MNI ASIA OPEN: Higher Tsy Ylds Fade Taper Talk on Wed' FOMC

EXECUTIVE SUMMARY

• MNI STATE OF PLAY: Fed To Advance Tapering Debate At July Meet
• FED: NatWest: Powell's Main Message Will Be "No Rush"
• FED: TD: FOMC To Emphasize More Progress Is Required
• WHITE HOUSE SAYS "NO SIGNIFICANT SIGNS" OF ECONOMIC IMPACT FROM DELTA VARIANT, Rtrs
• CDC to Recommend Vaccinated People Resume Wearing Masks in Certain Public Indoor Settings, DJ
• CDC Recommendation for Areas With High or Substantial Virus Transmission, DJ

US

FED: Investors will watch Fed Chair Jerome Powell's press conference Wednesday for evolving assessments on inflation and labor market progress, as officials continue to hash out how and when to wind down asset purchases.

• Since they last met in June, officials likely pushed up their inflation forecasts further after CPI surprised to the upside last month, rising 5.4% from a year earlier. But views differ over how transitory supply-side disruptions will prove.
  
• No announcement on tapering is expected at this week's meeting, and there will be no update of officials' economic projections and the rate hike timeline.
• The core of the FOMC maintains that the recent jump in prices is tied to the reopening of the economy and that inflation will return to 2% next year, urging patience on tightening. The proliferation of the Delta variant of Covid-19 in recent weeks, adding to downside risks for growth, reinforces their case. For more see MNI Policy main wire at 0620ET.

OVERNIGHT DATA

• US JUN DURABLE NEW ORDERS +0.8%; EX-TRANSPORTATION +0.3%
  
• US MAY DURABLE GDS NEW ORDERS REV TO +3.2%
• US JUN NONDEF CAP GDS ORDERS EX-AIR +0.5% V MAY +0.5%

• US MAY FHFA HPI SA +1.7% V +1.8% APR; +18.0% Y/Y

• US REDBOOK: JUL STORE SALES +15.0% V YR AGO MO
• US REDBOOK: STORE SALES +16.0% WK ENDED JUL 24 V YR AGO WK
• US REDBOOK: WILL RESUME MONTH-TO-MONTH DATA COMPARISON IN FEB 2022

• U.S. JULY CONSUMER CONFIDENCE INDEX 129.1

• Richmond Fed: Jul Manufacturing Index 27, Jun revision 26 from 22

MARKETS SNAPSHOT

Key late session market levels

• DJIA down 165.88 points (-0.47%) at 34978.59
• S&P E-Mini Future down 33.75 points (-0.76%) at 4380.5
• Nasdaq down 240.5 points (-1.6%) at 14598.93
• US 10-Yr yield is down 5.4 bps at 1.2361%
• US Sep 10Y are up 8.5/32 at 134-15
• EURUSD up 0.0027 (0.23%) at 1.1832
• USDJPY down 0.7 (-0.63%) at 109.69
• WTI Crude Oil (front-month) down $0.1 (-0.14%) at $71.80
• Gold is up $3.57 (0.2%) at $1801.24

European bourses closing levels:

• EuroStoxx 50 down 37.76 points (-0.92%) at 4064.83
• FTSE 100 down 29.35 points (-0.42%) at 6996.08
• German DAX down 99.85 points (-0.64%) at 15519.13
• French CAC 40 down 46.68 points (-0.71%) at 6531.92

US TSY SUMMARY: Yields Ebb in Lead-Up to FOMC

Tsys rallied Tuesday, weaker equities triggered by China stocks overnight (Shanghai Comp down 2.5% at 3,381.18 CSI 300 down 3.5% at 4,751.31) providing an early tail wind on an otherwise muted, pre-FOMC session.

• Yield curves broadly flatter w/30Y bonds holding early session highs after big miss on Durables (+0.8% vs. +2.1% exp -- softened somewhat by upward revision for prior: +3.2% vs. 2.3%). Trading desks reported carry-over buying in 2s-5s, two-way in 10s and more recently in 30s.
• Tsy futures held near session highs after $61B 5Y note (91282CCP4) auction tailed slightly: .01bp: high yield of 0.710% vs. 0.709% WI. Bid-to-cover 2.36x just over 5 month average of 2.35x. Indirect take-up climbed to 58.07% vs. 57.62% in June (59.01% 5M avg); direct bidder take-up slipped to 17.75% vs. 18.09% last month (5M avg of 16.29%); primary dealer take-up: 24.18% was still shy of the 5-month average of 24.70%. The next 5Y auction is tentatively scheduled for August 25.
• Focus turns to Wed's FOMC policy annc, no change in rate expected but many sell-side analysts anticipate more discussion regarding tapering.

MONTH-END EXTENSIONS: Preliminary Barclays/Bbg Extension Estimates for US

Preliminary forecast summary compared to avg increase for prior year and same time in 2020. TIPS 0.16Y; US Gov infl-linked 0.23Y.

