US BONDS: 10Y Yields Move Flat On The Day, Short End Underperforms
10Y Treasury yields are now flat on the day, falling 6+bp since the solid 10Y Note refunding auction at 1300ET and down 8bp from the highs set post-Services ISM selloff.
- The short end has held onto earlier losses, however: 2Y yields are up nearly 4bp on the session and 1bp since ISM (albeit 3bp off highs), resulting in a twist flattening in the curve.
- The short end underperformance corresponds with a slight uptick in the futures-implied Fed rate path (up 5-6bp through end 2025 vs Monday's close): while a 25bp cut is still basically fully priced for Thursday, December is not a done deal (19bp incremental), with 7bp less cuts through 2025 (114bp total). Overall the rate path is a little higher than it was before Friday's soft payrolls report. See chart below.
- Overall rates will remain highly sensitive to election headlines - checking on levels, 2-Yr yield is up 3.7bps at 4.1972%, 5-Yr is up 2.1bps at 4.1669%, 10-Yr is down 0.2bps at 4.2828%, and 30-Yr is down 2.3bps at 4.4447%.
US TSYS/OVERNIGHT REPO: SOFR Softens As Month-End Effects Continue To Reverse
Monday saw a swift reversal lower in repo rates, per NY Fed data out today: SOFR fell 4bp to 4.82%, and vs 4.90% posted on Oct 31. This is largely due to month-end effects which are now unwinding. Nothing in the distribution of rates by percentiles looks out of the ordinary for a post-month end move (see chart). Meanwhile, effective Fed funds remain steady as usual - though are set to drop effective Friday after the expected Fed 25bp rate cut on Thursday (to a range of 4.50-4.75%).
REPO REFERENCE RATES (rate, change from prev. day, volume):
- Secured Overnight Financing Rate (SOFR): 4.82%, -0.04%, $2308B
- Broad General Collateral Rate (BGCR): 4.82%, -0.02%, $796B
- Tri-Party General Collateral Rate (TGCR): 4.82%, -0.02%, $764B
New York Fed EFFR for prior session (rate, chg from prev day):
- Daily Effective Fed Funds Rate: 4.83%, no change, volume: $98B
- Daily Overnight Bank Funding Rate: 4.83%, no change, volume: $270B
US TSYS/OVERNIGHT REPO: ON RRP Continues To Fall, But Reserves Still Ample
Takeup of the NY Fed's Overnight Reverse Repo facility fell to the lowest level today since May 2021 - by $27B to $144.2B. Since October 29, takeup has fallen by over $100B, with levels well off the all-time high of over $2.5T at end-2022.
- The move has largely been unexpected, with most observers appearing to believe there would be an uptick starting from the low-$200B levels seen in mid-October. However, that hasn't materialized.
- It's an interesting time for ON RRP to get drained to this extent, given that the FOMC may be discussing QT policy on Thursday, albeit without any intention of making near-term changes. Overall, reserves + ON RRP (which is considered a fungible substitute for reserves in terms of system liquidity) total $3.4T (per Thursday's Fed weekly balance sheet release plus today's TGA), which is well above levels thought to be scarce (starting somewhere around $3T).
- The pullback in ON RRP takeup coincided closely with the rise in Tsy bill issuance amd rebuild of the Treasuey General Account after the suspension of the debt limit - but that suspension is set to be lifted at the start of 2025, and ON RRP is expected to bounce back at that time.
US ELECTIONS: Scenario Impacts: Trump Good For USD, Bad For Tsys
As election day proceeds, markets are eyeing a Trump win / Republican sweep as a “base case”, albeit with under 40% probability, and Trump at better than 50% to win the election. In US rates, multiple moves since mid-September appear to reflect the policy risks stemming from this outcome: steeper yield curve, pricing out of Fed cuts, higher real yields and inflation breakevens, and higher term premia.
