MNI ASIA OPEN: Lead-Up to Latest FOMC Policy Annc

EXECUTIVE SUMMARY

• MNI: Fed Dots To Signal Faster Tightening Cycle - Ex-Officials
• US: Majority Leader Hoyer: House To Vote On Debt Limit Suspension Next Week
• Secretary of the Treasury Janet L. Yellen Op-Ed: "Congress, raise the debt limit -- We are finally emerging from the pandemic crisis, Let's not plunge ourselves into a financial one."

US

FED: The Federal Reserve on Wednesday is likely to signal a more aggressive approach to tightening monetary policy coming out of the pandemic, with a fresh dot plot that may show growing support for lifting interest rates next year and hikes once a quarter in 2024, former officials told MNI.

• The FOMC meets Tuesday and Wednesday and is expected to affirm its commitment to start winding down pandemic-era stimulus policies this year by paring its USD120 billion monthly asset purchase program. Rate hikes will follow when more stringent employment and inflation objectives are met, with heightened risks a hike could come as soon as next year. Delta variant uncertainty could see some FOMC members hold off from advancing rate hike dots, former officials said.
  
• "I expect the distribution among participants to spread out more and for the median to move a bit up in time into 2022," former Fed Vice Chair Alan Blinder said in an interview. For more see MNI Policy main wire at 1240ET.

CANADA: ELECTION WATCH

• Most likely outcome in election Monday: Liberal chance of winning a minority of seats 59% vs prior 56% according to CBC Poll Tracker
• Conservatives chance of winning the most seats 27% vs prior 28%
• Chance of a majority government 12% vs prior 14% for Liberals, down from 45% at start of campaign, and 1% for Conservatives
• Conservative Leader Erin O'Toole may face more questions about Alberta's Conservative Premier imposing tougher Covid regulations after cases spiked following a period of laxer restrictions
• Former US President Obama tweeted support for Liberal PM Trudeau Thurs
• Some polls have shown that while Liberals about tied in national level polls, they have a decent lead in seat-rich Ontario; Conservatives worried about losing votes in swing ridings to right-wing People's Party of Canada
• Leaders have started to cut down on media events in final days of campaign, pitches starting to focus more on fears of what other party will do than new policy ideas
• Outsized mail-in voting suggests some results may be delayed on election night, Sept 20

OVERNIGHT DATA

UMICHIGAN U.S. CONSUMER SENTIMENT 71.0 SEPT (72.0 EXP., 70.3 PRIOR)

MARKET SNAPSHOT

Key late session market levels:

• DJIA down 168.71 points (-0.49%) at 34585.4
• S&P E-Mini Future down 41 points (-0.92%) at 4423.75
• Nasdaq down 156.8 points (-1%) at 15026.12
• US 10-Yr yield is up 3.1 bps at 1.3684%
• US Dec 10Y are down 10/32 at 132-25
• EURUSD down 0.0037 (-0.31%) at 1.173
• USDJPY up 0.2 (0.18%) at 109.93
• WTI Crude Oil (front-month) down $0.59 (-0.81%) at $72.03
• Gold is down $0.52 (-0.03%) at $1753.25

• EuroStoxx 50 down 39.03 points (-0.94%) at 4130.84
• FTSE 100 down 63.84 points (-0.91%) at 6963.64
• German DAX down 161.58 points (-1.03%) at 15490.17
• French CAC 40 down 52.4 points (-0.79%) at 6570.19

US TSYS: Tsy Support Breached, November Taper Announcement Back on

Tsys weaker but off midmorning lows by the closing bell. Following German Bund lead initially, sell-off in Tsys continued, 10Y futures falling through a couple levels of technical support:

• Dec 10Y fell to new session low of 132-20.5 (-14.5), next support 132-12 -- 0.764 projection of the Aug 4/11/17 price swing. Break reinforces a bearish theme and suggests potential for a deeper sell-off. A resumption of weakness would open 132-12, a Fibonacci projection. Next support if sell-off really accelerates: 131-27+ 1.00 proj of the Aug 4 - 11 - 17 price swing.
• Moderate volumes, TYZ>1.29M, position adjustments ahead next week's FOMC (dealers talking up November taper announcement), tight stops triggered, option and incoming Tsy supply selling added to move.
• Eurodollar highlight: >+50,000 EDZ4 (Blue Dec'24) 98.535 helped future lead volume across the strip at just over 200k (adds to Wed's +40,000 EDZ4 from 98.61 to .615).
• Likely unwinding short leg of over 50,000 Green/Blue Dec spds bought/blocked on June 22 at .435 (smaller around .385 this week). Additional EDZ'4 associated spds include EDZ2/EDZ4 bought in good size at 1.185 around the June FOMC -- a recommendation by Morgan Stanley trading desks say, that collapsed to around 1.050 (an re-recommended as a buy).
• Large 10Y options flows ahead next week's October option expiration noted.
• By the close the 2-Yr yield is up 0.4bps at 0.2237%, 5-Yr is up 2.4bps at 0.8648%, 10-Yr is up 3.1bps at 1.3684%, and 30-Yr is up 2.5bps at 1.9084%.

