MNI ASIA OPEN: Hedging Mild Pre-FOMC Uncertainty

EXECUTIVE SUMMARY

• MNI STATE OF PLAY: Fed To Stay Patient on QE Taper
• MNI REALITY CHECK: US Retail Spending Seen Strong Through May
• UK PM JOHNSON: DELAYS END OF ENGLAND LOCKDOWN TO JULY 19 AS CASES RISE, Bbg
• ECB STIMULUS WILL BE AT LEAST AS PROLONGED AS FED'S: VILLEROY, Bbg

US

FED: The FOMC this week is expected to cheer steady progress in the Covid-19 recovery but maintain that it will still take some time before the economy meets the Fed's "substantial further progress" bar for tapering asset purchases.

• Officials will likely talk about stepping back QE but give no new guidance or refinement of the "substantial further progress" standard. Policymakers have also said the debate over the taper will take several meetings.
• The Fed is wary of detailed on-the-record discussions on tapering because such talks have the potential to trigger volatility in financial markets and a tightening effect on the trajectory of the real economy, former officials told MNI. For more see MNI Policy main wire at 1153ET.

US TSY: US 10Y Yield Keeps Consolidating Lower as Uncertainty Rises

• US 10Y yield has been constantly retracing lower in the past few weeks after hitting a local high of 1.77% on March 30, which corresponds to the 50% retracement of the 0.3140% - 3.26% range.
• While some investors are saying that the consolidation is a supply shock as US Treasury is borrowing less than expected due to the run down in TGA cash balance, the rising uncertainty over the Covid19 situation could also explain the recent increase in demand for 'safe' assets.
• In addition, the significant contraction in Chinese credit and liquidity since the start of the year could weigh on risky assets in the coming months and therefore result in lower LT bond yields due to higher uncertainty.
• As governments are delaying the global reopening, the probability of a renewed period of lockdown in winter 2022 keeps increasing and therefore could also result in higher demand for US Dollars and Treasury Bonds.
• The 10Y recently broke below its 100D SMA at 1.4950% last week; next support to watch on the downside stands at 1.44% (38.2% Fibo).

OVERNIGHT DATA

• CANADA APR FACTORY SALES -2.1%
  
• CANADIAN APR MANUFACTURING SALES -2.1% MOM
• CANADA APR FACTORY INVENTORIES +0.8%; INVENTORY-SALES RATIO 1.56

MARKETS SNAPSHOT

Key late session market levels:

• DJIA down 238.68 points (-0.69%) at 34479.6
• S&P E-Mini Future down 8.5 points (-0.2%) at 4241.25
• Nasdaq up 58.6 points (0.4%) at 14069.42
• US 10-Yr yield is up 4.6 bps at 1.4973%
• US Sep 10Y are down 10/32 at 132-17
• EURUSD up 0.001 (0.08%) at 1.2118
• USDJPY up 0.42 (0.38%) at 109.69
• WTI Crude Oil (front-month) down $0.03 (-0.04%) at $71.35
• Gold is down $12.03 (-0.64%) at $1856.19

European bourses closing levels:

• EuroStoxx 50 up 5.97 points (0.14%) at 4135.51
• FTSE 100 up 12.62 points (0.18%) at 7161.54
• German DAX down 19.63 points (-0.13%) at 15718.25
• French CAC 40 up 15.69 points (0.24%) at 6611.99

US TSY SUMMARY: Muted Start to Week, FOMC Wed

• Aside from apparent position squaring ahead Wednesday's FOMC monetary policy annc, Eurodollar and Treasury option traders reported better buyers of wing insurance (low delta call and put buying reflecting indecision over direction of yields in the near term).
• Tsy option traders looked at buying the TYN 132/132.25/132.5/132.75 put condor. Current market a relatively cheap 2/64 bid -- at 3/64, 132-26 ref. Traders see 13/64 potential profit if Wed's FOMC annc turns out to be a non-event. July options expire June 25.
• Benchmark 3M LIBOR continues to make new low: -0.00088 to 0.11800% (-0.00937 total last wk): Jun'21 futures settles 99.882. New lead quarterly EDU1 holds slightly weaker.
• The 2-Yr yield is up 1.2bps at 0.159%, 5-Yr is up 4.7bps at 0.7854%, 10-Yr is up 4.6bps at 1.4973%, and 30-Yr is up 5.1bps at 2.1885%.

