MNI ASIA MARKETS ANALYSIS: Slightly Dovish Powell Take Away

US Tsys Hold Range as Chair Powell Threads Policy Needle at Testimony

• Treasury futures look to finish near where they started Tuesday's session, mildly weaker after some brief volatility tied to Fed Chairman Powell's semi-annual monetary policy report to the Senate (testimony to the House tomorrow).
• Futures initially gapped higher (TYU4 up to 110-18) in reaction to more dovish comments: "It doesn't seem likely that the next policy move would be a rate increase," he told the Senate Banking Committee. "We don't take things like that off the table, but that does not seem the likely direction. The likely direction does seem to be: as we make more progress in inflation, and as a labor market remains strong, we begin to loosen policy at the right moment."
• Support quickly evaporated as Powell stated the "Committee has stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%."
• Treasuries extended session lows by midmorning but traded back near opening levels after the London close.
• Treasury 10Y futures pare losses slightly (TYU4 110-12, -7) after $58B 3Y note auction (91282CKZ3) stops .6bp through: 4.399% high yield vs. 4.405% WI; 2.67x bid-to-cover vs. 2.43x prior.

SOFR FIXES AND PRIOR SESSION REFERENCE RATES

SOFR Benchmark Settlements:

• 1M +0.00006 to 5.32637 (-0.00106/wk)
• 3M -0.00059 to 5.30404 (-0.00285/wk)
• 6M -0.00596 to 5.20850 (-0.01797/wk)
• 12M -0.01535 to 4.95593 (-0.04956/wk)

• Secured Overnight Financing Rate (SOFR): 5.32% (+0.00), volume: $2.090T
• Broad General Collateral Rate (BGCR): 5.31% (+0.00), volume: $772B
• Tri-Party General Collateral Rate (TGCR): 5.31% (+0.00), volume: $758B
• (rate, volume levels reflect prior session)

• Daily Effective Fed Funds Rate: 5.33% (+0.00), volume: $80B
• Daily Overnight Bank Funding Rate: 5.32% (+0.00), volume: $252B

FED Reverse Repo Operation

RRP usage climbs to $423.152B from $415.257B Monday. Number of counterparties to 73 from 72 prior. Today's usage compares to $327.066B on Monday, April 15 -- the lowest level since mid-May 2021.

SOFR/TEASURY OPTION SUMMARY

Except for a large scale buyer of Sep midcurve puts Tuesday, SOFR options continued to favor upside calls, Treasury options more mixed on lighter volumes as underlying futures trade mildly weaker. Projected rate cut pricing looks steady to fractionally lower by year end vs. early Tuesday levels (*): July'24 at -4.5% w/ cumulative at -1.1bp at 5.318%, Sep'24 cumulative -18.9bp (-19.7bp), Nov'24 cumulative -30.2bp (-30.1bp), Dec'24 -49.9bp (-50.1bp). Salient flow includes:

• SOFR Options:
  • +10,000 SFRX4/SFRZ4 95.25/95.37/95.50/95.62 call fly strip, 3.75
  • 2,500 SFRZ4 95.18/95.25/95.31/95.37 call condors ref 95.50
  • Block/screen, +67,000 0QU4 95.00 puts 1.0 ref 96.00
  • Block, 5,000 SFRU4 95.00/95.06 call spds, 0.5 ref 94.865
  • Block, +5,000 SFRU4 95.00/95.06 call spds, 0.5 adds to prior buys, +30k total
  • Block, 10,000 2QZ4 95.50 puts, 6.5 vs. 96.365/0.15%
  • 1,500 SFRU5 95.25/95.75 2x1 put spds
  • +5,000 SFRM5 97.00 calls, 12.0 vs. 95.77/0.15%
  • +5,000 SFRU4 95.50/95.75 call spds, 0.25 vs. 94.895/0.05%
  • +15,000 SFRU4 95.00/95.06 call spds, 0.5 ref 94.87 (ongoing buyer)
  • +2,000 0QZ4 96.00 straddles, 68.0 ref 95.195
  • over 11,300 SFRV4 95.31 calls, 10.5 last
  • over 5,600 SFRV4 94.43 calls and 4,800 SFRV4 95.50 calls
  • Block, 4,000 SFRZ4 95.25/95.37/95.50/95.62 call condors, 1.75 ref 95.195
  • 2,000 SFRV4 94.75/95.18 put spds ref 95.205
  • 6,000 0QU4 96.12/96.50 call spds vs. 3QU4 96.50/96.87 call spds
• Treasury Options:
  • -12,500 TYU4 109/112 strangles 47 to 49
  • 2,000 TYQ4 110/110.5 strangles 55 ref 110-09
  • 3,000 USQ4 120/121.5/122.5 call trees ref 118-18
  • over 11,300 TYQ4 109 puts, 7
  • 3,700 TYQ4 111 calls, 21 last
  • 4,000 TYQ4 111.5 calls, 13 last
  • 1,145 FVU4 105.5/106.25 put spds vs. 107.25/108.75 call spds

EGBs-GILTS CASH CLOSE: Weaker, With France Leading Spread Widening

European yields rose Tuesday, with risk spreads widening.

