MNI ASIA OPEN: How Long Will Inflation Last?

EXECUTIVE SUMMARY

• MNI INTERVIEW: Fed's Mester: Rates Likely Headed Above Neutral
• MNI INTERVIEW: BOC May Need 75BP June Hike- Ex Adviser Ambler

US

FED: The Federal Reserve likely needs to move monetary policy to a restrictive stance to contain inflation, Cleveland Fed President Loretta Mester told MNI Monday, warning that the Fed's estimate of the nominal longer run fed funds rate of 2% to 3% might still leave policy too accommodative.

• "With inflation as high as it is, and with expectations for inflation above 2%, you need to take into account that -- at least on the short end -- we’re still at an accommodative stance of policy. And even if we get up to 2.5%, depending on what’s happening on the inflation and expected inflation, we may still be accommodative," she said in an interview.
• "When you’re assessing the stance of policy, you have to be also looking at real rates because that’s really what matters for the economy."
• She reiterated her support for two more 50 basis point rate increases in June and July before reassessing whether a "more aggressive" pace will be required to tame price rises.

CANADA

BOC: The Bank of Canada needs to do more to control inflation and could even find itself obliged to hike by 75 basis points on June 1 followed by more tightening to above the neutral rate, former BOC adviser Steve Ambler told MNI.

• Increases of 25bps in March and 50bps in April lag this year's inflation jump, meaning real rates have turned even more negative and signaling the central bank is further behind in a quest to pull demand back in line with supply, Ambler said. Inflation has climbed 1.6 percentage points this year to 6.7%, the fastest since the Bank adopted inflation targets in 1991, and has topped the 2% target for over a year.
• Governor Tiff Macklem raising the 1% overnight rate by 50bps at the next meeting “is pretty much guaranteed and at this point I wouldn’t even be shocked to see a 75-basis-point increase," said Ambler, who also helps lead the C.D. Howe think tank's shadow monetary policy council.

US TSYS Roundup

• No obvious headline trigger, Tsys broke upside range soon after the equity open. Little react to morning data (NY Empire mfg index -11.6, new orders -8.8) with two-way trade/inside range by midmorning.
• Nothing really new from NY Fed Williams espousing 50bp hikes next couple meetings, comment "WE DON'T KNOW EXACTLY HOW LONG INFLATION WILL STAY HIGH" not exactly confidence inspiring.
• MNI exclusive w/ Loretta Mester: "With inflation as high as it is, and with expectations for inflation above 2%, you need to take into account that -- at least on the short end -- we’re still at an accommodative stance of policy. And even if we get up to 2.5%, depending on what’s happening on the inflation and expected inflation, we may still be accommodative," she said in an interview.
• Fed speakers resume Tuesday: Bullard, Harker, Kashkari, Mester, Evans through the session, Chairman Powell headlining at 1400ET.
• Deal-tied flow in the mix Monday with just under $10B swappable corporate issuance lead by $3B Paypal 4pt on the day. Gradual start to Jun/Sep Tsy futures rolling kicked off while June option expiration this Friday also added to volume trade.

OVCERNIGHT DATA

• US NY FED EMPIRE STATE MFG INDEX -11.6 MAY
  
• US NY FED EMPIRE MFG NEW ORDERS -8.8 MAY
• US NY FED EMPIRE MFG EMPLOYMENT INDEX 14.0 MAY
• US NY FED EMPIRE MFG PRICES PAID INDEX 73.7 MAY

• CANADA MAR WHOLESALE SALES +0.3%; EX-AUTOS -0.1%
• CANADA MAR WHOLESALE INVENTORIES +0.4%: STATISTICS CANADA
• CANADIAN MAR MANUFACTURING SALES +2.5% MOM
• CANADA MAR FACTORY INVENTORIES +2.6%; INVENTORY-SALES RATIO 1.58

MARKETS SNAPSHOT

Key late session market levels:

• DJIA up 239.9 points (0.75%) at 32437.52
• S&P E-Mini Future up 12.75 points (0.32%) at 4033.25
• Nasdaq down 38.2 points (-0.3%) at 11766.17
• US 10-Yr yield is down 3.6 bps at 2.8822%
• US Jun 10Y are up 14.5/32 at 119-20
• EURUSD up 0.0025 (0.24%) at 1.0437
• USDJPY down 0.08 (-0.06%) at 129.14
• WTI Crude Oil (front-month) up $3.28 (2.97%) at $113.79
• Gold is up $6.12 (0.34%) at $1817.93

• EuroStoxx 50 down 18.08 points (-0.49%) at 3685.34
• FTSE 100 up 46.65 points (0.63%) at 7464.8
• German DAX down 63.55 points (-0.45%) at 13964.38
• French CAC 40 down 14.91 points (-0.23%) at 6347.77