- Here is the MNI Politics Team's scenario matrix as of last week, ascribing probabilities to each of the 8 possible outcomes. We note that while betting markets have actually been moving toward our prognosis since we published it, we still ascribe a higher probability of Harris winning the presidency (~55% implied) than do betting markets (which are closer to 55-60% for Trump). However we agree that the most single common (modal) scenario is a “clean sweep” by the Republicans of each of the Presidency/Senate/House. Either way, there is no clear outcome implied by either our assessment or betting odds.
For a comprehensive summary of the market-relevant policies proposed by Kamala Harris and Donald Trump on the campaign trail please see the MNI 2024 Presidential Election Policy Tracker here (PDF). In short, we have no reason to argue with the generally-accepted view that the following political configurations have the following macro consequences:
- Trump presidency = higher likelihood of trade tariffs and (extended) tax cuts = higher inflation/growth = relatively tighter Fed policy, higher rates, stronger USD (especially vs emerging markets, eg Mexico). These effects are amplified by a "Clean Sweep".
- Harris presidency with a split Congress would basically entail the closest outcome to a “status quo” – which implies the least policy risk versus the current configuration, and some of the biggest risk that the "Trump trade" of the last month reverses (ie weaker USD, lower yields, Fed cuts getting priced back in). An unlikely "Clean Sweep" by Democrats is much less expected, and arguably has a more mixed outcome than Harris/Split Congress, given that Democrats would have the ability to expand fiscal policy in a way that isn't easily possible to do against congressional Republican opposition.
A large part of the repricing since mid-September is separate from election speculation and is rather reflecting the impact of data on the assessment of the economy and on Fed policy: since the September FOMC, we would say about half of the move in rates/USD has been data-related (coinciding with data surprise releases), with the other half potentially attributable to improving Trump/Republican odds of victory.
- This seems to be largely consistent with what we've seen from sell-side, with some variations - JPM for example estimates that FX markets currently price in a 60-70% chance of a Trump win, eyeing vols 10-30% higher at this point in 2020 and 2016 (we would guess that due to FX being more directly impacted than rates by possible Trump tariffs).
- Even so, there is likely to be a large impact on markets as results become apparent, with no single outcome fully priced.
- Here's the MNI Markets Team's rough expectations for market movements in the four broad possible configurations:
STIR: New Cycle Highs For UK Terminal Rate Expectations
- SONIA futures again underperform SOFR and EURIBOR counterparts today, in relative moves that aren’t justified by data (mild upward revision for final October services PMI) but rather appear to be sustained pressure since last week’s Budget.
- Implied yields are as much as 12.5bp higher for 2H26 contracts, with new cycle highs for terminal rate expectations that closes in on 4% for a 21bp increase since the day before last Wednesday’s Budget.
- Outright moves are likely helped by the SOFR curve steepening on the back of a strong ISM services report, with yields 8.5bps higher. ISM Services surprised with its highest since Aug 2022 and importantly with the employment sub-component firming to its strongest since Aug 2023 after a heavily distorted October payrolls report.
- The BoE is widely expected to cut 25bp on Thursday but with added attention on the extent of support for the move after the run up in terminal rate expectations in recent weeks. The MNI BoE preview will be published later today.
- UK terminal rates continue to remain the exception compared to the US and Eurozone, where both remain comfortably below implied terminals seen early in the summer despite strong recent climbs for the US in particular.
US OUTLOOK/OPINION: Boeing Wage Deal Offers Marginal Upside Risk To Wage Growth
- Boeing workers late yesterday voted to accept a new labor contract, bringing an end to eight weeks of disruption including a strike that accounted for 33k of an unusually large 44k striking workers nationwide in the October payrolls reference period.
- Workers can return to work as early as Wednesday and must return by next Tuesday, so they should be counted as on the payroll in the November payrolls report.
- IAM representatives say 59% of union members voted in favor of the accord, which includes a 38% wage increase over four years and enhanced retirement contributions. (IAM link, Boeing link)
- This 38% wage increase over four years marks a continuation of large wage settlements in the past two years – see the below chart from Bloomberg Law compiling data back to 1988.
