MNI ASIA OPEN: Mixed Message From Fed Post-Blackout

EXECUTIVE SUMMARY

• MNI SOURCES: EU To Avoid N. Ireland Dispute Sparking Trade War
• MNI BRIEF: SF Fed: Inflation Unlikely to Persist After Dec
• MN Fed Pres Kashkari (dove) in a Yahoo Finance exclusive says he opposes rate hikes through 2023
• BULLARD: IS SOME UPSIDE RISK ON INFLATION FORECAST, Bbg
• BULLARD SAYS LEANING TOWARD IDEA FED MAY NOT NEED TO BE IN MBS, Bbg
• BULLARD: CHAIR POWELL OFFICIALLY OPENED TAPER DISCUSSION AT LAST MEETING, MORE IN DEPTH DISCUSSION TO FOLLOW, Rtrs

US

FED: The recent U.S. spike in inflation is unlikely to persist beyond this year, according to a new San Francisco Fed blog post Friday, noting that price increases in health-care services, used vehicles and other "Covid-sensitive" products should be temporary.

• Economist Adam Shapiro also noted a risk that recent gains could end up "raising longer-run inflation expectations among businesses, altering current and future price-setting behavior." MNI has reported the Fed's downplaying of faster inflation may send price expectations lurching higher than policymakers want.

EUROPE

EU/UK: The European Union is likely to confine its reaction to any further unilateral UK extensions of grace periods for trade between the British mainland and Northern Ireland to dispute resolution and infringement procedures and avoid any escalation which might threaten the overall EU-UK Brexit trade deal, EU sources said. For more see MNI Policy main wire at 1049ET.

OVERNIGHT DATA

NY Fed GDP Nowcast:

• The New York Fed Staff Nowcast stands at 3.7% for 2021:Q2 and 4.4% for 2021:Q3.
• News from this week's data releases decreased the nowcast for 2021:Q2 by 0.5 percentage point and decreased the nowcast for 2021:Q3 by 0.9 percentage point.
• Negative surprises from advanced retail sales and building permits data accounted for most of the decrease in both quarters, with Empire State Manufacturing survey data also contributing to the decline in 2021:Q3.

• The UIG "full data set" measure for May is currently estimated at 3.2%, a 0.5 percentage point increase from the previous month.
• The "prices-only" measure for May is currently estimated at 3.1%, a 0.1 percentage point increase from the previous month.
• The twelve-month change in the May CPI was +5.0%, a 0.8 percentage point increase from the previous month.

MARKETS SNAPSHOT

Key late session market levels

• DJIA down 466.46 points (-1.38%) at 33361.01
• S&P E-Mini Future down 49.75 points (-1.18%) at 4163
• Nasdaq down 146.1 points (-1%) at 14016.04
• US 10-Yr yield is down 5.4 bps at 1.4498%
• US Sep 10Y are up 8.5/32 at 132-9
• EURUSD down 0.0034 (-0.29%) at 1.1873
• USDJPY down 0.07 (-0.06%) at 110.14
• WTI Crude Oil (front-month) up $0.6 (0.84%) at $71.65
• Gold is down $3.46 (-0.2%) at $1769.84

European bourses closing levels:

• EuroStoxx 50 down 74.77 points (-1.8%) at 4083.37
• FTSE 100 down 135.96 points (-1.9%) at 7017.47
• German DAX down 279.63 points (-1.78%) at 15448.04
• French CAC 40 down 97.1 points (-1.46%) at 6569.16

Bullard Kickstarts Reflation Unwind Theme

After some early chop w/Tsys and equities reversing late overnight gains, comments from StL Fed pres Bullard on CNBC kickstarted a more hawkish take on FOMC: Bullard DOTS sees liftoff in late 2022, sees Chairman Powell's presser as officially opening the discussion on tapering. Bullard also concerned about feeding into "housing froth", while "leaning toward idea Fed may not need to be in MBS." (MN Fed Kashkari, dove downplayed late: no hike until after 2023).