US TSY FUTURES CLOSE

• 3M10Y -5.08, 185.391 (L: 181.438 / H: 194.839)
• 2Y10Y -2.993, 30.238 (L: 28.687 / H: 33.971)
• 2Y30Y +1.229, 50.47 (L: 46.578 / H: 52.374)
• 5Y30Y +4.333, 25.466 (L: 19.427 / H: 26.465)
• Current futures levels:
• Jun 2Y up 1.375/32 at 105-23.25 (L: 105-20.75 / H: 105-25.25)
• Jun 5Y up 9.25/32 at 113-8 (L: 112-28.25 / H: 113-12.25)
• Jun 10Y up 14.5/32 at 119-20 (L: 119-01.5 / H: 119-27.5)
• Jun 30Y up 24/32 at 139-27 (L: 138-25 / H: 140-13)
• Jun Ultra 30Y up 7/32 at 155-17 (L: 154-24 / H: 156-21)

‌‌US 10Y FUTURES TECH: (M2)‌‌ Corrective Cycle Still In Play

• RES 4: 122-12+ High Apr 4
• RES 3: 121-09 High Apr 14
• RES 2: 121-08+ 50-day EMA
• RES 1: 120-01/120-18+ High Apr 28 / High Apr 27
• PRICE: 119-05+ @ 11:17 BST May 16
• SUP 1: 118-03+/117-08+ Low May 11 / Low May 9 and a bear trigger
• SUP 2: 116-28 0.764 proj of the Mar 7 - 28 - 31 price swing
• SUP 3: 116-11+ 2.0% 10-dma envelope
• SUP 4: 116.00 Round number support

The primary downtrend in Treasuries remains intact, however, a corrective (bullish) cycle established last week remains in play, suggesting potential for short-term gains. The contract has traded above the 20-day EMA and this opens 120-18+, the Apr 27 high. This level represents an important short-term resistance where a break would signal scope for a stronger retracement. Key support and the bear trigger is unchanged at 117-08+.

US EURODOLLAR FUTURES CLOSE

• Jun 22 +0.005 at 98.175
• Sep 22 +0.005 at 97.380
• Dec 22 +0.005 at 96.905
• Mar 23 +0.015 at 96.770
• Red Pack (Jun 23-Mar 24) +0.035 to +0.075
• Green Pack (Jun 24-Mar 25) +0.090 to +0.110
• Blue Pack (Jun 25-Mar 26) +0.10 to +0.110
• Gold Pack (Jun 26-Mar 27) +0.080 to +0.095

SHORT TERM RATES

US DOLLAR LIBOR: Latest settlements

• O/N -0.00342 to 0.82229% (+0.00714 total last wk)
• 1M +0.04886 to 0.93557% (+0.04457 last wk)
• 3M +0.01129 to 1.45500% (+0.04185 last wk) * / **
• 6M +0.02200 to 2.01700% (+0.03043 last wk)
• 12M +0.00472 to 2.65686% (-0.04257 last wk)
• * Record Low 0.11413% on 9/12/21; ** New 2Y high: 1.45500% on 5/16/22

STIR: FRBNY EFFR for prior session:

• Daily Effective Fed Funds Rate: 0.83% volume: $84B
• Daily Overnight Bank Funding Rate: 0.82% volume: $266B

US TSYS: Repo Reference Rates

• Secured Overnight Financing Rate (SOFR): 0.79%, $917B
• Broad General Collateral Rate (BGCR): 0.80%, $356B
• Tri-Party General Collateral Rate (TGCR): 0.80%, $341B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

NY Fed reverse repo usage currently 1,833.152B w/ 92 counterparties vs. prior session's 1,865.287B (all-time high of $1,906.802B on Friday, March 29, 2022).

PIPELINE: $3B Paypal 4Pt Launched

• Date $MM Issuer (Priced *, Launch #)
• 05/16 $3B #Paypal $500M 5Y +110, $1B 10Y +155, $1B 30Y +195, $500M 40Y +215
• 05/16 $1.2B #Virginia Electric Power $600M 5Y +98, $600M 30Y +160
• 05/16 $1.35B #Keycorp $600M 3NC2 +130, $750M 11NC10 +190
• 05/16 $1B #AEP Texas $500M 10Y +185, $500M 30Y +215
• 05/16 $Benchmark Commonwealth Bank of Australia (CBA) 3Y SOFR+60a
• 05/16 $Benchmark Santander 2Y +130, 2Y SOFR+124
• Expected Tuesday:
• 05/17 $Benchmark Export Development Canada 5Y SOFR +36a
• 05/17 $1B OKB 3Y SOFR+27a

EGBs-GILTS CASH CLOSE: Flatter As Hike Expectations Rise

European yields retreated from early highs in the afternoon, with periphery EGB spreads generally wider.

