MNI ASIA OPEN: Heavy Volumes on Atypical Summer Session: Risk-On

EXECUTIVE SUMMARY

• MNI INTERVIEW: BLS May Alter CPI Calculation Over Rent Skew
• MNI SOURCES: Vague ECB Prices Target To Spark Lively Meetings
• MNI BRIEF: Trudeau Drops Line About Not Wanting Canada Election

US

FED: The U.S. Bureau of Labor Statistics could modify its calculation of CPI to correct an over-reliance on apartment rental data which has tended to push owners' equivalent rent slightly higher since 2013, Cleveland Fed economist Randal Verbrugge told MNI.

• OER, the implicit cost to rent the home you own, will likely be revised down because apartment rental prices have accelerated much quicker than those of detached units, which account for only about 30% of the BLS' rental sample, he said. The BLS does not distinguish between the two types of housing, using only location to calculate neighborhood rent increases.
• "We've discovered, we think for the first time ever, evidence that there could be a problem with just using 'location, location, location' as the basis for determining how much rent for a particular owner went up," he said, referring to research produced jointly with staff at the BLS. For more see MNI Policy main wire at 1328ET.

CANADA

Canadian Prime Minister Justin Trudeau on Tuesday added to signals around potentially calling an early election to take advantage of the glow from improving vaccination rates and record deficit outlays that are swelling voter pocketbooks.

• During a funding announcement from Hamilton, an Ontario city whose districts split between Liberal and NDP in the last election, he referenced his "build back better" slogan and attacked what he called the weak record of other parties on the economy and minority rights.
• "We are announcing a lot this summer" now that pandemic restrictions are easing, Trudeau said when asked about election timing. He declined to repeat his past response about not wanting an election. Sources have told MNI an vote may be called for the fall seeking to convert the Liberal Party's minority in the House of Commons into a majority.
  
• The government on Monday will install a new Governor General, an official who must be consulted on an election call. Nova Scotia's provincial government on Saturday called an Aug. 17 vote and federal leaders often avoid scheduling conflicts, so a federal campaign may come soon after local voting.

EUROPE

ECB: Members of the European Central Bank's Governing Council face tough talks to turn their new, carefully ambiguous, inflation target into forward guidance in a simplified introductory statement for Thursday's meeting, Eurosystem sources told MNI, adding that the ECB will push back key decisions regarding the future of asset purchases for many months and possibly until next spring.

• ECB President Christine Lagarde has already anticipated publicly that altering the guidance is unlikely to be the result of a unanimous decision, with at least some officials arguing for the bare minimum of changes to incorporate the new target. For more see MNI Policy main wire at 1100ET.

OVERNIGHT DATA

• US JUN HOUSING STARTS 1.643M; PERMITS 1.598M
• US MAY STARTS REVISED TO 1.546M; PERMITS 1.683M
• US JUN HOUSING COMPLETIONS 1.324M; MAY 1.343M (REV)

• US REDBOOK: JUL STORE SALES +14.5% V YR AGO MO
• US REDBOOK: STORE SALES +15.0% WK ENDED JUL 17 V YR AGO WK
• US REDBOOK: WILL RESUME MONTH-TO-MONTH DATA COMPARISON IN FEB 2022

• US JUL PHILADELPHIA FED NONMFG INDEX 53.1

MARKETS SNAPSHOT

Key late session market levels

• DJIA up 589.97 points (1.74%) at 34539.79
• S&P E-Mini Future up 71.75 points (1.69%) at 4320.5
• Nasdaq up 263.2 points (1.8%) at 14528.07
• US 10-Yr yield is up 1.8 bps at 1.2069%
• US Sep 10Y are down 1/32 at 134-21
• EURUSD down 0.0017 (-0.14%) at 1.1783
• USDJPY up 0.36 (0.33%) at 109.82
• WTI Crude Oil (front-month) up $1 (1.51%) at $67.42
• Gold is down $3.77 (-0.21%) at $1808.61

European bourses closing levels:

