MNI ASIA OPEN - US ISM Services Pushes Back On Growth Fears

NEWS:

ECB (MNI): Both 75, 50BP Still In Play As ECB Readies Hike
The chances of a 75-basis-point hike at the European Central Bank's meeting this week have risen, as even more dovish officials recognise the need to take interest rates above 1% by the end of the year to tame inflation, but a smaller 50-bp increase remains on the table, Eurosystem sources told MNI.

ECB (BBG): ECB’s Kazaks Says Broad, Protracted Recession Could Slow Hikes
The European Central Bank may slow interest-rate increases if a deep euro-area recession damps inflation, according to Governing Council member Martins Kazaks. If underlying price pressures strengthen further, however, officials could maintain their swift pace of raising borrowing costs, Kazaks said in a magazine article published for the Eurofi conference.

US (MNI): OFR Nears Proposing Rule To Fill Repo Data Gap
The U.S. Office of Financial Research plans soon to ask for public comment on its plan to collect data on the opaque non-centrally cleared bilateral repo market, MNI understands, in what would be a step toward better understanding the risk that hedge funds' growing presence in short-term funding markets poses to the financial system.

BOC (MNI): Canada Could Hike To 4.75% - WLU Researchers
Canada's central bank could raise its key lending rate to 4.75% or even further according to researchers modeling policymakers' previous reactions to price swings and the economic outlook, in an analysis that supports a more hawkish view than that of most investors.

BOC (MNI): MNI Preview: Looking For New Guidance
The Bank of Canada is widely expected to hike its overnight rate 75bps to 3.25% on Wednesday with only 5 of 30 analysts calling for a 50bp hike instead, following last month’s surprise front-loaded 100bp hike.

US (BBG): US Natural Gas Slumps as Output Jumps Amid Mild Weather Outlook
US natural gas futures slumped the most since June 30 as rising production and a milder weather outlook led traders to shed some of their bullish bets.

US (WPT): U.S. Plans to Shift to Annual Coronavirus Shots, Similar to Flu Vaccine
White House coronavirus coordinator Ashish Jha said Tuesday the newly reformulated omicron-targeting boosters mark an "important milestone" in the U.S. pandemic response, moving the country to a point where a single annual coronavirus shot should provide a "high degree of protection against serious illness all year."

US DATA: ISM Services Belies PMI Weakness

• Tsys extend their sell-off (2YY +12.5bps, 10YY +16bps) after the stronger-than-expected US ISM services index in August (from 56.7 to 56.9, 55.4 expected) was in firm contrast to the decline in the service PMI from 47.3 to 43.7. The gap of 13pts is a new high since being above the service PMI since Jul’21. It’s a solid ISM report, led by “increases in business activity, new orders and employment”.
• “Based on comments from Business Survey Committee respondents, there are some supply chain, logistics and cost improvements; however, material shortages remain a challenge. Employment improved slightly despite a restricted labor market.”
• Response from the construction sector where starts/sales are sliding: “Some pullback on projects by clients, but activity is still strong for our company. This has alleviated some labor availability issues. Generally, there has been improvement in lead times and prices, but still longer and higher, respectively, than in 2021.”

US DATA: US Final Service PMI Doesn't Alter Recent Tsy Bear Steepening

• A small miss in the final August S&P Global US PMIs has done little to change the emerging bear steepening in Treasuries, (2YY +9bps & 10YY +12.5bps from Fri close), with focus now on the ISM Services in a few minutes.
• The S&P Global PMI service PMI was surprisingly revised down a little further in the final August print, such that it's now fallen from 47.3 to 43.7 (vs flash 44.1).
• This sees business activity contract at the sharpest pace since May’20 amid a solid fall in new orders from both domestic and foreign clients.
• Adding in last week’s better than expected manufacturing print, the S&P Global Press Release notes: “In contrast to that seen in July, service sector firms registered a decline in new business in August. As a result, private sector new orders fell at the quickest pace since May 2020, while new export orders also fell at a solid pace."

MNI: US ISM AUG SERVICES COMPOSITE INDEX 56.9

• BUSINESS INDEX 60.9
• PRICES 71.5
• EMPLOYMENT INDEX 50.2
• NEW ORDERS 61.8

MNI INSIGHTS - 6th September 2022

CANADA: MNI BoC Preview: Looking For New Guidance

• The Bank of Canada is widely expected to hike its overnight rate 75bps to 3.25% on Wednesday with only 5 of 30 analysts calling for a 50bp hike instead [now 3 of 31], following last month's surprise front-loaded 100bp hike.
• https://marketnews.com/mni-boc-preview-looking-for...