- It leaves an annualized run rate clearly above the 3.1% annualized or 3.8% Y/Y for private sector wages & salaries in Q3 ECI data. However, it’s important to view it after a period where pay only increased 4% between 2016-24 following a 2014 deal that also ended traditional guaranteed pensions.
- The particularly publicized nature of these negotiations runs a risk of feeding through to broader wage setting processes, but US union membership remains relatively low at ~6% for the private sector (vs 15% for Canada) and 33% for the public sector (vs 76% for Canada).
- It’s unlikely to alter Fed guidance around the labor market that has stood for some time now, e.g. Fed Chair Powell at Jackson Hole “It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon." It does however continue to present an upside risk to this baseline assumption.
CANADA DATA: Trade Data Show Mixed Signs For Domestic Demand Growth
- Canada saw another month with a larger than expected merchandise trade deficit, at C$1.26bn (cons C$0.95bn) in September after an upward revised C$1.47bn (initial C$1.1bn).
- The relative improvement from that larger than first thought deficit came as a smaller non-energy deficit (from C$13.1bn to $12.1bn) offset a smaller energy surplus (from C$11.6bn to C$10.9bn).
- It leaves a three-month run annualized deficit at 0.4% GDP, comprising of a non-energy deficit worth 5.0% GDP and an energy surplus worth 4.6% GDP.
- Add a services deficit worth 0.5% GDP over the same three-month basis and the goods & services trade deficit was unchanged at 0.9% GDP, having averaged close to 1% GDP since late spring. That’s relatively large by post-pandemic standards but smaller than the 1.5-2% GDP averaged pre-pandemic.
- Taking a step back and looking just at the merchandise data again, import volumes show mixed domestic demand implications.
- Total import volumes were broadly flat in September (-0.2% M/M) which left them at -2% Y/Y (0% Y/Y 3mth). It masks genuinely strong consumer goods volumes of 6% Y/Y (8% Y/Y 3mth) with a sizeable counterweight from continued weakness in our proxy for capital goods import volumes at -3% Y/Y (-1% Y/Y 3mth).
CHINA: PBOC to Maintain Accommodation, Increase Countercyclical Adjustments
China are to maintain an accommodative monetary policy stance, and are to increase their countercyclical monetary adjustments, according to Xinhua.
These China headlines come amid the Nov 4 - Nov 8 NPC Standing Committee meeting, at which markets expect more detail on stimulus efforts, both shape and size. A fresh fiscal package worth over CNY 10trl is expected - financed via special treasury and local government bonds, but reports suggest the package could be larger in the event of a Trump victory.
- In terms of timings for a potential announcement - it's unlikely to be before November 8th (the final day of the NPC meeting), and that also allows the NPC to gauge the election results in the US to make any tweaks to the statement.
- Local analysts in the NPC Observer note that a likely time for an announcement could be on CCTV's Xinwen Lianbo program at 7pm local time (1100GMT / 0600ET), with full details of a potential package to follow later that evening.
BONDS: EGBs-GILTS CASH CLOSE: Gilts Extend Underperformance With Event Risk Eyed
Gilts underperformed again Tuesday, ahead of major global event risk the next couple of sessions.
- Today's US election and Thursday's multitude of central bank decisions (including the BoE and Fed) have set a bearish backdrop for core European FI so far this week, with Gilts continuing to reel from last week's UK fiscal announcement.
- Today saw weak demand at the 10Y Gilt auction, underlining the negative sentiment. A strong US ISM Services number saw Gilt weakness extent, with selling continuing into the close. The belly of the UK curve underperformed on the day, with 5Y yields up 10bp.
- Gilt underperformance to Bunds continued: 10Y spread up 4+bp today to a fresh post-Oct 2022 high of 210bp.
