MNI ASIA MARKETS ANALYSIS - Steepening Consolidated Whilst Equities Slide

US TSYS: Ending The Week Notably Steeper

• Treasuries are off session highs although have given back some of the losses seen after the release of two US citizens held hostage in Gaza and the US pushing Israel to delay its invasion. Whilst landing late, the upcoming S&P sovereign rating for Italy expected from 1600ET will likely draw some attention.
• With cash benchmarks trading 2.5-9.5bp richer (5Y leads, 30Y underperforms), the day’s rally can be attributed to a mix of positioning ahead of weekend worry re: the Israel-Hamas conflict and several cycle highs across the core global FI yield landscape presenting enticing entry points for participants (a case in point being the 10Y rising to 4.993% but not quite breaching 5% and now back to 4.92%).
• 2s10s at -16.4bps is near unchanged on the day, close to recent steeps of -14.5bps
• TYZ3 trades at 105-31+ below session highs of 106-06 but having lifted off Thursday’s post-Powell low of 105-10+. Resistance is seen at 106-15+ (Oct 18 high).
• In DC, the hunt for a House Speaker will continue next week with Jordan losing the nomination after failing a new conference vote following unsuccessful attempts, whilst Biden’s $105B funding request for Ukraine (the bulk at $61.4B), Israel and other foreign policy objectives compared to the $100B touted.
• With the FOMC entering media blackout, next week sees advance national accounts for Q3 (real GDP cons 4.5%, Atlanta Fed nowcast 5.4%) on Thursday, which will also give a hint of the potential latest monthly print for September landing the following day.
• Corporate earnings also come more into focus, with Alphabet, Microsoft, Amazon and Meta all reporting in the biggest earnings week of the quarter with 38% of the S&P 500 up.

US STIR: Fed Rate Boost From Retail Sales More Than Reversed Ahead Of Blackout

• Fed Funds implied rates have seen some notable declines on the day, with no new data drivers amidst a thin docket but rather extending yesterday’s post-Powell drop to more than reverse the climb seen after strong retail sales data earlier in the week.
• There are no longer any hikes priced for Nov, and cumulative tightening builds to just 7.5bp for a 5.41% terminal in January (-2bp) from the current effective rate of 5.33%.
• The Dec’24 rate drops to 4.64%, -8bp on the day and -14bp since Powell spoke on Thursday as it pulls back having seen a strong increase toward the 5-5.25% median dot for end-2024 in the September dot plot.
• Cuts from terminal: 27bp to Jun’24 and 78bp to Dec’24.
• There are still some FOMC members lined up to speak next week, including Chair Powell, but it will be strictly for opening remarks considering the media blackout starts at midnight ET today ahead of Nov 1 decision.

FOREX: Equities Weakness Further Weighs On NZD

• The late pullback for front-end US yields this week has weighed on the greenback overall, with the USD index set to close around 0.5% lower on the week. However, mixed performance across G10 FX and the ongoing geopolitical uncertainty have contained any downside momentum for the index.
• Weakness for equities on Friday was unable to promote any significant haven demand in currency markets, with most major pairs holding narrow ranges ahead of the weekend close. However, the moves have further weighed on the New Zealand dollar, which has declined 0.35%.
• NZDUSD broke to fresh yearly lows this week below 0.5860 with softer than expected CPI being the catalyst. The pair continues to consolidate this weakness as we approach the weekend close.
• Both EURUSD and USDJPY traded in tight 30-40 pip ranges on Friday, with the latter once again failing to pierce the 150.00 mark as market participants remain wary of further verbal intervention from the MOF, limiting the risk/reward for bulls, despite the attractive carry profile.
• More notable on Friday was the strength for the Mexican peso, which recovered 0.7%, despite the risk off sentiment across major equity benchmarks.
• Eurozone flash PMIs will kick things off next week on Tuesday before Australian CPI on Wednesday. On the central bank slate, the BOC and ECB decisions are highlights amid a number of EM central bank decisions.

