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MNI ASIA MARKETS ANALYSIS: Treasuries Edge Lower Pre Debt Talks, US CPI

Highlights:

  • Treasuries pare losses after a strong 3Y auction but with the 2YY holding north of 4% and 10Y 3.5%
  • Stocks see a subdued overall session with regional banks bouncing back from early pressure, whilst oil sees a late boost
  • EUR/GBP prints a new YTD low, resuming bear cycle
  • Biden debt limit talks with congressional leaders ahead at 1600ET. Upside risk seen to US core CPI consensus for tomorrow's print

US TSYS: 3Y Auction Demand Helps Pare Losses; Debt Limit Talks Up Next With CPI Tomorrow

  • Cash Tsys have pared earlier losses for limited moves on the day, with the reversal coming shortly ahead of the 3Y auction and then ramping up on surprisingly strong demand with a large 2.8bp stop through and the highest bid-to-cover since March 2018. It sees 3s outperform on the day with yields +1.1bps at typing vs +3.1bps for the 2Y (4.035%), +1.7bps for the 5Y (3.510%) and +2.1bps for the 10Y (3.528%).
  • Gov Jefferson (voter, and seemingly in a good position for the Vice Chair pick) offered little new to go on whilst NY Fed’s Williams broadly stuck to FOMC guidance from last week’s decision for someone typically at the more dovish end of the committee.
  • TYM3 at 115-03+ trades close to lows of 115-01+ on subdued cumulative volumes of 850k, with a push lower potentially opening support at the 50-day EMA of 114-26.
  • Fed Funds implied rates have nudged higher on the day but still see last week’s 25bp hike as the last of the cycle (+2.5bp priced for June) before 21bp cut to Sep and a cumulative 67bps to 4.41% at year-end.
  • Next up sees Biden meeting with congressional leaders at 1600ET. Both the White House and McCarthy have said a short-term debt extension is not the plan (Reuters reporting McCarthy specifically referring to Sep 30) whilst McConnell says Biden must negotiate with McCarthy for a bipartisan spending deal.
  • US CPI is in focus tomorrow – full preview here.

FOREX: EURGBP Slides To Lowest Level Since December

  • The greenback traded with a surer footing on Tuesday as UK markets returned from a holiday and global participants eagerly await the April US CPI figures.
  • The USD index has risen around a quarter of a percent, extending Monday’s modest bounce amid weakness for major equity indices and potential profit taking dynamics ahead of the key US data. Lower equity benchmarks, although the pullback has been relatively contained so far, have weighed on the likes of AUD, NZD, placing them toward the bottom-end of the pile amid relatively thin trade.
  • EURUSD weakness also extended on the move through the Friday low at 1.0967 with 1.0942 support holding the pair for the time being. Ahead of tomorrow, the more meaningful downside level of 1.0874 will be in focus.
  • Single currency weakness was also notable against sterling, with EURGBP sliding to the lowest level since mid-December 2022. The cross has cleared key support at 0.8719, the Mar 15 low and the clear break of this level confirms a resumption of the bear cycle that started Feb 3 and initially opens 0.8649, a Fibonacci retracement.
    • Furthermore, RBC recommended going short cable in this week’s trade of the week, highlighting that although the BoE is widely expected to hike by 25bps and stay hawkish on Thursday, the hurdle is high to out-hawk the forward curve.
  • The Norwegian Krone was one of the poorest performers in G10 on Monday, prompting USD/NOK to recover back above the 50-dma and partially reverse four consecutive sessions of losses. These moves come ahead of Wednesday’s April CPI release, with markets expecting the CPI-ATE Y/Y measure to slow to 6.1% from 6.2% prior.
  • Clear focus on Wednesday will be the US inflation report, where Consensus puts core CPI inflation at 0.3% M/m in April but with sizeable risk skewed to the upside.

US STOCKS: A Subdued Session With Support Intact Ahead Of Debt Limit Talks, CPI Tomorrow

  • Equities have seen a subdued day, with the S&P E-mini little changed in US hours after sliding overnight for -0.3% on the day (SPX -0.2%, Nasdaq -0.6%).
  • At 4139.75 off a low of 4131.00, support remains intact with the key short-term level seen at 4062.25 (May 4 low).
  • 10Y real yields have pushed 2bps higher but clearly don’t materially change the macro landscape, with focus firmly on upcoming debt ceiling talks and tomorrow’s CPI print.
  • It’s been a more mixed day for banks. PacWest earlier headlined for being down as much as -10% within 30 minutes of the open but has since reversed that for currently +5% on the day, whilst regional banks more broadly are flat compared to the KBW index +0.5%.

FX OPTIONS: Overnight Vols Bid Ahead of US CPI

  • FX options activity makes for a quieter start to the week, with quieter EUR/USD, USD/JPY trade countering more active USD/CNY, AUD/USD and USD/TWD trade. This is mirrored in the modest downtick for front-end G10 vols early Tuesday.
  • AUD/USD notional has been supported by trades consistent with a $0.70/0.74 six-month call spread. The structure breaks even on a move above ~0.7075 in the spot rate.
  • Looking ahead, USD implied vol has been marked higher ahead of tomorrow's CPI. EUR/USD overnight vols have cleared 12 vol points - roughly equivalent to the levels seen ahead of the last inflation release on April 12th.

FX OPTIONS: Expiries for May10 NY cut 1000ET (Source DTCC)

  • EUR/USD: $1.1050(E652mln), $1.1070(E1.1bln), $1.1100(E672mln)
  • USD/JPY: Y135.40-50($952mln), Y136.00($822mln)
  • AUD/USD: $0.6900(A$2.8bln)
  • USD/CAD: C$1.3450($651mln), C$1.3600($786mln)

COMMODITIES: Oil Buoyed By SPR Sales Cancellation Report

  • Crude oil prices have reversed early declines that lasted most of the session, helped by the Biden Administration said to be canceling further SPR sales plus wildfires in Alberta shutting in more than 0.3mbpd production.
  • It came along with an only partial reversal of earlier equity weakness, helping overcome USD strength ahead of debt ceiling discussion uncertainty plus US CPI landing tomorrow.
  • WTI is +0.6% at $73.59, moving closer to initial resistance at $73.93 (Apr 28 low) after which lies the key short-term $76.92 (Apr 28 high).
  • The day's most active strikes in the CLM3 have clearly been for downside protection with $70/bbl and $65/bbl puts.
  • Brent is +0.4% at $77.33, close to resistance at yesterday’s high of $77.43 after which lies the 50-day EMA of $78.76.
  • Gold is +0.7% at $2035.91, gaining later in the session with some paring of earlier USD strength and Treasury yields also unwinding earlier increases after the 3Y auction. It remains some way off resistance at $2063 (May 4 high).

MNI US CPI Preview: Sizeable Upside Risk To Core CPI Consensus Of 0.3


MNI US Employment Insight, May'23: Moderating Jobs Growth But Historically Tight


FED: RRP Uptake Still Sees Little Post FOMC Lift

  • RRP uptake nudged just $5B higher to $2,223B today, keeping to a relatively tight range so far this month of $2207B-$2267B as it stabilizes after typical month-end flows despite another kick higher in the rate after last week’s FOMC decision.
  • The increase came despite the number of counterparties falling by 4 to 100 for the lowest since Apr 26.


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