• EGBs flattened in early trade as ECB's Villeroy saying he was eyeing EUR weakness, and expected June's meeting to be "decisive" for normalising policy. 2022 ECB hike expectations closed at fresh highs.
• BTP spreads pushed higher (10Y nearing 195bp) on those remarks, though narrowed over the course of the session. Greece underperformed.
• Gilts strengthened but the short-end underperformed as BoE TSC testimony highlighted familiar themes on growth and inflation concerns.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany:

• Germany: The 2-Yr yield is up 3bps at 0.136%, 5-Yr is up 0.7bps at 0.606%, 10-Yr is down 1.1bps at 0.937%, and 30-Yr is down 1.9bps at 1.104%.
• UK: The 2-Yr yield is down 1.2bps at 1.237%, 5-Yr is down 1.9bps at 1.363%, 10-Yr is down 1.4bps at 1.73%, and 30-Yr is down 2.1bps at 1.977%.
• Italian BTP spread up 0.2bps at 190.6bps / Greek up 5.8bps at 259.7bps

FOREX: Greenback Edges Lower To Start The Week, CAD Tops G10 Leaderboard

• Broadly the US Dollar traded in a fairly tight range on Monday as the USD index looks to finish 0.2% lower after being confined to a 32-pip range on the day.
• At the same time, USDJPY experienced a decent amount of intra-day volatility as markets have become accustomed to over recent weeks. Risk-off flows overnight following the bleak Chinese activity data had prompted a move down to 128.70 for the pair, however these Yen gains were slowly unwound throughout European trade, with the move extending into the early NY session.
• The pair peaked two pips shy of the day’s high at 129.64 before reversing once more to trade around unchanged circa 129.20 approaching the APAC crossover.
• With the Euro still trading close to cycle lows, it is worth noting that technically, EURJPY remains vulnerable with the move lower last week marking an extension of the reversal from Apr 21.
• The cross has breached a number of important S/T support levels and additional weakness at this juncture would turn the focus to an important cluster of support between 132.66 and 1.3220.
• CAD (+0.44%) is the top performer of the majors today despite some signs of moderation in the housing market. Higher oil prices acting as a tailwind for the loonie as well as rising expectations of potentially bolder future action from the BOC. Initial support eyed at the 20-day EMA of 1.2842 for USDCAD will be eyed given the overall bullish outlook in place.
• RBA minutes are scheduled overnight before a busy European and US economic data docket. This includes UK and Eurozone unemployment as well as US retail sales for April.
• Fed Chairman, Jerome Powell, is due to speak on inflation at Wall Street Journal's Future of Everything Festival, in New York. Currently scheduled for 1400ET - audience questions are expected.

Tuesday Data Calendar

Date	GMT/Local	Impact	Flag	Country	Event
17/05/2022	0130/1130			AU	RBA May Meeting Minutes
17/05/2022	0600/0700	***		UK	Labour Market Survey
17/05/2022	0800/1000	**		IT	Italy Final HICP
17/05/2022	0900/1000	**		UK	Gilt Outright Auction Result
17/05/2022	0900/1100	*		EU	Employment
17/05/2022	0900/1100	***		EU	EMU Preliminary Flash GDP Y/Y
17/05/2022	0900/1100	***		EU	EMU Preliminary Flash GDP Q/Q
17/05/2022	1200/0800			US	St. Louis Fed's James Bullard
17/05/2022	1230/0830	***		US	Retail Sales
17/05/2022	1255/0855	**		US	Redbook Retail Sales Index
17/05/2022	1315/0915	***		US	Industrial Production
17/05/2022	1315/0915			US	Philadelphia Fed's Patrick Harker
17/05/2022	1400/1000	*		US	Business Inventories
17/05/2022	1400/1000	**		US	NAHB Home Builder Index
17/05/2022	1505/1605			UK	BOE Cunliffe Fireside Chat
17/05/2022	1530/1130	**		US	US Treasury Auction Result for 52 Week Bill
17/05/2022	1630/1230			US	Minneapolis Fed's Neel Kashkari
17/05/2022	1700/1900			EU	ECB Lagarde Speech at Soroptimist International Club
17/05/2022	1800/1400			US	Fed Chair Jerome Powell
17/05/2022	1830/1430			US	Cleveland Fed's Loretta Mester
17/05/2022	2245/1845			US	Chicago Fed's Charles Evans