• While we heard from a few ECB speakers, including Centeno and Nagel, commentary didn't move markets, and there was little in the way of relevant macro data. Supply potentially weighed on the space, including syndications of E9bln of EU Bond and GBP4.5bln of Gilt linker.
• Both the German and UK curves bear steepened on the day, with Gilts modestly underperforming Bunds at the longer end of the curve.
• With French fiscal/political risk concerns appearing to re-emerge after Monday's post-election relief rally, OAT/Bund spreads are back at last Thursday's closing level after widening over 4bp.
• That led overall EGB spread widening, with periphery spreads up 1-2bp.
• Wednesday's calendar is highlighted by BoE speakers Pill and Mann, with the week's primary focus being Thursday's US CPI release (preceded by UK GDP).

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 1.8bps at 2.924%, 5-Yr is up 3.5bps at 2.562%, 10-Yr is up 4bps at 2.58%, and 30-Yr is up 4.2bps at 2.74%.
• UK: The 2-Yr yield is up 0.3bps at 4.128%, 5-Yr is up 3.5bps at 4%, 10-Yr is up 4.6bps at 4.159%, and 30-Yr is up 4.7bps at 4.664%.
• Italian BTP spread up 1.4bps at 136.2bps / Spanish up 1.4bps at 77.7bps

EGB Options: Upside Interest In UK Rate Options Tuesday

Tuesday's Europe rates/bond options flow included:

• DUQ4 105.7/105.2ps 1x2 sold at 20 and 20.25 in 5.2k
• SFIQ4 95.10/95.15/95.20c ladder bought for 2 in 6k
• SFIU4 95.10/95.20/95.30c fly, bought for 2.75 in 2k
• SFIQ4 95.20/95.30/95.40c fly bought for half in 11k total

FOREX Greenback Edges Higher Post Powell, Focus on CPI Thursday

• Fed Chair Powell's semiannual testimony provided little really new information versus last week's communications. The recent rise in the unemployment rate has not met the FOMC's cutting "test" of unexpected weakness in the labour market and this may have provided a moderate boost to the greenback on Tuesday. As such, the USD index is up 0.15% approaching the close, however, G10 ranges overall have remained subdued.
• Price action did allow USDJPY to edge higher and is the best performing major pair. USDJPY briefly rose above 161.40 - the Friday high and further progress through here will confirm the pullback off the multi-decade high as corrective in nature, and bring new cycle highs and Japanese intervention back into question.
• JPY selling in the crosses helped to add to the move, with EUR/JPY falling just shy of fresh multi decade highs, adding extra pressure to the JPY trade-weighted index.
• AUD net positioning continued to rise in the latest CFTC report, reducing the AUD net short to 8% of open interest, the smallest net short in a year. Indeed, AUDUSD bullish conditions remain intact following the recent break of key short-term resistance at 0.6714, the May 16 high. This highlights a significant range breakout and confirms a resumption of the bull leg that started Apr 19. A continuation higher would open 0.6771 next, the Jan 3 high and 0.6839, the Jan 02 high.
• Given the proximity to tomorrow’s RBNZ meeting, AUDNZD will be in focus, a cross that has garnered more attention in recent sessions as we rise back above 1.10 once again. We note the move has been assisted by rate differentials, with the AU-NZ 2yr swap spread now 46bps above the May lows at -48bps. This represents the highest levels since August 2022.
• Having struggled to maintain momentum above this 1.10 mark over the past 12 months, closes above 1.1031 and 1.1056 will be crucial for the cross going forward. A break above 1.1088 would place the cross at the highest level since October 2022.

FX OPTIONS: Expiries for Jul10 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0600(E1.3bln), $1.0650(E1.6bln), $1.0760-80(E3.0bln), $1.0795-00(E705mln), $1.0875-80(E1.1bln), $1.0895-05(E1.3bln)
• USD/JPY: Y159.50($1.6bln), Y160.00($2.1bln), Y161.00-20($1.8bln), Y161.50($1.1bln)
• AUD/USD: $0.6770(A$1.0bln), $0.6810(A$716mln)
• USD/CNY: Cny7.2500($661mln), Cny7.3000($1.1bln)

