MNI ASIA OPEN: Whippy Trade Into Month End

EXECUTIVE SUMMARY

• MNI: Fed's Mester Warns Against Complacency on Inflation
• MNI BRIEF: Fed’s Powell-Hard To Hike Without Hit To Growth
• MNI: NY Fed Bond Distress Gauge Rising But Still Healthy
• POWELL: WE UNDERSTAND BETTER HOW LITTLE WE UNDERSTAND INFLATION, Bbg
  
• POWELL: I'M OUT OF THE BUSINESS OF GIVING FISCAL POLICY ADVICE, Bbg

US

FED: Supply shocks during the Covid-19 pandemic could raise inflation expectations in a way that would prompt a policy response from the Federal Reserve and other central banks, challenging conventional wisdom that supply shocks have little impact on longer-term inflation, Cleveland Fed President Loretta Mester said Wednesday.

• U.S. inflation expectations at the five-to-10-year horizon are rising, and households' survey responses are becoming more dispersed, she said in remarks prepared for the ECB conference in Sintra. Persistently high gas and food prices also signal some risk that the longer-term inflation expectations of households and businesses will continue to rise.
• Econometric models at the Fed suggest "the more costly error is assuming inflation expectations are anchored when they are not," which would lead to a looser setting of policy than warranted and a vicious cycle for inflation, she said. For more see MNI Policy main wire at 0631ET.

US TSYS: Real Yields Climb Vs. Nominals

Rates trading near top end of the range after the bell, whippy first half trade gave way to better buying in the long end into midday - bonds trading sideways through the second half, USU2 +1-21 at 136-26. Despite the drop in nominal US yields, real yields sit at 69bps, up more than 10bps since early Monday levels and the highest since Mar-2019. Yield curves mixed after the bell, 2s10s -1.605 at 4.183, well off early 7.177 early high, 5s30s +1.365 at 5.776.

• Early domestic and foreign data in play. Rates gapped higher overnight following much weaker than expected German CPI for North Rhine (0.1% MoM; EST 0.9%; 7.5% YoY; EST 8.1%), blipped higher after prelim German CPI gained less than anticipated (+0.1% MoM vs. +0.4%).
• Tsys resumed march higher after Q1 GDP declines slightly more than expected (-1.6% vs. -1.5% est).
• Fed Chair Powell at ECB forum in Sintra: Hard to hike rates "without a hit to growth" or boosting unemployment. “There’s no guarantee that we can do that,” Powell said. “It’s something that’s going to be quite challenging.” The Fed raised rates by 75 basis points this month and has signaled substantial further increases to come.
• Cross asset: US$ extended on Tuesday’s bounce and the USD index has comfortably breached last week’s highs, rising a half a percent on the day.
• Crude oil prices are ending a three-session rally by sliding circa 2% despite US crude inventories falling by more than expected in EIA data, as growth concerns mount with Treasuries rallying solidly.

OVERNIGHT DATA

• US Q1 GDP -1.6%

• US MBA: MARKET COMPOSITE +0.7% SA THRU JUN 24 WK

MARKETS SNAPSHOT

Key late session market levels:

• DJIA up 73.29 points (0.24%) at 31022.27
• S&P E-Mini Future down 5.25 points (-0.14%) at 3820.5
• Nasdaq down 23 points (-0.2%) at 11159.01
• US 10-Yr yield is down 7.5 bps at 3.0966%
• US Sep 10Y are up 25/32 at 117-15.5
• EURUSD down 0.0083 (-0.79%) at 1.0436
• USDJPY up 0.4 (0.29%) at 136.54
• WTI Crude Oil (front-month) down $2.02 (-1.81%) at $109.74
• Gold is down $2.25 (-0.12%) at $1817.77