FX OPTIONS: Expiries for Oct23 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0535-50(E1.5bln), $1.0600(E629mln), $1.0660-75(E1.5bln)
• USD/JPY: Y148.75($1.6bln), Y149.00($1.4bln), Y149.20($775mln), Y149.50($1.4bln), Y150.00($1.5bln), Y150.25-35($1.0bln), Y150.50($659mln)

EQUITIES: S&P E-mini Sees Renewed Test Of Session Low

• Stocks are finishing on the back foot with the S&P 500 set for its fourth consecutive daily decline.
• ESZ3 trades at 4258 (-1.0%) in a late push back to earlier lows of 4255.25 for what has been another step towards the bear trigger at 4235.50 (Oct 4 low).
• Tech suffers today with the Nasdaq 100 e-mini underperforming (-1.3%) vs outperformance for the Dow (-0.7%) and Russell 2000 (-0.9%).
• Specifically within SPX, energy currently leads the decline (-1.6%), with the fall in WTI futures after a hostage release in Gaza and the US pressing Israel to delay its invasion, closely followed by IT (-1.5%). Financials (-1.3%) mask heavier underperformance for banks (-2.2%). Broader banks see heavier declines, with the KBW index -2.7% and regionals -2.9%.
• Corporate earnings come more into focus next week, with Alphabet, Microsoft, Amazon and Meta all reporting in the biggest earnings week of the quarter with 38% of the S&P 500 up.

COMMODITIES: WTI Sees Drop On Hostage Release, Gold Still Gains

• Crude futures saw a sharp intraday decline to offset earlier as the ongoing conflict in the Middle East sparks huge volatility. The fall followed reports that Hamas has released two US hostages following mediation with Qatar. Despite the drop, WTI remains up around 1% since the start of the week.
• US total rig count increased by 2 on the week to 624, according to Baker Hughes
• Venezuela has released five prisoners, including a well-known opposition figure as part of Washington's demand that certain prisoners be freed this week in return for temporarily eased sanctions on its oil & gas sector.
• JP Morgan does not expect Middle East instability to result in a long-term oil price spike according to a recent research note.
• WTI is -0.7% at $88.75, with resistance seen at $98.58 (76.4% retrace Sep 28 – Oct 6 bear leg) and support at $83.90 (50-day EMA).
• Brent is -0.1% at $92.28 off a high of $93.48, with resistance seen at a bull trigger of $95.35 (Sep 28 high) and support at $87.91 (50-day EMA).
• Gold is +0.4% at $1981.89 off a high of $1996.99 but still holding its clearance of resistance at $1982.4 (Jul 20 high) as geopolitical tensions remain high despite the hostage release. Next resistance is seen at $2003.4 (76.4% retrace of May 4 – Oct 6 bear leg).
• Weekly moves: WTI +1.2%, Brent +1.5%, Gold +2.5%, US nat gas -9.6%, EU TTF nat gas -5.3%

Gold surge continuesSource: Bloomberg

MNI US EARNINGS SCHEDULE - Busiest Week of the Quarter

EXECUTIVE SUMMARY:

• Alphabet, Microsoft, Amazon and Meta Platforms headline the coming week
• 38.2% of the S&P 500 by market cap set to report, the biggest week of the quarter
• Consumer staples, materials and real estate have performed most strongly vs. expectations, while communication services and energy have missed

MNIUSEARNINGS231023.pdf

MNI Fed Balance Sheet Tracker: Oct 20, 2023

We've just published our latest Fed Balance Sheet Tracker:

• System reserves are almost exactly unchanged since the start of June, defying some expectations that scarcity would develop as cash left banks in favor of Treasury bills.
• The Fed appears unconcerned with reserve scarcity at this point, with SOMA manager Perli this month saying balance sheet reduction was "proceeding smoothly" with "no significant disruptions to financial or funding markets".
• Treasury's Oct 30 financing requirements announcement ahead of the Nov 1 refunding announcement will provide a further indication as to the trajectory of its TGA cash rebuild (and its impact on overnight reverse repo takeup and reserves) over the coming months.

PDF here

FED: RRP Usage Sees Large Decline Despite Month-End

• RRP usage resumed its decline today, falling $45B, after broadly stabilized earlier this week after heavy declines late last week.
• The $1652B uptake is a new low since March 2022. The drop is particularly notable coming at month-end when usage usually increases, and indeed the number of counterparties jumped from 96 to 105, although bill and coupon auction settlements are likely a factor.
• In contrast the Jul 31 month-end saw 105 counterparties use $1821B.