Late Equities Roundup: Narrow Range After S&P/Nasdaq Mark New Highs

• Stocks remain mixed in late trade, holding to a narrow range after scaling off midmorning highs shortly after Fed Chairman Powell's semi-annual testimony to Congress. S&P Eminis and Nasdaq indexes marked new all-time highs for the sixth consecutive session (5,642.75 and 18,505.82 respectively) after Fed Chairman Powell all but ruling out further rate hikes citing labor market cooling.
• Currently, the DJIA trades down 85.04 points (-0.22%) at 39259.86, S&P E-Minis up 6.25 points (0.11%) at 5631.75, Nasdaq up 30.3 points (0.2%) at 18433.77.
• Financials and Consumer Discretionary sectors led gainers in late trade, banks continued to support the former: Citigroup +2.64%, Bank of America +2.26%, Citizens Financial Group +1.88%. Reminder, banks highlight the latest equity earnings cycle that kicks off Friday: Wells Fargo, Bank of NY Mellon, JP Morgan and Citigroup.
• Auto maker Tesla gained 3.85% in the second half, helping the Consumer Discretionary sector outpace earlier gains in Communication Services.
• On the flipside, Materials and Energy sectors continued to underperform in late trade, chemical companies weighed on the former w/ Albemarle -7.5% as falling lithium prices spurred multiple downgrades. FMC Corp -2.53%, Dow -2.1%. Energy equipment and services shares trade weaker: Baker Hughes -1.95%, Schlumberger -1.71%, Haliburton -0.75%.

E-MINI S&P TECHS: (U4) Heading North

• RES 4: 5713.31 3.236 proj of the Apr 19 - 29 - May 2 price swing
• RES 3: 5700.00 Round number resistance
• RES 2: 5668.00 3.00 proj of the Apr 19 - 29 - May 2 price swing
• RES 1: 5640.00 Intraday high
• PRICE: 5629.00 @ 1520 ET Jul 9
• SUP 1: 5526.86/5427.77 20- and 50-day EMA values
• SUP 2: 5267.75 Low May 31 and key support
• SUP 3: 5213.25 Low May 6
• SUP 4: 5155.75 Low May 3

The trend condition in S&P E-Minis is bullish and this week’s extension reinforces this set-up. Fresh cycle highs confirm a resumption of the uptrend and maintain the bullish price sequence of higher highs and higher lows. Moving average studies are in a clear bull-mode set-up and this continues to highlight positive market sentiment. Sights are on 5668.00, a Fibonacci projection. Support is at 5526.86, the 20-day EMA.

COMMODITIES: Crude Edges Lower as Hurricane Beryl Risks Recede

• Crude prices are headed for US close trading lower amid easing concerns of disruption in the USGC due to Hurricane Beryl. Front-month WTI futures are down 1% around $81.50/bbl.
• A bull cycle in WTI futures remains in play and the latest pullback appears to be a correction. The recent breach of $80.11, the May 29 high and a key resistance, strengthened a bullish theme.
• In oil news, the EIA in its July Short Term Energy outlook has marginally decreased its forecast for 2024 global oil demand to 102.9m b/d.
• Separately, OPEC and its Russia-led allies moved closer to quota compliance in June, cutting crude output by 130k b/d to 40.87m b/d, according to a Platts survey.
• In precious metals, subdued activity for the greenback post Fed Chair Powell’s semi-annual testimony to congress kept the daily adjustment for both gold and silver very minimal.
• Gold traded higher last week and the yellow metal has pierced resistance at $2387.8, the Jun 7 high. This undermines a recent bearish theme and a clear break would be a bullish development and open the key resistance at $2450.1, the May 20 high. Initial support to watch lies at the 50-day EMA, at 2326.3.

WEDNESDAY DATA CALENDAR

Date	GMT/Local	Impact	Flag	Country	Event
10/07/2024	0130/0930	***		CN	CPI
10/07/2024	0130/0930	***		CN	Producer Price Index
10/07/2024	0200/1400	***		NZ	RBNZ official cash rate decision
10/07/2024	0600/0800	***		NO	CPI Norway
10/07/2024	0800/1000	*		IT	Industrial Production
10/07/2024	1100/0700	**		US	MBA Weekly Applications Index
10/07/2024	-	***		CN	Money Supply
10/07/2024	-	***		CN	New Loans
10/07/2024	-	***		CN	Social Financing
10/07/2024	1330/1430			UK	BoE Pill At Asia House
10/07/2024	1400/1000	**		US	Wholesale Trade
10/07/2024	1400/1000			US	Fed Chair Jerome Powell
10/07/2024	1430/1030	**		US	DOE Weekly Crude Oil Stocks
10/07/2024	1530/1630			UK	BOE's Mann Panellist on UK Business investment
10/07/2024	1700/1300	**		US	US Note 10 Year Treasury Auction Result
10/07/2024	1830/1430			US	Chicago Fed's Austan Goolsbee