US TSY FUTURES CLOSE

• 3M10Y -7.929, 132.276 (L: 128.489 / H: 139.251)
• 2Y10Y -2.198, 3.59 (L: 1.662 / H: 7.177)
• 2Y30Y -0.974, 15.536 (L: 13.195 / H: 20.064)
• 5Y30Y +1.365, 5.776 (L: 3.707 / H: 8.027)
• Current futures levels:
• Sep 2Y up 3.75/32 at 104-22.875 (L: 104-18 / H: 104-23.875)
• Sep 5Y up 15.5/32 at 111-16.75 (L: 111-02.25 / H: 111-17.75)
• Sep 10Y up 25.5/32 at 117-16 (L: 116-26.5 / H: 117-17)
• Sep 30Y up 1-23/32 at 136-28 (L: 135-13 / H: 136-31)
• Sep Ultra 30Y up 2-15/32 at 151-27 (L: 149-19 / H: 152-01)

(U2)‌‌ Remains Below Recent Lows

• RES 4: 120-00 Round number resistance
• RES 3: 119-16+ High Jun 1
• RES 2: 119-03+ 76.4% retracement of the May 26 - Jun 14 bear leg
• RES 1: 118-08/17+ High Jun 24 / 50-day EMA
• PRICE: 117-12+ @ 1120ET Jun 29
• SUP 1: 115-20 Low Jun 17
• SUP 2: 114-07+ Low Jun 14 and bear trigger
• SUP 3: 114-00 Round number support
• SUP 4: 113-19 Low Jun 19, 2009 (cont)

Treasuries have drifted off last week’s highs, partially reversing the recent firm short-term tone. Key short-term resistance has been defined at 118-08, the Jun 24 high where a break is required to signal a resumption of recent gains. This would open the 50-day EMA, at 118-17+. Note that the primary trend is down. Initial firm support to watch is 115-20, the Jun 17 low. A breach would expose 114-07+, the bear trigger.

US EURODOLLAR FUTURES CLOSE

• Sep 22 -0.005 at 96.725
• Dec 22 -0.040 at 96.155
• Mar 23 -0.015 at 96.180
• Jun 23 +0.035 at 96.340
• Red Pack (Sep 23-Jun 24) +0.090 to +0.165
• Green Pack (Sep 24-Jun 25) +0.145 to +0.170
• Blue Pack (Sep 25-Jun 26) +0.095 to +0.130
• Gold Pack (Sep 26-Jun 27) +0.085 to +0.090

SHORT TERM RATES

US DOLLAR LIBOR: Latest settlements

• O/N -0.00057 to 1.57029% (-0.00585/wk)
• 1M +0.04700 to 1.71314% (+0.08043/wk)
• 3M +0.02671 to 2.27714% (+0.04271/wk) * / **
• 6M +0.06985 to 2.94671% (+.08014/wk)
• 12M +0.00628 to 3.61357% (+0.06886/wk)
• * Record Low 0.11413% on 9/12/21; ** New 3Y high: 2.27714% on 6/29/22

• Daily Effective Fed Funds Rate: 1.58% volume: $95B
• Daily Overnight Bank Funding Rate: 1.57% volume: $247B

• Secured Overnight Financing Rate (SOFR): 1.52%, $929B
• Broad General Collateral Rate (BGCR): 1.51%, $352B
• Tri-Party General Collateral Rate (TGCR): 1.51%, $338B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

NY Fed reverse repo usage climbs to $2,226.976B w/ 98 counterparties vs. $2,213.784B prior session. Compares to record high of $2,285.428B from Thursday June 23.

EGBs-GILTS CASH CLOSE: Bobls Soar Amid Low German CPI And Risk-Off Move

Mixed Eurozone inflation readings ultimately resolved in a bullish outcome for Bunds Wednesday, boosted by equity weakness. Periphery EGB spreads tightened.

• Spanish June CPI unexpectedly hit a record high, but conversely, German inflation data came in much softer than expected (due in part to one-off factors).
• Ultimately the weak German inflation data translated into a strong close for core EGBs, with Bobl outperforming on the curve.
• Among much ECB speak (incl an MNI interview with Lithuania's Simkus), Lagarde said she was eyeing Friday's eurozone CPI data.
• Gilts outperformed with some bull steepening; contributing was incoming BoE MPC member Dhingra's comments that she eyed a "gradual approach" to tightening.