US TSY FUTURES CLOSE:

• 3M10Y +4.804, 147.453 (L: 142.045 / H: 147.791)
• 2Y10Y +3.347, 133.638 (L: 130.055 / H: 134.176)
• 2Y30Y +3.92, 202.82 (L: 198.843 / H: 203.298)
• 5Y30Y +0.617, 140.215 (L: 138.977 / H: 140.677)
• Current futures levels:
• Sep 2Y down 0.75/32 at 110-10.375 (L: 110-10.25 / H: 110-11.375)
• Sep 5Y down 6/32 at 123-29.75 (L: 123-29.25 / H: 124-05)
• Sep 10Y down 11/32 at 132-16 (L: 132-15.5 / H: 132-29.5)
• Sep 30Y down 21/32 at 158-18 (L: 158-16 / H: 159-14)

US EURODOLLAR FUTURES CLOSE

• Sep 21 -0.010 at 99.870
• Dec 21 -0.010 at 99.815
• Mar 22 -0.010 at 99.830
• Jun 22 -0.010 at 99.790
• Red Pack (Sep 22-Jun 23) -0.025 to -0.01
• Green Pack (Sep 23-Jun 24) -0.04 to -0.025
• Blue Pack (Sep 24-Jun 25) -0.045 to -0.04
• Gold Pack (Sep 25-Jun 26) -0.045 to -0.04

Short Term Rates

US DOLLAR LIBOR: Latest Settles

• O/N +0.00000 at 0.05538% (+0.00025 total last wk)
• 1 Month +0.00175 to 0.07463% (-0.00837 total last wk)
• 3 Month -0.00088 to 0.11800% (-0.00937 total last wk) ** (New Record Low: 0.11800% on 6/14)
• 6 Month -0.00212 to 0.15038% (-0.01238 total last wk)
• 1 Year -0.00188 to 0.23750% (-0.00662 total last wk)

• Daily Effective Fed Funds Rate: 0.06% volume: $60B
• Daily Overnight Bank Funding Rate: 0.04% volume: $252B

• Secured Overnight Financing Rate (SOFR): 0.01%, $834B
• Broad General Collateral Rate (BGCR): 0.01%, $370B
• Tri-Party General Collateral Rate (TGCR): 0.01%, $350B
• (rate, volume levels reflect prior session)

• Tsy 0Y-2.25Y, $12.401B accepted vs. $48.056B submission
• Next scheduled purchases:
• Tue 6/15 1010-1030ET: TIPS 7.5Y-30Y, appr $1.225B
• Wed 6/16 ---- No buy-op due to FOMC rate annc
• Thu 6/17 1010-1030ET: Tsy 22.5Y-30Y, appr $2.025B

PIPELINE: $5B Nvidia 4Pt Jumbo Leads High-Grade Issuance

• Date $MM Issuer (Priced *, Launch #)
• 06/14 $5B #Nvidia $1.25N 2NC1 +15, $1.25B 3NC2 +25, $1.25B 7Y +40, $1.25B 10Y +55a
• 06/14 $1.15B #John Deere $550M 5Y +30, $600M 10Y +52
• 06/14 $2B #BP Capital $1.45B 20Y +95, $550M 40Y +125
• 06/14 $650M #Global Atlantic Financing 10Y +165
• 06/14 $550M #AIG Global Funding 3Y +35a
• Later in week
• 06/15 $00M Kommunalbanken 2Y +2a
• 06/?? $Benchmark Rep of Turkey 5Y Sukuk

FOREX: JPY Weakens As Most G10 Currencies Hold Narrow Monday Ranges

• The Dollar Index held a 19 pip range on Monday which was a fair barometer for G10 FX ranges on Monday.
• Market holidays in Australia, China, Hong Kong and Taiwan prompted limited activity overnight, with the US dollar making very marginal gains, however, the DXY rejected Friday's high.
• Throughout the rest of the trading day the index gradually turned from positive to negative territory, with small gains for EUR, NZD and CAD despite US yields slowly inching higher.
• Bucking the trend, JPY was the notable underperformer on Monday, alongside the Swiss Franc. USDJPY strengthened 0.38% to breach 110 to the topside. The recovery refocuses attention on 110.33, Jun 4 high, where a break would reinstate the uptrend and open this year's 110.97 high from Mar 31. Yen weakness was the key driver with EURJPY and AUDJPY advancing by a similar magnitude.
• Larger moves were seen in the EM space, with BRL (+0.92%) leading gains and TRY (-0.89%) the major laggard following President Biden's meeting with his Turkish counterpart.
• Tomorrow's overnight highlight is the RBA minutes before US Retail Sales and PPI headline the US data docket.
• Focus is undoubtedly on Wednesday's Fed meeting, where Chair Powell will likely make it clear that the FOMC is not yet ready to move any further than just talking about reducing asset purchases.