- As with Monday, German yields traded largely within last week's ranges, with some bear flattening seen in today's trade. Periphery EGB spreads narrowed for the session, tracking a bounce in equities, after having widened early.
- After hours we hear from ECB's Schnabel. All attention overnight will be on the US election outcome. Early Wednesday we get German factory orders data and final Services PMIs for the Eurozone, in addition to multiple ECB speakers.
Closing Yields / 10-Yr Periphery EGB Spreads To Germany
- Germany: The 2-Yr yield is up 3.9bps at 2.303%, 5-Yr is up 3.4bps at 2.292%, 10-Yr is up 3bps at 2.425%, and 30-Yr is up 2.7bps at 2.609%.
- UK: The 2-Yr yield is up 7.8bps at 4.513%, 5-Yr is up 10bps at 4.434%, 10-Yr is up 7.2bps at 4.53%, and 30-Yr is up 3.4bps at 4.958%.
- Italian BTP spread down 2.6bps at 124.6bps / Spanish down 0.5bps at 70.3bps
EUROPE OPTIONS: Mixed Rate Trade Ahead Of Busy Risk Event Calendar
Tuesday's Europe rates/bonds options flow included:
- OEZ4 117.00/119.25 combo paper paid 3.0 on 5K, buying the calls
- ERZ4 97.00/96.87/96.75 ladder (1x1.5x1), sells the 1 for flat in 9k (-9k/+13.5k/+9k)
- ERH5 97.625 / 98.25 1x1.5 call spread vs 97.125 put in 10.5k. Paper sells the call spread and buys the put, receiving 11.0 (ref: 97.63). Desks note that this is a position unwind.
- ERU5 98.12/98.62 call spread paper paid 13.5 on 5K
- 0RZ4 97.75/97.50 put spread bought for 5.5 in 5k
- 0RZ4 97.875 / 97.75 1x1.5 put spread. Bought for 1.875 to 2 in 10k
- SFIZ4 95.50/95.60/95.70/95.80 call condor 10K given at 1.5
- SFIG5 95.75/95.85 call spread paper paid 3.75 on 36K
FOREX: Greenback Retreats Further as US Election Results Beckon
- Despite the odds for a Trump victory firming on Tuesday and an associated reversal higher for US yields, the dollar’s resolve is being tested and the USD index has extended session declines to 0.5% as the APAC crossover approaches.
- There has been broad strength for G10 currencies against the dollar, with AUD a notable outperformer and the Swiss Franc displaying a relatively contained trading range.
- For AUDUSD (+0.75%), the move has been assisted by the RBA maintaining a hawkish stance overnight, having seen little change in the economy over the last few months to warrant an adjustment to its higher-for-longer strategy.
- Price action narrows the gap to initial resistance at 0.6648, the 20-day EMA. The more significant 50-day resides at 0.6691, which may limit the short-term topside given overnight straddle pricing currently points to a ~50pip move either side of the strike.
- USDJPY (-0.35%) has also edged back below the 152 handle on Tuesday, printing a pullback low of 151.38. With the election remaining a close call, any early leanings towards a Harris victory could further weigh on USDJPY and there remains plenty of downside before initial firm support at 149.11, the 50-day EMA. The 20-day EMA is at 150.86.
- Significant volatility has already been seen in the Mexican peso, rising as high 20.3560, before sharply paring that advance back to 20.18 at typing. USDMXN overnight implied vol did clear 100 points - an all-time high for the contract. This implied a ~4% swing for USD/MXN on the results, and will place the pair under the spotlight as results begin to emerge.
- New Zealand employment data will play second fiddle to the US election developments overnight. Central bank decisions from Sweden, Norway, the BOE and Fed are all due Thursday.
FOREX: USDJPY Prints 152.09, Short-Term Attention on Gap to Friday’s Close
- While US yields have ticked higher on Tuesday, USDJPY has operated in a relatively contained 45 pip range, recently edging back towards session lows of 152.09. Betting odds for a Trump victory are now more reflective of Friday’s levels, which might suggest the short-term risks could be tilted towards the greenback filling the gap to last week’s closing prints.