• EuroStoxx 50 up 27.81 points (0.71%) at 3956.34
• FTSE 100 up 36.74 points (0.54%) at 6881.13
• German DAX up 83.07 points (0.55%) at 15216.27
• French CAC 40 up 50.88 points (0.81%) at 6346.85

US TSY SUMMARY: Risk Appetite Returns After Early US$ Bid

• Long end support completely evaporated by midmorning, Bonds leading sale to new session lows on wide ranges and heavy volumes (TYU already 2M), yld curves bear steepen after Mon's sharp bull flattening. Current 10YY at 1.2169% after falling to 1.1260% earlier (early Feb level), 30YY currently 1.8745% vs. 1.7781% low.
• Trading desks report prop and fast$ accts sold 5-10s early, steepeners in 2s and 5s vs.10 and 30s, real$ selling 30s, deal-tied selling in shorts to intermediates. Some long end buying from dealers in 30s more recently.
• Early bid: desks cited familiar risk-off drivers (virus variant spd, geo-political, peak growth/inflation in rear-view). Bonds gained after Housing Starts come out stronger than expected (1.643M vs 1.590M) while Building Permits come out weaker than expected (1.598M vs. 1.696M) - down 5.1%/month.
• Eurodollar futures: Huge selling in lead quarterly EDU1 futures: over 130,000 EDU1 sold down to 99.855-.85, small print at 99.845 (-0.020) in early trade.
• The 2-Yr yield is down 2.4bps at 0.1915%, 5-Yr is down 3.1bps at 0.6738%, 10-Yr is up 1.8bps at 1.2069%, and 30-Yr is up 4.8bps at 1.8675%.

US TSY FUTURES CLOSE

• 3M10Y +2.717, 117.035 (L: 107.532 / H: 117.621)
• 2Y10Y +4.774, 101.895 (L: 93.654 / H: 102.631)
• 2Y30Y +7.477, 167.69 (L: 158.65 / H: 168.029)
• 5Y30Y +7.767, 119.148 (L: 111.855 / H: 119.467)
• Current futures levels:
• Sep 2Y up 1/32 at 110-9.125 (L: 110-07.625 / H: 110-09.75)
• Sep 5Y up 2/32 at 124-13.75 (L: 124-07.75 / H: 124-22)
• Sep 10Y down 4/32 at 134-18 (L: 134-14 / H: 135-07)
• Sep 30Y down 30/32 at 165-7 (L: 165-04 / H: 167-04)
• Sep Ultra 30Y down 2-13/32 at 200-00 (L: 199-30 / H: 203-26)

US EURODOLLAR FUTURES CLOSE

• Sep 21 -0.010 at 99.855
• Dec 21 -0.010 at 99.80
• Mar 22 -0.005 at 99.820
• Jun 22 steady at 99.775
• Red Pack (Sep 22-Jun 23) +0.010 to +0.015
• Green Pack (Sep 23-Jun 24) +0.005 to +0.010
• Blue Pack (Sep 24-Jun 25) -0.02 to -0.005
• Gold Pack (Sep 25-Jun 26) -0.045 to -0.025

SHORT TERM RATES

US DOLLAR LIBOR: Latest Settles

• O/N -0.00050 at 0.08550% (-0.00025/wk)
• 1 Month +0.00375 to 0.08900% (+0.00537/wk)
• 3 Month +0.00400 to 0.13825% (+0.00400/wk) ** (Record Low: 0.11800% on 6/14)
• 6 Month +0.00100 to 0.15275% (+0.00062/wk)
• 1 Year +0.00012 to 0.24175% (-0.00038/wk)

• Daily Effective Fed Funds Rate: 0.10% volume: $67B
• Daily Overnight Bank Funding Rate: 0.08% volume: $255B

• Secured Overnight Financing Rate (SOFR): 0.05%, $888B
• Broad General Collateral Rate (BGCR): 0.05%, $369B
• Tri-Party General Collateral Rate (TGCR): 0.05%, $337B
• (rate, volume levels reflect prior session)

• TIPS 7.5Y-30Y, $1.199B accepted vs. $2.114B submission
• Next scheduled purchases
• Wed 7/21 1010-1030ET: Tsy 2.25Y-4.5Y, appr $8.425B
• Thu 7/22 1010-1030ET: Tsy 22.5Y-30Y, appr $2.025B
• Fri 7/23 1010-1030ET: Tsy 4.5Y-7Y, appr $6.025B

FED: Reverse Repo Operations

NY Fed reverse repo usage dips to $848.102B from 75 counterparties vs. $860.468B on Monday. Remains well off June 30 record high of $991.939B.

