MNI ASIA MARKETS ANALYSIS: Mixed Fed Speak, Improved UofM Data

US TSYS: Weaker Rates Discount Rising UofM Sentiment, Lower 1Y Inflation Exp

• Treasury futures remain weaker, but off morning lows after futures inexplicably reversed a post UofM sentiment data rally, front month 10Y futures slipped to 112-24.5 low, trades above technical support (112-12+, Low Jun 14) at 113-00, yield 3.7730% +.0565.
• No particular headline driver for the reversal as it appeared FI longs took the post UofM rally (sentiment 63.9 vs. 60.0 est, 59.2 prior while 1Y inflation exp falls to 3.3% vs. 4.1% est) as an opportunity to scale back risk ahead the long holiday weekend.
• The 2s10s curve tapped -98.341 low, lowest since March 8 43 year inverted low of appr -110.0, this as short end rates price in projected 25bp hike in one of the next 3 FOMC meets.
• Chances of a 25bp hike next at the July 26 FOMC is approximately 70% with Fed funds implied at 17.6bp. Probability of a 25bp hike over the two meetings that follow remain above 80%: September cumulative at +21.3bp to 5.293%, November cumulative 20.3bp to 5.282%. while December cumulative holds at 11.8bp to 5.197%. At the moment, Fed terminal at 5.290% in Oct'23.
• Mixed policy opinions with the Fed out of blackout: Slowing the pace of interest rate increases gives the Fed more time to assess data, and the Fed can "do more" if slowing demand isn't translating into lower inflation, Richmond Fed Barkin said Friday.
• Conversely, the Federal Reserve must raise interest rates a lot more in order to bring inflation back to target and this week's pause was misguided given stubborn prices, former Richmond Fed President Jeffrey Lacker told MNI earlier.

SHORT TERM RATES

SOFR Benchmark Settlements:

• 1M -0.01430 to 5.07629 (-.06141/wk)
• 3M -0.00933 to 5.20684 (-.04254/wk)
• 6M +0.00084 to 5.28937 (+.00326/wk)
• 12M +0.01092 to 5.23032 (+.08215/wk)

US DOLLAR LIBOR: Latest settlements:

• O/N -0.01100 to 5.06514%
• 1M +0.01028 to 5.15657%
• 3M -0.00371 to 5.51000 */**
• 6M +0.03757 to 5.66600%
• 12M -0.00186 to 5.87700%
• * Record Low 0.11413% on 9/12/21; ** New 16Y high: 5.54443% on 6/9/23

• Daily Effective Fed Funds Rate: 5.07% volume: $128B
• Daily Overnight Bank Funding Rate: 5.06% volume: $292B

• Secured Overnight Financing Rate (SOFR): 5.06%, $1.527T
• Broad General Collateral Rate (BGCR): 5.04%, $630B
• Tri-Party General Collateral Rate (TGCR): 5.04%, $604B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

NY Fed reverse repo usage back of $2T after falling below the number for first time since June 2, 2022 yesterday. Current figure $2,011.556B w/ 104 counterparties, compared to $1,992.140B 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.

US: The decline in the overnight reverse repo facility this week is clearly linked to take-up of rising Fed bill issuance - but there may be obscuring short-term factors at play.

• The $117B fall in ON RRP yesterday brought the total below $2T for the first time since April 2022 and marked a $262B fall in the month so far.
• The Treasury's General Account (TGA) at the Fed meanwhile is up $86B over the same period.
• With net bill issuance nearing $200B so far in June, the data suggest that the "benign" scenario for reserve scarcity may be playing out, with bill purchases being made from funds parked at the ON RRP facility, rather than being siphoned off from bank reserves.
• However, JPMorgan points out that there could be seasonal factors at play, with a similar drawdown in ON RRP on June 15 in 2021 and 2022 ($74B in 2021 and $61B in 2022). That coincides with the tax deadline when money market fund assets tend to decline. As such, ON RRP's drop may be somewhat exaggerated, and could rebound in the subsequent days.
• However, the overall trend is still almost certainly lower.