• Curve flattening resumed in earnest as long end bounced/traded higher into late morning. Trading desks reported buy stops and forces steepener unwinds as Bonds continued to charge higher ahead midday. 5s30s slipped to 110.568 low.
• Tsy 30YY fell to 2.002% low, 2.0140% by the close
• Tsy 10YY fell to 1.4364% low, 1.4414% by the close
• NY Fed reverse repo usage dips to $747.121B -- just off Thu's record high of $755.8B in the aftermath of FOMC's IOER technical adjustment to 0.15% from 0.10%.
• Large Spd Volume Continues: Near 33,000 Mar'22/Jun'22 spds traded 0.060 recently, additional trades across Whites pushing volumes over 525k for strip, another 244k in first two Reds (EDU2-EDZ2).
• Carry-over heavy spd activity as prospect of tighter policy sooner than later roils markets: EDU2/EDU3 +4 to .630 Thu, EDU3/EDU4 fell 7.5 to .505, EDH3/EDH4 climbed to 64.5. Blocks: 20k each EDU2/EDU4 and EDZ2EDZ4.
• The 2-Yr yield is up 4.9bps at 0.2581%, 5-Yr is up 0.7bps at 0.8876%, 10-Yr is down 5.4bps at 1.4498%, and 30-Yr is down 7.1bps at 2.0213%.

US TSY FUTURES CLOSE

• 3M10Y -7.019, 139.579 (L: 139.243 / H: 148.209)
• 2Y10Y -10.739, 118.329 (L: 117.117 / H: 130.561)
• 2Y30Y -12.288, 175.654 (L: 174.104 / H: 189.584)
• 5Y30Y -7.735, 113.356 (L: 110.568 / H: 122.704)
• Current futures levels:
• Sep 2Y down 3.125/32 at 110-3.5 (L: 110-01.625 / H: 110-07.25)
• Sep 5Y down 2/32 at 123-10 (L: 122-27.5 / H: 123-17.25)
• Sep 10Y up 11.5/32 at 132-12 (L: 131-21 / H: 132-13.5)
• Sep 30Y up 1-15/32 at 161-6 (L: 159-13 / H: 161-11)
• Sep Ultra 30Y up 2-22/32 at 194-13 (L: 191-01 / H: 194-30)

US EURODOLLAR FUTURES CLOSE

• Sep 21 -0.005 at 99.860
• Dec 21 -0.015 at 99.795
• Mar 22 -0.020 at 99.80
• Jun 22 -0.040 at 99.720
• Red Pack (Sep 22-Jun 23) -0.05 to -0.04
• Green Pack (Sep 23-Jun 24) -0.025 to +0.030
• Blue Pack (Sep 24-Jun 25) +0.035 to +0.065
• Gold Pack (Sep 25-Jun 26) +0.080 to +0.095

SHORT TERM RATES

US DOLLAR LIBOR: Latest Settles

• O/N +0.01725 at 0.08050% (+0.02513/wk)
• 1 Month -0.00238 to 0.09100% (+0.01812/wk)
• 3 Month +0.00038 to 0.13488% (+0.01600/wk) ** (New Record Low: 0.11800% on 6/14)
• 6 Month -0.00238 to 0.15625% (+0.00375/wk)
• 1 Year -0.00500 to 0.24013% (+0.00075/wk)

• Daily Effective Fed Funds Rate: 0.10% volume: $64B
• Daily Overnight Bank Funding Rate: 0.08% volume: $226B

• Secured Overnight Financing Rate (SOFR): 0.05%, $998B
• Broad General Collateral Rate (BGCR): 0.05%, $393B
• Tri-Party General Collateral Rate (TGCR): 0.05%, $347B
• (rate, volume levels reflect prior session)

Reminder: The Fed RRP surged to record high $756B yesterday after the Fed's technical adjustment to IOER from 0.10% to 0.15%