UK: LAB Hold Widest Lead Over CON Since 2013 In Latest Poll As Truss Takes Over

• The latest poll from YouGov shows the main opposition centre-left Labour Party holding a 15-point lead over incoming PM Liz Truss' centre-right Conservatives.
• https://marketnews.com/lab-hold-widest-lead-over-c...

GILTS: Curves steepen on energy price plans (and market digest Mann's comments)

• Two themes evident in markets: first, how much will Truss's energy plans impact gilt supply and second, how will the BOE react.
• https://marketnews.com/curves-steepen-on-energy-pr...

CHINA: CNY Fixing Firmer, But Not Strong Enough?

• The USD/CNY fixing came in above 6.9000, the first such occurrence in 2 years. It printed at 6.9096, versus a Bloomberg consensus of 6.9253.
• https://marketnews.com/usd-cny-fix-not-leaning-hea...

RBA REVIEW: Something for Everyone as Normalisation Phase Ends

• RBA reaffirmed view on inflation and once again pointed to the narrow path that it finds itself on.
• https://marketnews.com/mni-rba-review-september-20...

NBP PREVIEW: To Hike Policy Rate By 25bps

• The NBP is likely to hike its policy rate by 25bps to 6.75% on September 7 to continue its fight against inflation. This move will increase the benchmark to its highest level since November 2002.
• https://marketnews.com/mni-nbp-preview-september-2...

US TSYS: Significant Cheapening As TYZ2 Clears Bear Trigger

• Cash Tsys have seen a sizeable cheapening today as the front end reversed the rally from Friday’s payrolls report and with larger relative moves further along the curve, all driven by large increases in real yields weighing on risk sentiment.
• The move came in earnest as the US came back from the Labor Day weekend but a beat for ISM services helped the move stick, with service activity holding up well at the highest index level since the April in a solid report that pushed back notably against growth fears.
• 2YY +10.1bps at 3.488%, 5YY +13.3bps at 3.426%, 10YY +13.5bps at 3.324% and 30YY +13.3bps at 3.477% all from Friday’s close, driving a 3.5bp increase in 2s10s to -16bps or
• TYZ2 has cleared the bear trigger of 115-23 (Sep 1 low) with a session low of 115-14+ (currently 115-19), opening next support at 114-26 (Jun 16 low).
• The Fed’s Beige Book comes into focus tomorrow with continued attention on growth, plus a collection of Fedspeak.

OPTIONS: Mixed U.S. Rates Trade Tuesday

Tuesday's US rates options flow included:

• SFRU2 96.75p, traded 3 up to 4.25 in 3.6k
• SFRV2 96.37/96.12/95.87p fly, traded 6.5 in 3k
• SFRV2/SFRZ2 96.00/95.87ps spread, bought for 1 in 2k
• 2EU2 96.62p, sold at 11 in 5k (ref 96.645, 48 del)
• SFRX2 96.81c, traded 3 in 3k
• SFRZ2 96.56/96.43ps 2x vs 96.25/96.00ps 1x, traded 8 in 2k (block)
• 0QV2 96.75/96.50ps, traded 14.5 in 2k
• EDZ2 95.75/95.50ps, bought for 6.5/6.75 in 10k in the pit, and 7 in 20k (block)
• EDH3 99.62c, traded 0.25 and half in 3.4k
• 2EU2 96.62/96.25ps 3x2, traded 16.5 in 3k (block)
• 2EZ2 98.37c, traded 1.5 in 1k

EGBs-GILTS CASH CLOSE: Major UK Twist Steepening

The re-steepening of the UK yield curve from multi-year flat/inverted levels was the highlight of Tuesday's European price action, with long-end yields soaring while short-end rates dipped modestly.

