MNI ASIA OPEN: Fed DOT Shift Hammers 5s, Taper Likely in November

EXECUTIVE SUMMARY

• MNI: Fed Sees Taper 'Soon'; Hawkish Dots Hint at 2022 Hike
• MNI BRIEF: US Existing Home Sales Down on Prices, Inventory
• MNI INTERVIEW: Canada New Tax Message Will 'Punish' Business
• MNI: China May Prioritise Evergrande USD Debt, Retail Investors
• US TSY: Former Secretaries of the Treasury Send Letter to Congressional Leadership on the Debt Limit
• GOP HOUSE LEADERS AGAINST BIPARTISAN INFRASTRUCTURE BILL: AXIOS

US

FOMC: The Federal Reserve on Wednesday said it will "soon" start reducing its USD120 billion monthly bond purchases if the job market keeps making steady progress as officials expect, while official forecasts hinted at a possible rate hike as early as next year.

• "If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted," the Fed said in its post-meeting statement.
  
• Fed officials, in their quarterly forecasts, were evenly split on the prospect of a rate hike next year, while many participants were penciling in more than one rate increase for 2023. Still, the median forecast was for the federal funds rate to end next year at 1%.
• Ex-Fed officials told MNI to expect a nod to a taper that might come as early as November in the FOMC statement Wednesday. MNI also reported the dot plots would likely show a hawkish tilt, including stronger support for a rate increase next year.

US: TD and Citi on Funding/ Debt Ceiling Bill: Though House Democrats passed a dual stopgap funding (through Dec 3)/debt ceiling (through 2022) continuing resolution late Tuesday, Republicans remain opposed to the CR as long as the two measures are intertwined.

• TD analysts believe the "fight over the debt ceiling is likely to go down to the wire again as it is complicated by the partisan reconciliation bill and the need to fund the government past September 30th. We estimate that the debt ceiling X-date will be reached around the week of October 25th, leaving Congress little time to act.
• TD said they expect the "debt ceiling to be raised by Democrats using reconciliation or by changing filibuster rules. However, this will likely necessitate a smaller partisan fiscal package, likely in the $1.5-2tn range."
• Citi analysts expect the CR to fail in the senate with a shutdown "now the most likely outcome. The debt limit will likely be raised or suspended in early October, but market concern may grow in coming days as the prospect for a shutdown and uncertain debt ceiling resolution grow."
• Citi posits the "infrastructure bill vote promised on September 27th looks increasingly likely to fail or be delayed, although the bill will most likely still pass into law."

US TSYS: Steady FOMC, But Likely Taper in November Leaves Tsys Mixed

Fed left rate steady while main takeaway from Powell's press conference is that the taper is very likely going to be announced in November barring a poor September jobs report. "That could come as soon as the next meeting," he said, adding that the taper could end sometime in the middle of 2022. MNI had reported before the meeting the Fed would likely signal such a timeline at this meeting.

• Tsy futures trade mixed after the bell-- rotating around near steady 10s. Curves broadly flatter as 30Y Bond trades near late session highs, short end under heavy pressure.
• The 5s30s yield curve fell below 100.0bps to 96.726 low -- level last seen around July 2020. One desk noted 2-3s "are actually up more in yield" due to the "slight movement in the dots -- as front end will be affected by eventual hikes" while the long end outperforms on "move toward 'fighting' inflation."
• Overnight reverse repurchase agreement operations: "at an offering rate of 0.05 percent and with a per-counterparty limit of $160 billion per day, twice prior limit to "help ensure continued support for effective policy implementation."
• Focus turns to Thu's weekly claims (+320k est vs. 332k prior), Markit PMIs, Fed exits blackout Thu evening.
• Currently, 2-Yr yield is up 2.2bps at 0.2363%, 5-Yr is up 2.6bps at 0.8553%, 10-Yr is down 1.2bps at 1.3108%, and 30-Yr is down 2.4bps at 1.8317%.