• Credit Suisse contributor Zoltan Pozsar says the repriced facility as "too generous" and will quickly become a "big problem for banks" as the "banking system is going from being asset constrained (deposits flooding in, but nowhere to lend them but to the Fed), to being liability constrained (deposits slipping away and nowhere to replace them but in the money market)."
• "So the sterilization of reserves begins, and so the o/n RRP facility turns from a largely passive tool that provided an interest rate floor to the deposits that large banks have been pushing away, into an active tool that "sucks" the deposits away that banks decided to retain."
• Quick-take: Zoltan sees LIBOR-OIS re-widening "unless the Fed lowers the o/n RRP rate!"

• Tsys 7Y-10Y, $3.199B accepted vs. $6.905B submission
• Next scheduled purchases:
• Mon 6/21 1010-1030ET: Tsy 10Y-22.5Y, appr $1.425B
• Tue 6/22 1010-1030ET: TIPS 1Y-7.5Y, appr $2.025B
• Wed 6/23 1010-1030ET: Tsy 4.5Y-7Y, appr $6.025B
• Thu 6/24 1010-1030ET: Tsy 22.5Y-30Y, appr $2.025B
• Fri 6/25 1010-1030ET: Tsy 2.25Y-4.5Y, appr $8.425B

FED: Reverse Repo -- Off Thu's Record High (but not by much)

NY Fed reverse repo usage dips to $747.121B -- just off Thu's record high of $755.8B in the aftermath of FOMC's IOER technical adjustment to 0.15% from 0.10%.

PIPELINE: High-Grade Issuance Over $24B/Wk

• Date $MM Issuer (Priced *, Launch #)
• 06/17 $1B *Kenya 2034 Bond 6.3%
• 06/17 $800M *GXO Logistics 5Y +85a, 10Y +120a
• 06/17 $750M *Eagle Materials 10Y +110
• 06/17 $600M *Sun Communities 10Y +125

EGBs

A fairly busy session but also a puzzling one regarding semi core, with few dislocations.

• Still difficult to pinpoint a clear catalyst for the big underperformance in BTP today.
• This has been the question of the day in the street.
• Some suggestion a possible carry trade, but this has been unclear and unconfirmed
• Next support in the contract comes at 150.11 Low Jun 8 and key near-term support
• The spread versus the German 10yr has now widened by 6.7bps, moving from a 101.1828 low yesterday to 107.8517 today..
• Italy's Draghi also said that The European growth is bouncing back.
• And although the midday headline may have helped the downside momentum in BTP, the contract was under pressure from the open.
• Looking ahead, after market RATING:
• Fitch on Slovenia (current rating: A; Outlook Stable) & the United Kingdom (current rating: AA-; Outlook Negative)
• Moody's on Luxembourg (current rating: Aaa; Outlook Stable) & Slovakia (current rating: A2; Outlook Stable)

FOREX: Greenback Steamrolls Higher, Extending Post-Fed Rally

• One-way traffic in currency markets Friday saw the USD rally further, putting the USD Index at new multi-month highs and within range of the March highs of 93.44. These USD gains were mostly felt against NOK, NZD and GBP, which underperformed all others in G10.
• Evidence of the FOMC's tilting hawkish bias further emerged as St Louis Fed's Bullard stated that it may become appropriate for the Fed to begin hiking interest rates next year in the face of above-target inflation. Bullard said "I put us starting in late 2022" when talking about rate liftoff.
• GBP/USD underperformed throughout following a set of weaker-than-expected retail sales figures. Retail sales fell 1.4% on the month, well below the expected gain of 1.5%, raising questions about the UK's post-pandemic recovery, which has been fuelled by solid consumption. By-election results in the UK also went against the ruling Conservative party, adding additional pressure to GBP/USD. The pair touched 1.3785 Friday, the lowest level since mid-April.
• Focus in the coming week turns to the Bank of England rate decision, German IFO figures and the May personal income/spending data from the US.