98.
• Energy sector shares continued to outperform after crude prices surged in the first half following Bbg headline: "SAUDI TO EXTEND CUT OF 1 MLN B/D FOR 3 MONTHS UNTIL DEC." Leaders included Occidental Petroleum +2.85%, EOG Resources +2.1%, Halliburton +2.35% with West Texas crude +1.06 at 86.61 vs. 87.99 high.
• Meanwhile, software and services subsector continued to buoy IT stocks in the second half, outperforming microchip and hardware makers. Leaders included Oracle +2.45%, AMD +1.85%, Intel +1.55%.
• Laggers: Utilities, Industrials and Materials sectors underperformed, gas and independent energy names weaker: ATO -2.65%, Dominion Energy -2.38%, AES Corp -2.63%. Industrials were weighed by transportation and airline shares: Old Dominion -2.95%, Alaska Air -2.95%, American Airlines and United both -2.50%, UAL off lows after a country-wide ground-stop was canceled after a computer glitch was rectified. Construction materials names traded weaker: Eastman Chemicals -4.75%, Martin Marietta Materials -3.2%, PPG -3.45%.

E-MINI S&P TECHS: (U3) Trading Closer To Its Recent Highs

• RES 4: 4634.50 High Jul 27 and key resistance
• RES 3: 4593.50 High Aug 2
• RES 2: 4560.75 High Aug 4
• RES 1: 4547.75 High Sep 1
• PRICE: 4511.50 @ 1505 ET Sep 5
• SUP 1: 4458.00/4350.00 50-day EMA / Low Aug 18 and a bear trigger
• SUP 2: 4344.28 38.2% retracement of the Mar 13 - Jul 27 bull cycle
• SUP 3: 4305.75 Low Jun 8
• SUP 4: 4254.62 50.0% retracement of the Mar 13 - Jul 27 bull cycle

The E-mini S&P contract maintains a firmer tone and the contract is holding on to the bulk of its recent gains. Price has traded above resistance at 4531.67, the base of a bull channel, drawn from the Mar 13 low that was breached on Aug 16. A clear break of this level would strengthen the upleg and open 4560.75, the Aug 4 high. Initial support to watch lies at 4458.00, the 50-day EMA. A return below the average would be a bearish development.

COMMODITIES Crude Rallies on Saudi-Russia Output Cut Extension, Gold Slides On USD Strength

• Crude futures are off highs but still see solid gains after Saudi Arabia and Russia in a surprise announcement pledged to extend the voluntary cuts to crude production and exports by three months until the end of the year according to Russian Deputy PM Novak and the Saudi Press Agency. The announcement saw Brent clear $90/bbl for the first time since November and push on to a high of $91.15.
• Elsewhere, OPEC+ production cuts have resulted in a large deficit of 2.3mbpd in Q3 according to Goldman Sachs.
• The aggregate open interest across all ICE Brent options has increased slightly compared to this time last month with calls interest up to 1.357m and put contracts at 1.050m.
• WTI is +1.4% at $86.74, clearing $86.62 (1.382 proj of Jun 28 – Jul 13 – Jul 17 price swing) to open the round $90.
• Brent is +1.1% at $89.97, clearing two resistance levels in $89.22 (Sep 4 high) and the round $90 to open $92.91 (Nov 17, 2022 high cont).
• Gold is -0.8% at $1926.57 as strong USD appreciation on higher US Treasury yields has weighed heavily. It touched a low of $1925.41 but appears to have found some support at the 20-day EMA of $1926.1, with a more concerted push lower potentially opening $1903.9 (Aug 25 low).

WEDNESDAY DATA CALENDAR

Date	GMT/Local	Impact	Flag	Country	Event
06/09/2023	0130/1130	***		AU	Quarterly GDP
06/09/2023	0600/0800	**		DE	Manufacturing Orders
06/09/2023	0730/0930	**		EU	IHS Markit Final Eurozone Construction PMI
06/09/2023	0830/0930	**		UK	IHS Markit/CIPS Construction PMI
06/09/2023	0900/1100	**		EU	Retail Sales
06/09/2023	0900/1000	**		UK	Gilt Outright Auction Result
06/09/2023	1100/0700	**		US	MBA Weekly Applications Index
06/09/2023	1230/0830	**		CA	International Merchandise Trade (Trade Balance)
06/09/2023	1230/0830	**		US	Trade Balance
06/09/2023	1230/0830			US	Boston Fed's Susan Collins
06/09/2023	1255/0855	**		US	Redbook Retail Sales Index
06/09/2023	1315/1415			UK	BoE Reports Hearing (Financial Stability & MP)
06/09/2023	1345/0945	***		US	IHS Markit Services Index (final)
06/09/2023	1400/1000	***		CA	Bank of Canada Policy Decision
06/09/2023	1400/1000	***		US	ISM Non-Manufacturing Index
06/09/2023	1800/1400			US	Fed Beige Book
06/09/2023	1900/1500			US	Dallas Fed's Lorie Logan