HIGHLIGHTS
- Treasuries look to finish weaker after climbing to the one week highs briefly early Tuesday, decent overall volumes (TYZ4 >1.6M) amid position squaring ahead of Wednesday's FOMC policy announcement.
- Despite a modest rise in yields (10Y +.0205 at 3.6381%) projected rate cuts through year end held near recent highs, as markets lean more towards a 50bp cut tomorrow vs. 25bp.
- Unlikely to sway the Fed's decision, Retail Sales momentum continues to pick up: 0.1% M/M vs -0.2% expected, 1.1% prior rev up 0.1pp.
US TSYS: Modest Pre-FOMC Consolidation
- Treasuries look to finish weaker but off lows Tuesday, this after climbing briefly to one week highs on the open. Generally quiet position squaring ahead of tomorrow's FOMC policy announcement where markets still project closer to a 50bp cut than a 25bp move from the Fed.
- Projected rate hikes through year end gain slightly vs. late Monday levels (*): Sep'24 cumulative -42.3bp (-41.5bp), Nov'24 cumulative -78.8bp (-78.2bp), Dec'24 -118.3bp (-119.8bp).
- Retail Sales headline beat and a slight upward revision to prior data (0.1% M/M (vs -0.2% expected, 1.1% prior rev up 0.1pp) -- was slightly on the strong side of consensus, should do little to persuade or dissuade the Fed from cutting either 25bp or 50bp on Wednesday.
- Meanwhile, Industrial production was much stronger than expected in August at 0.8% M/M (cons 0.2) but with some of the gloss taken off by a downward revision to -0.9% (initial -0.6%). Manufacturing production led the increase with 0.9% M/M (cons 0.2) but it also drove the downward revision with -0.7% (initial -0.3%).
- Volumes accelerated in the second half, Dec'24 10Y over 1.6M as the contract dipped 7.5 to 115-10.5, still well above initial technical support of 114-31.5 (Low Sep 12). Curves flattened but were off lows, 2s10s -1.575 at 4.890 at the bell vs. 1.898 low.
- Tomorrow's FOMC announcement includes the Summary of Economic projections.
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
SOFR Benchmark Settlements:
- 1M -0.04947 to 4.96482 (-0.11791/wk)
- 3M -0.04374 to 4.81963 (-0.12155/wk)
- 6M -0.04522 to 4.43627 (-0.14265/wk)
- 12M -0.04277 to 3.84556 (-0.14629/wk)
- Secured Overnight Financing Rate (SOFR): 5.38% (+0.05), volume: $2.212T
- Broad General Collateral Rate (BGCR): 5.33% (+0.01), volume: $818B
- Tri-Party General Collateral Rate (TGCR): 5.33% (+0.01), volume: $783B
- (rate, volume levels reflect prior session)
- Daily Effective Fed Funds Rate: 5.33% (+0.00), volume: $96B
- Daily Overnight Bank Funding Rate: 5.33% (+0.00), volume: $249B
FED Reverse Repo Operation
NY Federal Reserve/MNI
RRP usage bounced to $256.337B from $239.386B Monday -- lowest since early May 2021. Number of counterparties rebounds to 55 from 44 on Monday.
US SOFR/TREASURY OPTION SUMMARY
Option desks reported two way SOFR options Tuesday, leaning towards call spread unwinds ahead of Wednesday's FOMC policy announcement. Projected rate hikes through year end gain slightly vs. late Monday levels (*): Sep'24 cumulative -42.3bp (-41.5bp), Nov'24 cumulative -78.8bp (-78.2bp), Dec'24 -118.3bp (-119.8bp).
- SOFR Options:
- -5,000 SFRX4 96.12/96.25 call spds 2.75 ref 9596
- -3,000 SFRZ4 95.62 calls vs 0QZ4 97.00 calls, 5.0 net front Dec over
- +5,000 SFRV4 96.25/96.50 call spds 2.0 ref 95.97
- -7,000 SFRZ5 97.00/98.00 call spds, 36.0 vs.97.15/0.28%
- +4,000 SFRX4 96.12/96.25/96.37/96.50 call condors 2.0 ref 9598
- +10,000 SFRZ4 95.50/95.75 put spds, 5.5 vs. 95.97/0.10%
- 3,300 SFRZ4 95.12/95.43 put spds ref 95.985
- 3,200 0QM5 97.75/98.25/98.75/99.25 call condors ref 97.198
- 2,000 2QZ4 96.38/96.50/96.75 broken put flys ref 97.135
- 2,000 SFRZ4 96.12/96.37 call spds vs. 95.00/95.25 put spds
- 5,000 SFRZ4 95.25/95.50/96.50/96.75 call condors ref 95.98
- Block, 4,000 SFRZ4 95.18/95.25 put spds, cab
- 2,000 SFRZ4 95.43/95.50 put spds ref 95.975
- +10,000 SFRV4 95.93/96.00/96.12/96.18 call condors
- Block, 4,000 SFRH5 96.50/97.00 call spds vs. 2QH5 97.50/98.00 call spds, 9.5 net front March over
- Block, 4,000 0QF5 96.12/96.50/96.87 put flys 6.0
- Block, 2,500 SFRZ4 95.50/95.62/95.75 call flys, 1.25
- Treasury Options:
- 3,000 FVV4 110/111 strangles, 10 ref 110-18.5
- -10,000 TYV4 115/TYX 114 put spds, 11 ref 115-19.5
- +10,000 TYX4 113.5/114.5 put spds, 16 ref 115-19.5
- +6,000 TYV4 115.5/116 1x2 call spds, 2
BONDS: EGBs-GILTS CASH CLOSE: Intraday Reversal Sees Modest Bear Flattening
European curves flattened Tuesday, with relatively pronounced weakness at the short end of curves.