US TSY FUTURES CLOSE

• 3M10Y +3.574, 133.296 (L: 128.118 / H: 134.83)
• 2Y10Y +2.823, 114.274 (L: 110.26 / H: 115.436)
• 2Y30Y +2.261, 168.274 (L: 164.487 / H: 169.57)
• 5Y30Y +0.056, 104.2 (L: 102.372 / H: 105.007)
• Current futures levels:
• Dec 2Y down 0.625/32 at 110-4 (L: 110-03.75 / H: 110-04.625)
• Dec 5Y down 5/32 at 123-9 (L: 123-06.5 / H: 123-14)
• Dec 10Y down 10/32 at 132-25 (L: 132-20.5 / H: 133-04.5)
• Dec 30Y down 26/32 at 162-19 (L: 162-08 / H: 163-19)
• Dec Ultra 30Y down 1-6/32 at 197-27 (L: 197-09 / H: 199-16)

US EURODOLLAR FUTURES CLOSE

• Dec 21 +0.005 at 99.820
• Mar 22 steady at 99.850
• Jun 22 steady at 99.810
• Sep 22 steady at 99.720
• Red Pack (Dec 22-Sep 23) -0.025 to -0.005
• Green Pack (Dec 23-Sep 24) -0.04 to -0.03
• Blue Pack (Dec 24-Sep 25) -0.055 to -0.04
• Gold Pack (Dec 25-Sep 26) -0.06 to -0.055

Short Term Rates

US DOLLAR LIBOR: Latest settlements

• O/N -0.00350 at 0.07075% (-0.00088/wk)
• 1 Month -0.00388 to 0.08350% (-0.00038/wk)
• 3 Month +0.00188 to 0.12388% (+0.00813/wk) ** Record Low 0.11413% on 9/12/21
• 6 Month +0.00275 to 0.15225% (+0.00288/wk)
• 1 Year +0.00013 to 0.22438% (+0.00188/wk)

• Daily Effective Fed Funds Rate: 0.08% volume: $66B
• Daily Overnight Bank Funding Rate: 0.07% volume: $256B

• Secured Overnight Financing Rate (SOFR): 0.05%, $905B
• Broad General Collateral Rate (BGCR): 0.05%, $387B
• Tri-Party General Collateral Rate (TGCR): 0.05%, $367B
• (rate, volume levels reflect prior session)

• TIPS 1Y-7.5Y, $2.001B accepted vs. $6.204B submission
• Next scheduled purchases
• Mon 9/20 1010-1030ET: Tsy 7Y-10Y, appr $3.225B
• Tue 9/21 1010-1030ET: TIPS 7.5Y-30Y, appr $1.225B
• Wed 9/22 No buy operation scheduled due to FOMC
• Thu 9/23 1010-1030ET: Tsy 10Y-22.5Y, appr $1.425B
• Fri 9/24 1010-1030ET: Tsy 4.5Y-7Y, appr $6.025B

FED: Reverse Repo Operation, New Record High

NY Fed reverse repo usage climb to new record high of 1,218.303B from 79 counter-parties vs. $1,147.494B Thursday. Prior record high was $1,189.616B set Tuesday, Aug 31.

PIPELINE: Over $65B High-Grade Debt Issued on Wk

• Date $MM Issuer (Priced *, Launch #)
• 09/17 No new $Benchmark issuance on tap as yet
• $7.36B Priced Thursday, $65.71B/wk
• 09/16 $6.16B *Industrial and Commercial Bank of China (ICBC) Undated NC5 AT1 Capital bonds 3.2%
• 09/16 $600M *Hartford Financial WNG 30Y +107
• 09/16 $600M *Indonesia's BNI PerpNC5.5 4.3%

EGBs-GILTS CASH CLOSE: Poor Close To The Week

European bonds lost further ground entering the weekend, with Gilts underperforming but bear steepening across the curves. Peripheral spreads traded mixed, with Italy underperforming.

• 10Y Bund yields rose to the highest levels since early July. Losses extended on technical breaks in the future, with longs appearing to exit.
• A variety of catalysts at play, with much of the session's focus on an FT report saying that ECB chief econ Lane told analysts that the bank expects to reach the 2% inflation target by 2025.
• The ECB denied the report, and meanwhile ECB speakers including Kazaks and Makhlouf spoke on upside inflation risks.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 0.8bps at -0.695%, 5-Yr is up 1.4bps at -0.607%, 10-Yr is up 2.2bps at -0.28%, and 30-Yr is up 2.2bps at 0.217%.
• UK: The 2-Yr yield is up 0.4bps at 0.289%, 5-Yr is up 1.6bps at 0.506%, 10-Yr is up 2.9bps at 0.846%, and 30-Yr is up 3.4bps at 1.152%.
• Italian BTP spread up 0.8bps at 100.4bps / Spanish down 0.6bps at 63.5bps

FOREX: US Dollar Cements Strong Weekly Gain, DXY At Three-Week Highs

• The greenback consolidated most of Thursday's advance throughout early trade on Friday before extending during US hours.
• The dollar index looks set to close around 0.3% higher on the session, tallying weekly gains of 0.7% and rising to three-week highs for the index.
• Dollar gains were broad based amid higher US yields, however, with weakness in both equity indices and broad commodities, NZD and CAD and NOK were notable underperformers, all retreating over 0.5%.
• EURUSD continued its bearish trend with Thursday's sell-off confirming a resumption of bearish technical pressure. This narrows the gap with key support at 1.1664, the Aug 20 low, a break of which would strengthen a medium-term bearish case.
• As previously noted, USDCHF broke the July highs of 0.9275 and the downtrend from the 2020 high which has resulted in the pair trading at the best levels since April. The break has prompted a strong move to the initial target of 0.9330, the 50% retracement of the 2020 High – 2021 Low price swing.
• Market focus will be firmly on the FOMC decision/statement on Wednesday next week. Other notable central bank meetings include the Bank of Japan, Swiss National Bank and the Bank of England.