- For USDJPY, closing this gap would require a move to 153.01, and technical conditions suggest an overall bullish trend structure remains intact for the pair. On the topside, a clear breach of 153.40 (retracement level) would set the scene for an extension towards 155.27, a Fibonacci projection.
- It is also worth highlighting that overnight Reuters cited former BOJ board member Makoto Sakurai as saying the BOJ are likely to wait until January to raise interest rates when there will be more clarity on political and market developments. Given some analysts have touted December for the next move, this could be deemed as a dovish view at the margin.
- On the other hand, with the election remaining a close call and a potentially subdued session ahead, any early leanings towards a Harris victory could further weigh on USDJPY and there remains plenty of downside before initial firm support at 149.11, the 50-day EMA. The 20-day EMA is at 150.86.
MEXICO: USDMXN Vols Surge, Key Medium-Term Parameters in Focus
- US yields have edged higher on Tuesday, as betting odds for a Trump victory are now more reflective of levels late last week. Short-term risks could be tilted towards the greenback filling the gap to last week’s closing prints (20.2969 for USDMXN), and market participants will be paying close attention to USDMXN, which continues to operate near two-year highs.
- Overnight FX options contracts now capture the immediate outcome of the election, and USDMXN overnight implied has cleared 100 points - an all-time high for the contract (other notable prints: 95 points mid-COVID, 96 points on Trump's '16 election and ~100 points in the '08 GFC). This implies a ~4% swing in USD/MXN on the results, and an implied range of approximately 19.35 - 21.05.
- The top end of this range would coincide with a key medium-term resistance point of 21.0535, the July 2022 high. We would highlight 20.4578 as the first target, the 1.764 projection of the Sep 18 - Oct 1 - Oct 4 price swing.
- More benign outcomes are likely to be met with strong peso short covering and could even make a move lower for USDMXN more pronounced as traders flock back to the attractive carry profile of the MXN. One analyst suggested a Harris victory could lead to USDMXN reaching 18.50, subject to the overall global risk reaction.
- While we would highlight the domestic risks surrounding constitutional reforms may limit the USDMXN downside, attention will be on the following levels: 19.6124, the 50-day EMA, 19.0666/18.9929, the Sep 18 low/June 12 high and key medium-term support at 18.4860, the Oct 2023 high.
FOREX: USDCHF Consolidating Near Three-Week Lows
- USDCHF (-0.14%) has been consolidating near three-week lows having entirely reversed its CPI-driven rally late last week, assisted by the broad pressure on the greenback. The pair closely matched the Monday lows earlier in the session, although ranges today have been relatively contained across G10.
- Immediate support for the pair is seen at 0.8611, the 50-day EMA and a meaningful break would signal scope for a move back towards a cluster of daily lows around the 0.8400 handle, a key medium term support area for the pair.
- The Swiss Franc’s funding status could easily thrust it back into the spotlight if we were to see a substantial repricing in US rates overnight. A potential trump victory and any ensuing CHF weakness would be underpinned by SNB easing expectations that have become more aggressive in the last months amid low inflation - contrary to the US, where cut pricing was pared back since October.
- In terms of USDCHF resistance, we see the nearest levels to watch as 0.8711 and 0.8749, the Aug 15 high. Above here, an influential pivot point at 0.8820 would be the most notable short-term target. While not necessarily in play over the next 24 hours, a protracted move higher for the greenback would refocus attention on 0.9050 and a key resistance zone between 0.9224/44.