• The 17bp rise in 2s10s was the biggest since March 2020 (see chart below), and prior to that, 2012. Yields across the curve hit multi-year highs; 5s hit a 3-handle for the first time since 2009 while 30Y yields had the 2nd highest rise since 2009.
• The main driver pressuring the long end was concerns over the fiscal / issuance impact of incoming UK PM Truss's energy cost mitigation plan, which some headlines priced up at as much as GBP197bln.
• The German curve saw twist steepening but to a lesser degree than the UK.
• ECB Sept hike pricing dipped as low as 62bp after some market participants focused on MNI's sources piece citing a Eurosystem official saying he thought it was likely that Lagarde would opt for 50bp; however pricing drifted back up to 66bp: we note that the story contains multiple sources and as a whole is more nuanced, as indicated by the headline ("MNI SOURCES: Both 75, 50BP Still In Play As ECB Readies Hike.")

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

• Germany: The 2-Yr yield is down 0.9bps at 1.118%, 5-Yr is up 6bps at 1.414%, 10-Yr is up 7.5bps at 1.638%, and 30-Yr is up 4.9bps at 1.759%.
• UK: The 2-Yr yield is down 0.6bps at 3.203%, 5-Yr is up 10.5bps at 3.027%, 10-Yr is up 16.2bps at 3.101%, and 30-Yr is up 20.7bps at 3.413%.
• Italian BTP spread down 1.7bps at 236.2bps / Greek down 13.4bps at 260bps

UK 2s10s Spread - Daily Change In bpsSource: BBG, MNI

EU OPTIONS: Large BTP Upside Play Features Tuesday

Tuesday's Europe rates / bond options flow was highlighted by a large BTP upside trade with November expiry, and included:

• DUX2 108/107.70ps, bought for 10.5 in 3k
• DUV2 108.00/107.70 put spread bought for 9 in 4k vs DUV2 108.50 call sold at 20 in 1.5k
• DUV2 107.90/70/50/30 put condor bought for 3 in 5kOEZ2 119 put bought for 64 in 5k
• IKX2 122/125cs, bought for 64 in 10k
• ERZ2 98.12/97.87/97.75/97.62p condor, sold at 5.75 in 3.2k
• ERZ2 98.00/97.75/97.62p ladder, bought for 1.5 in 4k

FOREX: Greenback Strength Extends, USDJPY Breaches 143.00

• Surging core yields have continued to weigh on the Japanese Yen on Tuesday, prompting USDJPY to print a fresh high of 143.07, extending the day’s gains to 1.7% and rising around 280 pips off the day's lows. Japanese authorities continue to let markets know they are watching the FX market and are vigilant, however, the language remains consistent with messaging over the past months and appears ineffective in its current form.
• Sights are on the 143.30 -- 2.23 projection of the Aug 2 - 8 - 11 price swing before the next psychological resistance point of 144.00.
• Mild pressure on equity markets also weighed on the likes of AUD and NZD which fell close to 1% against the USD, despite an overnight 50bp hike from the RBA. Outperforming in G10 was GBP, which is registering gains following new Prime Minister Liz Truss’ proposed spending package to deal with the developing energy crisis. Similarly, CAD remains unchanged ahead of tomorrow’s central bank decision.
• Despite an early bounce, EURUSD has made new cycle lows at 0.9864 which brings fresh attention to 0.9800 as next support.
• Overall, the greenback was bolstered by today's firmer US ISM Services PMI and it is worth noting there are very few notable US data points ahead of next Tuesday’s CPI release.
• Australian GDP data will precede Chinese trade balance figures. The European docket includes German Industrial production and the final reading of Eurozone GDP. Focus will then turn to the Bank of Canada, which is widely expected to hike its overnight rate 75bps to 3.25%.
• Fed speakers include Barkin, Mester and Brainard and worth noting the September ECB decision/press conference is on Thursday.

COMMODITIES: Oil Slides On China Lockdowns, Risk Off Sentiment

• Crude oil have moved sharply lower today as new China Covid-related lockdowns and a cutting of Saudi prices to Asia added to higher yield-induced risk off sentiment, reversing yesterday’s gains helped by OPEC+ unexpectedly deciding to cut output in October.
• WTI is -0.07% at $86.74 (from Friday’s close due to Labor holiday). Support is increasingly exposed, with $85.98 (Sep 1 low) sitting a little above the bear trigger at $85.37 (Aug 16 low).
• Most active strikes in the CLV2 have been $95/bbl calls.
• Brent is -3.19% at $92.67, with a bear threat remaining present, with support at $91.81 but still a little off the key bear trigger of $89.06 (Jul 14 low).
• Gold is -0.57% at $1700.74 as USD strength and surging Tsy yields weigh on the yellow metal. It moves closer to the bear trigger at $1681 (Jul 21 low).