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

• Germany: The 2-Yr yield is down 11.9bps at 0.838%, 5-Yr is down 15bps at 1.283%, 10-Yr is down 10.9bps at 1.519%, and 30-Yr is down 9bps at 1.738%.
• UK: The 2-Yr yield is down 7.5bps at 2.041%, 5-Yr is down 6.7bps at 2.075%, 10-Yr is down 8bps at 2.385%, and 30-Yr is down 4.3bps at 2.669%.
• Italian BTP spread down 5bps at 188.2bps / Spanish down 2.5bps at 107.2bps

FOREX: Renewed USD Strength Picks Up Momentum, Fresh Cycle Highs For USDJPY

• The greenback extended on Tuesday’s bounce and the USD index has comfortably breached last week’s highs, rising a half a percent on the day.
• Despite the drop in nominal US yields, real yields sit at 69bps, up more than 10bps since early Monday levels and the highest since Mar-2019 when excluding the fervour just before and after the June FOMC, supporting the dollar in the process.
• Greenback gains were initially most evident against the Japanese Yen as USDJPY printed fresh cycle highs and in the process printed at the best levels since 1998. Despite being 50 pips off best levels of 137.00, the overall move resumes the primary uptrend and maintains the sequence of higher highs and higher lows.
  • The focus shifts to 137.30, the 1.50 proj of the Feb 24 - Mar 28 - 31 price swing. Markets will remain on watch for any signs of overbought conditions, but with the RSI still sub-70 there's little sign the pair is running out of momentum at current levels.
• Early inflation data from Europe saw prompted EUR/USD to erase overnight losses to trade just above the 1.05 handle once more, but stopping short of the 1.0536 Asia session highs. This bounce met firm supply, with the pair then grinding consistently lower through the rest of the trading day and remains tied to the lows around 1.0445. Moving average studies still point south and further weakness would refocus attention on 1.0350, May 13 low and the bear trigger.
• It is also worth noting that EURCHF (-1.01%) is back below parity and has breached the YTD lows posted in March through 0.9972, the key support level. CHF strength follows the continued baking-in of rate hike expectations at the SNB, with SARON markets indicating expectations of further 50bps rate rises at both the September and December policy meetings. This would put year-end rates at +0.75%.
• Thursday brings the French flash inflation estimates for June, and euro area unemployment and German retail sales data for May. Chinese Manufacturing and Non-manufacturing PMI data is also due overnight. Core PCE Price Index data headlines the US docket before the release of the MNI Chicago Business Barometer.

Thursday Data Calendar

Date	GMT/Local	Impact	Flag	Country	Event
30/06/2022	0130/0930	***		CN	CFLP Manufacturing PMI
30/06/2022	0130/0930	**		CN	CFLP Non-Manufacturing PMI
30/06/2022	0600/0700	*		UK	Quarterly current account balance
30/06/2022	0600/0700	***		UK	GDP Second Estimate
30/06/2022	0630/0830	**		CH	retail sales
30/06/2022	0645/0845	***		FR	HICP (p)
30/06/2022	0645/0845	**		FR	PPI
30/06/2022	0645/0845	**		FR	Consumer Spending
30/06/2022	0700/0900	*		CH	KOF Economic Barometer
30/06/2022	0730/0930	**		SE	Riksbank Interest Rate
30/06/2022	0755/0955	**		DE	Unemployment
30/06/2022	0900/1100	**		EU	Unemployment
30/06/2022	1230/0830	***		CA	Gross Domestic Product by Industry
30/06/2022	1230/0830	**		US	Jobless Claims
30/06/2022	1230/0830	**		US	Personal Income and Consumption
30/06/2022	1230/0830	**		US	WASDE Weekly Import/Export
30/06/2022	1330/1530			EU	ECB Lagarde Speech at Simone Veil Pact
30/06/2022	1345/0945	**		US	MNI Chicago PMI
30/06/2022	1430/1030	**		US	Natural Gas Stocks
30/06/2022	1530/1130	*		US	US Bill 08 Week Treasury Auction Result
30/06/2022	1530/1130	**		US	US Bill 04 Week Treasury Auction Result
30/06/2022	1600/1200	***		US	USDA Acreage - NASS
30/06/2022	1600/1200	**		US	USDA GrainStock - NASS