OPTIONS: Expiries for Nov06 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.0750($550mln), $1.0800(E1.3bln), $1.0950-70(E1.0bln), $1.1040-50(E567mln)
- USD/JPY: Y151.00($1.3bln), Y153.50($729mln)
- AUD/USD: $0.6675(A$555mln) $0.6855(A$1.1bln)
- USD/CAD: C$1.3750($524mln)
EQUITY TECHS: E-MINI S&P: (Z4) Short-Term Bearish Threat
- RES 4: 6012.75 1.00 projection of the Aug 5 - Sep 3 - 6 price swing
- RES 3: 6000.00 Psychological handle
- RES 2: 5961.00 1.00 projection of the Sep 6 - 17 - 18 price swing
- RES 1: 5816.84/5927.25 20-day EMA / High Oct 17 and bull trigger
- PRICE: 5751.50 @ 14:11 GMT Nov 5
- SUP 1: 5724.00 Low Oct 2
- SUP 2: 5675.25 Low Sep 18
- SUP 3: 5637.60 38.2% retracement of the Aug 5 - Oct 17 bull cycle
- SUP 4: 5600.25 Low Sep 12
S&P E-Minis traded sharply lower last Thursday and the contract is trading just above its recent low. Price has cleared both the 20- and 50-day EMAs - an important short-term bearish development. The break lower signals scope for an extension and has exposed the next support at 5724.00, the Oct 2 low. Clearance of this level would open 5637.60, a Fibonacci retracement. Initial firm resistance is 5816.84, the 20-day EMA.
COMMODITIES: Crude Gains, Gold Consolidates Ahead Of US Election Results
- WTI continues to trade higher on the day but has pared its earlier gains as the market shifts focus to the US election. It briefly dipped into losses on the day before rebounding.
- WTI Dec 24 is up by 0.9% at $72.1/bbl.
- From a technical perspective, a bearish theme in WTI futures remains intact and the latest recovery, including Monday’s gains, appears to be a correction.
- However, a clear reversal would refocus attention on the key short-term resistance at $77.70, the Oct 8 high. Initial resistance at $72.34, the Oct 24 high, was pierced earlier today.
- Meanwhile, Henry Hub is set for losses today despite fears of disrupted production due to Tropical Storm Raphael. Downside comes from milder weather forecasts and expectations of higher-than-average inventory builds last week.
- US Natgas Dec 24 is down by 3.5% at $2.68/mmbtu.
- Spot gold has edged up by 0.2% to $2,742/oz, as it consolidates below last week’s record high at $2,790.
- The trend condition in gold remains bullish, with sights on the $2,800.0 handle next.
- Copper has extended its gains today, amid Chinese stimulus hopes, with the red metal rising by another 0.6% to $446/lb, taking gains so far this week to more than 2%.
| Date | GMT/Local | Impact | Country | Event |
| 06/11/2024 | - |  SE | Riksbank Meeting | |
| 06/11/2024 | 0030/0930 | ** |  JP | S&P Global Final Japan Services PMI |
| 06/11/2024 | 0030/0930 | ** | JP | S&P Global Final Japan Composite PMI |
| 06/11/2024 | 0700/0800 | ** |  DE | Manufacturing Orders |
| 06/11/2024 | 0930/0930 | ** |  GB | S&P Global/CIPS Construction PMI |
| 06/11/2024 | 1000/1100 | ** |  EU | PPI |
| 06/11/2024 | 1200/0700 | ** |  US | MBA Weekly Applications Index |
| 06/11/2024 | 1400/1500 | EU | ECB's Lagarde address at 10th anniversary of Single Supervisory Mechanism | |
| 06/11/2024 | 1430/1530 | EU | ECB's De Guindos speech and Q&A at Distinguished Speaker Seminar | |
| 06/11/2024 | 1500/1000 | * |  CA | Ivey PMI |
| 06/11/2024 | 1530/1030 | ** | US | DOE Weekly Crude Oil Stocks |
| 06/11/2024 | 1725/1225 | CA | BOC Sr Deputy Rogers speech in Toronto. | |
| 06/11/2024 | 1800/1300 | *** | US | US Treasury Auction Result for 30 Year Bond |
| 07/11/2024 | 2330/0830 | ** | JP | average wages (p) |
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