SOFR/TREASURY OPTION SUMMARY

• Mixed overnight option trade with some decent volume in SOFR call structures segued to better low delta put structure trade Friday. Underlying futures weaker in the short end as projected 25bp rate hike at one of the next 3 meetings gained traction. Reminder, June SOFR options expiring as do final June Eurodollar futures and options.
• SOFR Options:
  
  • Block, 10,000 OQU3 95.00 puts, 6.5 vs. 95.90/0.12%
  • Block, -28,467 OQU3 95.75/96.00 put spds, 13.0 ref 95.88
    
  • 5,000 TYQ3 114.5/116.5 1x2 call spds, 8 ref 112-27.5
  • Block/screen, over 52,500 SFRQ3 94.68 puts, 12.5 vs. 94.71/0.47%
    
  • 4,500 SFRQ3 94.56/94.68 2x1 put spds ref 94.665
  • 2,000 SFRU3 94.50/94.75 put spds vs. 94.75 calls, ref 94.665
  • -5,000 OQN3 95.37/95.50/95.56/95.75 broken put condors, 3.5 ref 95.915
    
  • 2,000 SFRN3 94.62/94.68/94.81 broken put trees, ref 94.67
  • Block, 5,000 OQM3 95.50 puts, 2.0 ref 95.54
    
  • 5,000 OQN3 96.50 calls ref 95.985
  • 4,000 OQQ3 96.50/97.00/97.50 call flys, ref 95.99 to -.985
  • 5,000 SFRM3 94.68/94.75/94.81 put flys, ref 94.785
  • Block/screen, 20,500 SFRU3 96.00/97.00 call spds, 1.75 ref 94.685 to -.69
    
  • 2,000 2QM3 96.75/97.12/97.50 call flys ref 96.65
  • Block/screen, over 12,250 SFRQ3 94.68 puts, 12.0 vs. 94.71/0.47%
    
  • 2,000 SFRN3 94.18/94.81 put spds ref 94.69
• Treasury Options:
  • Update, over 13,300 TYN3 114.5 calls, 3 ref 112-25.5 to -31
  • 4,000 USU3 114/118 put spds ref 127-18
  • 2,000 TYQ3 114/115 2x3 call spds ref 113-08
  • 1,500 TYN3 114.25 calls, 8 ref 113-11
  • 2,000 TYN3 113.5 puts, 27 ref 113-14.5

EGBs-GILTS CASH CLOSE: Peripheries End Week On A High Note

The German curve bull flattened Friday with the UK's bear flattening.

• BTP spreads led periphery tightening, falling 6bp on the day to the lowest in over a year. Greece was not far behind.
• This came amid a risk-on move more broadly (European equities gained on the day), but also as ECB hike pricing was relatively flat on the day as traders assessed Thursday's communications added to today's largely hawkish speakers (incl Holzmann, Runsch, Rehn, Villeroy).
• The morning saw Gilts outperforming as an BOE/Ipsos inflation attitudes survey showed expectations falling back, but UK yields resumed their march higher in the afternoon.
• The short-end/belly underperformed with attention turning to the Bank of England decision next week, which comes a day after a seemingly crucial UK CPI reading. BoE hike pricing was pulled back slightly Friday (3-4bp) to end a hawkish week, but 25bp is still 100% priced for next Thursday.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 0.3bps at 3.123%, 5-Yr is down 2.3bps at 2.582%, 10-Yr is down 3bps at 2.474%, and 30-Yr is down 3.4bps at 2.546%.
• UK: The 2-Yr yield is up 3.8bps at 4.945%, 5-Yr is up 3.9bps at 4.574%, 10-Yr is up 2.8bps at 4.412%, and 30-Yr is up 2.3bps at 4.525%.
• Italian BTP spread down 6.3bps at 156.3bps / Greek down 5.1bps at 130.6bps

EGB Options: Some Call Spread Buying To Close The Week

Friday's Europe rates / bond options flow included:

• RXQ3 134/136cs, bought for 48.5 in 2.5k
• ERN3 96.25/96.50cs, bought for 1.5 in 2k

USDJPY Approaches 142.00 Into The Close, Rising 1.10%

• Higher US yields and no surprises from the Bank of Japan continued to pressure the Japanese yen on Friday with USDJPY rising to a fresh trend high of 141.89 approaching the week’s close. This helped the USD index edge a little higher, stemming the significant overall pressure on the greenback in the aftermath of Wednesday’s FOMC decision.
• Price action extends USDJPY’s intra-day rally to 1.10% as of writing, and the week’s advance to around 1.75%. Yen weakness was initially fuelled by the overnight unchanged decision from the Bank of Japan. As a reminder, the board on Friday decided unanimously to keep yield curve control policy and pledged to continue patiently with monetary easing amid high economic and financial market uncertainty. The BOJ also kept the forward guidance for the policy rates and pledged to take additional easing measures if necessary.
• The USDJPY trend condition remains bullish and attention remains on key resistance at the top of a bull channel drawn from the Jan 16 low, which has now been pierced at 141.45. A sustained break of this hurdle would be bullish and open 142.25 the high on Nov 21, 2022.
• Additionally, EURJPY has traded sharply higher as this week’s bull run extended and sees the pair print as high as 155.22. Price has recently cleared key resistance at 151.61, the May 2 high and an important bull trigger for the pair, confirming a resumption of the longer-term uptrend.
• A generally optimistic tone for risk has supported the likes of GBP and CAD, the best performers in G10 on Friday. As a reminder, GBP strength comes hot on the heels of stronger-than-expected UK jobs and wage data on Tuesday, which triggered the biggest selloff in short-dated Gilts in over 8 months. The more hawkish BOE pricing has been underpinning the whole move with the technical outlook for cable improving significantly on the breach of 1.2680 an important medium-term technical break.
• Juneteenth Independence Day holiday in the US on Monday should keep volatility contained. Highlights next week include UK CPI and flash Eurozone PMI. On the central bank slate, the Bank of England, Norges Bank and then SNB will decide on rates.