CANADA

Canada's new government may introduce more unwelcome and punishing business taxes as it seeks to get deficits under control, Perrin Beatty, Chamber of Commerce president and a former Treasury Board and revenue minister in the 1980's, told MNI.

• Monday's election returned the Liberal Party to power, although again with a minority of seats and reliant on the NDP and Bloc Quebecois, two parties who have sought new levies on major corporations. Liberal leader and Prime Minister Justin Trudeau campaigned on a new tax on large banks and insurers, having come to power in 2015 raising taxes on richer households, before later introducing a carbon tax. For more see MNI Policy main wire at 1111ET.

OVERNIGHT DATA

• US AUG EXISTING HOMES SALES -2% MOM TO 5.88M SAAR; -1.5% YOY
  
• NAR: MEDIAN EXISTING-HOME PRICE +14.9% YOY TO $356,700
• NAR: INVENTORY -1.5% MOM TO 1.29M, -13.4% YOY FROM 1.49M
• NAR: UNSOLD INVENTORY UNCHANGED MOM AT 2.6-MONTH SUPPLY

• US MBA: MARKET COMPOSITE +4.9% SA THRU SEP 17 WK
• US MBA: REFIS +7% SA; PURCH INDEX +2% SA THRU SEP 17 WK
• US MBA: UNADJ PURCHASE INDEX -13% VS YEAR-EARLIER LEVEL
• US MBA: 30-YR CONFORMING MORTGAGE RATE UNCHANGED AT 3.03%

MARKET SNAPSHOT

Key late session market levels:

• DJIA up 391.34 points (1.15%) at 34379.58
• S&P E-Mini Future up 47 points (1.08%) at 4398
• Nasdaq up 165.7 points (1.1%) at 14926.64
• US 10-Yr yield is down 1 bps at 1.3125%
• US Dec 10Y are down 2/32 at 133-4
• EURUSD down 0.0029 (-0.25%) at 1.1707
• USDJPY up 0.6 (0.55%) at 109.77
• Gold is down $6.83 (-0.38%) at $1773.21

• EuroStoxx 50 up 52.68 points (1.29%) at 4150.19
• FTSE 100 up 102.39 points (1.47%) at 7083.37
• German DAX up 158.21 points (1.03%) at 15506.74
• French CAC 40 up 84.27 points (1.29%) at 6637

US TSY FUTURES CLOSE

• 3M10Y -2.876, 127.104 (L: 126.089 / H: 131.594)
• 2Y10Y -3.901, 106.57 (L: 106.537 / H: 111.999)
• 2Y30Y -5.308, 158.48 (L: 158.41 / H: 165.467)
• 5Y30Y -5.385, 96.945 (L: 96.726 / H: 103.443)
• Current futures levels:
• Dec 2Y down 1.875/32 at 110-3.25 (L: 110-02.75 / H: 110-05.125)
• Dec 5Y down 4.25/32 at 123-11 (L: 123-07 / H: 123-17)
• Dec 10Y steady at at 133-6 (L: 132-29.5 / H: 133-12.5)
• Dec 30Y up 18/32 at 164-10 (L: 163-12 / H: 164-11)
• Dec Ultra 30Y up 1-3/32 at 200-31 (L: 199-07 / H: 201-01)

US EURODOLLAR FUTURES CLOSE

• Dec 21 +0.005 at 99.820
• Mar 22 steady at 99.850
• Jun 22 -0.010 at 99.805
• Sep 22 -0.025 at 99.70
• Red Pack (Dec 22-Sep 23) -0.055 to -0.04
• Green Pack (Dec 23-Sep 24) -0.055 to -0.045
• Blue Pack (Dec 24-Sep 25) -0.045 to -0.015
• Gold Pack (Dec 25-Sep 26) -0.005 to +0.030