- Futures peaked in early trade, as Federal Reserve 50bp cut pricing ticked higher
- But Bunds and Gilts pulled back sharply after 1300UK as oil and equities picked up, while US retail sales data came in slightly stronger than expected on balance, helping keep pressure on the space.
- The main European data release was German ZEW which surprised to the downside, but it was not a market mover.
- Bunds underperformed Gilts, with both curves flattening on the day on a short-end yield backup as implied 2024 BoE and ECB cuts ticked up 2-3bp from intraday lows.
- Periphery EGB spreads closed basically unchanged, reversing early tightening.
- While the Fed decision after the European cash close takes top billing Wednesday, the early highlight is UK CPI which the BoE will have in hand ahead of its decision release Thursday. An uptick in services prices is expected, though the BoE will likely look through any surprises - MNI's preview is here (PDF).
Closing Yields / 10-Yr Periphery EGB Spreads To Germany
- Germany: The 2-Yr yield is up 4.4bps at 2.227%, 5-Yr is up 3.8bps at 2.033%, 10-Yr is up 2.1bps at 2.143%, and 30-Yr is down 0.2bps at 2.398%.
- UK: The 2-Yr yield is up 3.6bps at 3.824%, 5-Yr is up 2.4bps at 3.638%, 10-Yr is up 0.9bps at 3.768%, and 30-Yr is up 0.3bps at 4.353%.
- Italian BTP spread down 0.1bps at 135.5bps / Spanish up 0.2bps at 79.7bps
EGB OPTIONS: Call Spread Buying Vs Puts Predominant Tuesday
Tuesday's Europe rates/bond options included:
- ERV4 97.12/97.25cs vs 96.87p, bought the cs for half in 8k
- ERM5 98.25/98.75cs 1x1.5 bought for 5 in 5k
- SFIV4 95.70/95.90cs vs 95.50p, bought the cs for 4 in 3k. SFIZ4 96.00c, sold at 5.25 in 2.5k
- SFIV4 95/75/95.85cs vs 95.50/95.35ps, bought the cs for half in 5k
- SFIH5 95.85/96.55RR, sold the call at 2.75 in 2k.
FOREX: US Data & Profit Taking Dynamics Support Greenback Pre-FOMC
- Downside momentum for the US dollar lost steam on Tuesday, with the USD index unable to breach the previous lows seen in August. A firmer US advanced retail sales number and stronger-than-expected IP have supported a moderate correction higher for the DXY as we approach the pivotal FOMC decision on Wednesday.
- USDJPY (+0.95%) has had the most notable correction, with an impressive bounce from the 139.58 lows on Monday. Spot resides just below session highs of 142.00 as we approach the APAC crossover and firm resistance is not seen until 143.95, the 20-day EMA.
- GBP is underperforming on the session, declining 0.45% to trade back at 1.3160 against the dollar. We noted yesterday that overall, GBPUSD maintains a firmer tone having recovered from last week’s low around 1.3000. A stronger reversal higher would refocus attention on key short-term resistance ahead of the BOE decision this week. This resides at 1.3266, the Aug 27 high.
- A late dip lower for major equity benchmarks has also weighed on the likes of NZD and the Euro, although most G10 ranges remain relatively contained given the proximity to the Fed decision tomorrow.
- In emerging markets, the Mexican peso is rallying once more, assisted by an impressive 2.5% off the lows in MXNJPY, taking advantage of the higher yields and a calmer political backdrop in comparison to last week.
- UK Inflation data kicks off the docket on Wednesday ahead of Thursday’s BOE decision. However, all the focus will be on the highly anticipated FOMC decision and accompanying press conference.
US STOCKS: Late Equities Roundup
- Stocks have gradually pared first half gains to near steady in late Tuesday trade, Dow Industrials underperforming amid modest position squaring ahead Wednesday's FOMC policy announcement.