Equities Roundup: Utilities, Energy Shares Outperforming

• Off early session highs, stocks are trading mildly mixed in second half trade, SPX and DJIA shares outpacing softer Nasdaq. At current levels, SPX and Nasdaq shares are trading at the best levels since mid-April 2022, DJIA best levels since late November 2022.
• Currently, S&P E-Mini future are up 1 point (0.02%) at 4471.75; DJIA up 1.45 points (0%) at 34408.4; Nasdaq down 29.6 points (-0.2%) at 13753.43.
• Leading gainers: Utilities, Energy and Consumer Staples sectors outperforming. Electric companies buoyed Utilities in the second half: Edison Int +2.3%, NextEra Energy +2.2% while PG&E and Southern Co gained 1.5%. Energy shares underpinned by another rise in crude prices (WTI +0.81 at 71.43), Diamondback Energy +1.85%.
• Laggers: Communication Services underperformed as telecom, media and entertainment shares drifted lower (Warner Bros -3.95%, Match -2.15%, Netflix -1.65%). Meanwhile, though chip stocks traded firmer, Information Technology sector weighed down by hardware makers and software/services stocks.
• For a technical perspective, today's support (or lack of a significant reversal) for SPX Eminis confirms a resumption of the uptrend and maintains the bullish price sequence of higher highs and higher lows, marking an extension of the bull cycle that started in October 2022. The contract has tested 4491.19, the top of a bull channel drawn from the Oct 2022 low (cont). A clear break would open 4532.08, a Fibonacci projection. Initial support is at 4381.75, the Jun 5 high.

E-MINI S&P TECHS: (U3) Testing Resistance At The Top Of A Bull Channel

• RES 4: 4576.72 2.50 projection of the May 4 - 19 - 24 price swing
• RES 3: 4556.71 2.382 projection of the May 4 - 19 - 24 price swing
• RES 2: 4532.08 2.236 projection of the May 4 - 19 - 24 price swing
• RES 1: 4493.75 Intraday high
• PRICE: 4467.50 @ 14:40 ET Jun 16
• SUP 1: 4381.75/4320.18 Low Jun 5 / 20-day EMA
• SUP 2: 4241.84 50-day EMA
• SUP 3: 4154.75 Low May 24
• SUP 4: 4098.25 Low May 4 and a key support

S&P E-minis are trading higher today. This once again confirms a resumption of the uptrend and maintains the bullish price sequence of higher highs and higher lows, marking an extension of the bull cycle that started in October 2022. The contract has tested 4491.19, the top of a bull channel drawn from the Oct 2022 low (cont). A clear break would open 4532.08, a Fibonacci projection. Initial support is at 4381.75, the Jun 5 high.

COMMODITIES

• WTI Crude Oil (front-month) up $1.18 (1.67%) at $71.80
• Gold is up $1.11 (0.06%) at $1959.17

Monday-Tuesday Data Calendar

Date	GMT/Local	Impact	Flag	Country	Event
19/06/2023	1100/1300			EU	ECB Lane Fireside Chat
19/06/2023	1140/1340			EU	ECB Schnabel at Euro50 Group Conference
19/06/2023	1230/0830	*		CA	Industrial Product and Raw Material Price Index
19/06/2023	1400/1000	**		US	NAHB Home Builder Index
20/06/2023	0115/0915	***		CN	Loan Prime Rate
20/06/2023	0600/0800	**		DE	PPI
20/06/2023	0800/1000	**		EU	EZ Current Account
20/06/2023	0900/1100	**		EU	Construction Production
20/06/2023	0900/1000	**		UK	Gilt Outright Auction Result
20/06/2023	1030/0630			US	St. Louis Fed's James Bullard
20/06/2023	1230/0830	***		US	Housing Starts
20/06/2023	1230/0830	**		US	Philadelphia Fed Nonmanufacturing Index
20/06/2023	1530/1130	*		US	US Treasury Auction Result for 13 Week Bill
20/06/2023	1530/1130	*		US	US Treasury Auction Result for 26 Week Bill
20/06/2023	1700/1300	*		US	US Treasury Auction Result for Cash Management Bill