Short Term Rates

US DOLLAR LIBOR: Latest settlements

• O/N +0.00575 at 0.07250% (+0.00175/wk)
• 1 Month +0.00150 to 0.08325% (-0.00025/wk)
• 3 Month +0.00087 to 0.12925% (+0.00538/wk) ** Record Low 0.11413% on 9/12/21
• 6 Month +0.00212 to 0.15550% (+0.00325/wk)
• 1 Year +0.00112 to 0.22525% (+0.00088/wk)

• Daily Effective Fed Funds Rate: 0.08% volume: $70B
• Daily Overnight Bank Funding Rate: 0.07% volume: $277B

• Secured Overnight Financing Rate (SOFR): 0.05%, $894B
• Broad General Collateral Rate (BGCR): 0.05%, $377B
• Tri-Party General Collateral Rate (TGCR): 0.05%, $353B
• (rate, volume levels reflect prior session)

• No buy operation scheduled due to FOMC
• Next scheduled purchases
• 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, Fourth Consecutive Record High

NY Fed reverse repo usage climbs to new record high of 1,283.281B from 77 counter-parties vs. Tuesday's record $1,240.494B.

EGBs-GILTS CASH CLOSE: Italy Rallies As Market Awaits Fed, BoE

Bunds and Gilts strengthened slightly Wednesday, in a largely noncommittal session for European FI ahead of the Federal Reserve decision in the evening and the Bank of England Thursday.

• Italy was the standout performer, with 10Y spreads falling through the 100bp mark vs Germany to the tightest level since April on headlines that Italy would skip selling debt via syndication this autumn (though as MNI pointed out, it's unclear why this was a major surprise).
• ECB's Muller noted that the central bank could boost regular QE purchases after PEPP concludes, though later clarified "I am not sure if increasing the volume of APP purchases in the spring is the best way to avoid a cliff effect."
• Apart from BoE Thursday, flash PMIs will be in focus.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 0.1bps at -0.711%, 5-Yr is down 0.1bps at -0.634%, 10-Yr is down 0.7bps at -0.324%, and 30-Yr is down 0.8bps at 0.165%.
• UK: The 2-Yr yield is unchanged at 0.279%, 5-Yr is down 0.3bps at 0.482%, 10-Yr is down 0.8bps at 0.799%, and 30-Yr is down 0.1bps at 1.118%.
• Italian BTP spread down 2.5bps at 98.8bps / Spanish ad down 0.6bps at 63.6bps

FOREX: Initial Greenback Weakness Reverses, DXY Makes One-Month Highs

• After some initial choppy price action, greenback weakness resulted across the board following the release of the September FOMC decision/statement. The Dollar Index made fresh lows for the week in the aftermath of the release, briefly touching below the 93.00 mark.
• Referencing the substantial progress for the labor market during the press conference, Chair Powell was clear that the test could be met by the following meeting. Adding that tapering ending around mid-2022 may be appropriate was enough to bolster a greenback recovery.
• The DXY surged throughout the press conference, making new highs for the session and then extending to the week's best levels and the highest point since August 23.
• Particular weakness for the Japanese Yen with equity indices in the green saw USDJPY bouncing significantly from 109.11 support once more to trade 0.55% higher on Wednesday.
• EURUSD echoed broad dollar sentiment, breaching both sides of the week's range and eventually breaking below 1.1700 support. This opens key support at 1.1664, Aug 20 low and an important bear trigger, a break of which would strengthen a medium-term technical bearish case.
• CAD the best performing G10 currency, despite the weaker dollar. Further catch up with recent moves in oil prices in play here as well as a relief rally following Monday's election. CADJPY has firmed 1.2%, approaching its 200-day moving average at 86.42.
• Improved risk sentiment has outweighed the broader moves in the dollar with AUD and NZD also around 0.3% higher, bucking a recent string of losing days.
• Central Bank meetings continue tomorrow with the SNB and the BOE decisions/statements. On the data front, European Flash PMIs are scheduled before Canadian Retail Sales and US unemployment claims headline the NY session docket.