- The DJIA trades down 57.84 points (-0.14%) at 41564.35, S&P E-Minis down 7.5 points (-0.13%) at 5691.25, Nasdaq up 13.2 points (0.1%) at 17604.64.
- Energy and Consumer Discretionary sectors continued to lead gainers in late trade, oil/gas and servicer shares buoyed the former as crude prices continued to gain (WTI +1.33 at 71.42): Haliburton +3.34%, APA +3.05%, Diamondback Energy +2.88%, Marathon Oil +2.64%.
- The Consumer Discretionary sector was supported by a mix of stocks from Airbnb +4.14%, Pool Corp +3.53%, Las Vegas Sands and Aptiv +2.45%.
- On the flipside, Health Care and Consumer Staples sectors underperformed in the second half, the former weighed by Edwards Life Sciences -3.06%, Cigna -2.89%, Cencora -2.69%. Of note, Moderna gained 4% - a modest bounce compared to last week's 22% rout after announcing a cut in research spending by approximately $1B.
- Meanwhile, large retailers/distribution stocks weighed on Consumer Staples: Walmart -2.37%, Kroger -1.51%, Costco -0.90%.
EQUITY TECHS: E-MINI S&P: (Z4) Approaching Resistance
- RES 4: 5868.50 1.00 proj of the Apr 19 - Jul 16 - Aug 5 price swing
- RES 3: 5800.00 Round number resistance
- RES 2: 5785.00 High Jul 16 and key resistance
- RES 1: 5730.50 High Sep 3
- PRICE: 5685.50 @ 1520 ET Sep 17
- SUP 1: 5583.10/5451.25 50-day EMA / Low Sep 6 and a bear trigger
- SUP 2: 5424.75 Low Aug 13
- SUP 3: 5383.49 61.8% retracement of the Aug 5 - Sep 3 bull leg
- SUP 4: 5301.51 76.4% retracement of the Aug 5 - Sep 3 bull leg
S&P E-Minis have traded higher again, today and the contract maintains a firmer tone. Last week’s gains highlight a bullish reversal and the end of the Sep 3 - 6 corrective cycle. The contract is trading above the 20- and 50-day EMAs and this has exposed 5730.50, the Sep 3 high. Clearance of this level would open 5785.00, the Jul 16 high and a bull trigger. First support is 5583.10, the 50-day EMA.
COMMODITIES: Crude Trades Higher, Spot Gold Eases From Record Levels
- Crude markets are closing today trading higher. Support from near term supply disruptions in Libya and Kazakhstan is outweighing concerns over global demand for oil, especially from China.
- WTI Oct 24 is up by 1.7% at $71.3/bbl.
- WTI futures have pierced initial firm resistance at $70.99, the 20-day EMA. Next resistance is at $73.61, the 50-day EMA.
- The bearish oil positioning of commodity trading advisers is near maximum levels so could ease some recent selling pressure for now, according to Energy Aspects Quant Analytics.
- Goldman Sachs analysts see Brent recovering to $77/bbl in 4Q in its base case.
- Henry Hub has lost ground today, with the slow recovery in Gulf of Mexico production outweighed by limited demand due to a warmer weather forecast.
- US Natgas Oct 24 is down 2.3% at $2.32/mmbtu.
- Meanwhile, spot gold has fallen by 0.5% to $2,570/oz on Tuesday, following stronger-than-expected US IP and firm US retail sales data earlier.
- A bullish structure in gold remains intact, with focus on $2600.0 next. Firm support lies at $2,520.7, the 20-day EMA.
WEDNESDAY DATA CALENDAR
| Date | GMT/Local | Impact | Country | Event |
| 18/09/2024 | 2350/0850 | ** |  JP | Trade |
| 18/09/2024 | 2350/0850 | * | JP | Machinery orders |
| 18/09/2024 | 0600/0700 | *** |  GB | Consumer inflation report |
| 18/09/2024 | 0600/0700 | *** | GB | Producer Prices |
| 18/09/2024 | 0600/0800 | ** |  SE | Unemployment |
| 18/09/2024 | 0900/1100 | *** |  EU | HICP (f) |
| 18/09/2024 | 0900/1100 | ** | EU | Construction Production |
| 18/09/2024 | 1100/0700 | ** |  US | MBA Weekly Applications Index |
| 18/09/2024 | 1230/0830 | * |  CA | International Canadian Transaction in Securities |
| 18/09/2024 | 1230/0830 | *** | US | Housing Starts |
| 18/09/2024 | 1300/1500 | EU | MNI Connect Video Conference on Euro Area Macro Projections | |
| 18/09/2024 | 1430/1030 | ** | US | DOE Weekly Crude Oil Stocks |
| 18/09/2024 | 1730/1330 | CA | BOC Minutes (Summary of Deliberations) | |
| 18/09/2024 | 1800/1400 | *** | US | Fed Rate Decision / FOMC Statement |
| 18/09/2024 | 2000/1600 | ** | US | TICS |
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