PIPELINE: $6B VMware 5Pt Jumbo Launched; BoNY Mellon Guidance Updated

• Date $MM Issuer (Priced *, Launch #)
• 07/20 $6B #VMware $1B 2Y +45, $1.25B 3NC1 +65, $1.5B 5Y +75, $750M 7Y +90, $1.5B 10Y +100
• 07/20 $1.25B #Wells Fargo 5Y 4.25%
• 07/20 $650M #Blackstone Secured Lending Fund +5Y +168
• 07/20 $500M #MidAmerican Energy WNG 31Y green bond +85
• 07/20 $Benchmark Bank of NY Mellon +5Y +40a, 10Y +60a
• 07/20 $Benchmark CPPIB Capital 5Y FRN/SOFR +25a

EGBs-GILTS CASH CLOSE: Afternoon Reversal

German cash yields ended Tuesday's session lower, but well off the session's lowest levels, while UK yields fully reversed higher after a late afternoon correction.

• Among the notable moves: Schatz closed 2+bps lower, back to Feb levels - one of the biggest single-day moves of the past year. 10Y Gilts traded in a 6.8bp range (briefly setting a fresh post-Feb low 0.497% before closing at 0.564%).
• Tough to pin the moves on fundamentals - some giveback was inevitable given the magnitude of the yield drop, particularly as U.S. stocks rallied hard in the afternoon, forcing a reconsideration of the risk-off/economic slowdown narrative (however brief).
• Periphery spreads finished well off wides, with BTP 10s even tightening.
• Attention turns to the ECB meeting Thursday (our preview went out today).

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 2.3bps at -0.714%, 5-Yr is down 3.2bps at -0.688%, 10-Yr is down 2.4bps at -0.41%, and 30-Yr is down 3bps at 0.058%.
• UK: The 2-Yr yield is up 1.2bps at 0.093%, 5-Yr is up 0.6bps at 0.282%, 10-Yr is up 0.4bps at 0.564%, and 30-Yr is down 2.1bps at 1.01%.
• Italian BTP spread down 0.3bps at 109.6bps / Spanish up 0.8bps at 67.1bps

FOREX: Risk Bounce Stifles JPY Momentum, CAD Recovers

• An extension of Monday's late bounce in global equity indices aided USDJPY back up to just shy of the 110 mark on Tuesday.
• Overall, the dollar index edged out a small win of 0.1% in a mixed day for G10 FX.
• CAD (+0.4%) was the clear outperformer after yesterday's onslaught. USDCAD retraced back to 1.27 having printed a high above 1.28 during Monday's session. CADJPY had a strong squeeze higher after matching/bouncing from the April lows of 85.43. A late recovery in oil prices kept the Canadian dollar on the front foot.
• Most other G10 currencies lost ground to the greenback, with GBP and NZD retreating around 0.35%. The GBPUSD outlook remains bearish with moving average studies pointing south. What appears a clear breach of 1.3669 should reinforce bearish conditions and pave the way for an extension of the bear cycle. 1.3579, a Fibonacci retracement was briefly probed, support below here is 1.3567, the February lows.
• The greenback strengthened just ahead of the WMR fix, but the moves appeared to be more closely following the uptick in both equity markets and Treasury yields seen just beforehand.
• Australian retail sales and BOJ minutes headline the overnight docket before US crude oil inventories in the latter stages of Wednesday. As a reminder the July ECB statement/press conference is on Thursday.