SHORT TERM RATES

US DOLLAR LIBOR: Latest Settles

• O/N -0.00012 at 0.08088% (+0.00075/wk)
• 1 Month +0.00288 to 0.09013% (+0.00400/wk)
• 3 Month -0.00200 to 0.12963% (+0.00075/wk) ** (Record Low: 0.11800% on 6/14)
• 6 Month +0.00125 to 0.15850% (+0.00000/wk)
• 1 Year +0.00037 to 0.23900% (-0.00237/wk)

• Daily Effective Fed Funds Rate: 0.10% volume: $73B
• Daily Overnight Bank Funding Rate: 0.08% volume: $260B

• Secured Overnight Financing Rate (SOFR): 0.05%, $881B
• Broad General Collateral Rate (BGCR): 0.05%, $364B
• Tri-Party General Collateral Rate (TGCR): 0.05%, $342B
• (rate, volume levels reflect prior session)

• Tsy 10Y-22.5Y, $1.401B accepted vs. $2.859B submission
• Next scheduled purchases
• Wed 7/28 No buy-operation scheduled due to FOMC
• Thu 7/29 1010-1030ET: Tsy 22.5Y-30Y, appr $2.025B
• Fri 7/30 1010-1030ET: Tsy 2.25Y-4.5Y, appr $8.425B

FED: Reverse Repo Operation

NY Fed reverse repo usage climbs to $927.419B from 71 counterparties vs. $891.203B on Monday (compares to June 30 record high of $991.939B).

PIPELINE: Over $7B High-Grade Debt Priced Monday

• Date $MM Issuer (Priced *, Launch #)
• $7.35B priced Monday
• 07/26 $2.5B *Temasek $750M 10Y +40, $750M 20Y +65, $1B 40Y +85
• 07/26 $1.5B *Royal Bank of Canada $850M 3Y +30, $650M 3Y FRN/SOFR+36
• 07/26 $1.5B *Novelis Corp $750M 5NC2 3.25%, $750M 10NC5 3.875%
• 07/26 $850M *AutoNation $400M 7Y +95, $450M 10Y +115
• 07/26 $1B Jefferies Finance 7NC3 investor call
• Later in week:
• 07/28 $2.75B Air Canada 5NC, 8NC4.5, investor calls Monday
• 07/?? $1.5B Venture Global 8NC, 10NC

EGBs-GILTS CASH CLOSE: Bund Yields Close At 5+ Month Lows

Bund yields (5Y through 30Y) closed at the lowest levels since February, with Gilts also strengthening and bull flattening Tuesday.

• Core FI strength accelerated into the cash close, as equities re-tested the session's weakest levels. The theme throughout the day was China's regulatory crackdown hitting local stocks, with spillovers into US and European markets. Periphery spreads widened.
• Comparatively little on the data front Tuesday. In supply, the UK sold GBP3bln of Gilt, while Italy sold E3.75bln of BTP short-term.
• On Wednesday, Germany sells E2.5bln of Bund, while we get some confidence data (German GfK, French consumer confidence, Italian manufacturing/consumer confidence). No central bank speakers scheduled, but the Federal Reserve meeting will be in focus.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 1.3bps at -0.746%, 5-Yr is down 1.9bps at -0.722%, 10-Yr is down 2.3bps at -0.441%, and 30-Yr is down 2.7bps at 0.037%.
• UK: The 2-Yr yield is down 0.4bps at 0.076%, 5-Yr is down 0.7bps at 0.271%, 10-Yr is down 1.3bps at 0.558%, and 30-Yr is down 1.9bps at 0.972%.
• Italian BTP spread up 1.7bps at 106.4bps/ Spanish up 1.5bps at 71.3bps

FOREX: USDCNH Extends Gains As Safe Havens Back In Favour

• The offshore Yuan came under persistent pressure on Tuesday, extending losses throughout the US session. USDCNH broke through firm resistance at 6.50 in early trade and consolidated gains ahead of the US cash equity open.
• Steady CNH supply saw losses extend, aided by headlines relating to Chinese software firm Hello withdrawing their plans for a US IPO, further weighing on sentiment. USDCNH remains close to the highs of the day around 6.5280 with some analysts now expecting a push towards the 2021 highs at 6.5876.
• Sentiment certainly filtered through to other major G10 currencies, with the Japanese Yen the notable beneficiary. USDJPY sunk back through 110 and experienced 0.7% losses to reach 109.60. More significant moves seen in the crosses with AUDJPY (-1.00%) and in particular NZDJPY (-1.36%) bearing the brunt of the risk sell-off.
• Links to the Chinese economy created headwinds for the New Zealand Dollar, matching CNH as the worst performing currency against the greenback, with 0.7% losses on the day.
• GBPUSD shone once again, rising 0.55% and likely to close right on the highs just below 1.39. A break of yesterday's highs through 1.3833 sparked a quick 50 pip spike for cable, coinciding with a decent uptick in futures volumes approaching the WMR fix. The pair now trades within close proximity to the 100-day MA at 1.3925.
• The market's focus now turns to the July Fed statement and press conference, due tomorrow. The FOMC will use the July meeting to debate its strategy to taper asset purchases (including timing, pace, and composition).
• Also on Wednesday, both Australian and Canadian CPI data will be published.