MNI ASIA OPEN - Fed Fighting Inflation Until It Turns

NEWS

FED (MNI): Fed's Mester Focused on QT Impact on Liquidity
Federal Reserve Bank of Cleveland President Loretta Mester told MNI Wednesday she's more concerned about the potential for quantitative tightening to constrain market liquidity than its effect on financial conditions, and she favors letting the USD95 billion-a-month asset run-off program continue on autopilot.

FED (BBG): Fed Vice Chair Brainard Says Will Fight Inflation Until It Turns
Federal Reserve Vice Chair Lael Brainard said the US central bank will have to raise interest rates to restrictive levels and keep them there for “some time,” while cautioning risks would become more two-sided in the future. “We are in this for as long as it takes to get inflation down,” Brainard said Wednesday at a conference hosted by The Clearing House and Bank Policy Institute in New York. “Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target.”

FED (DJ): Jerome Powell's Inflation-Fighting Pledge Could Tee Up Another 0.75-Point Interest Rate Rise
Federal Reserve Chairman Jerome Powell's public pledge to reduce inflation even if it increases unemployment appears to have put the central bank on a path to raise interest rates by 0.75 percentage point rather than 0.50 point this month. His remarks and tone placed him among the Fed officials who favor a more aggressive pace of rate increases than others, said Tim Duy, chief U.S. economist at research firm SGH Macro Advisors. Raising rates by 0.75 percentage point would fit that approach, he said.

US (MNI): US Economy, Inflation Softening-Fed's Beige Book
The U.S. economy has softened while inflation has ebbed from very high levels in recent weeks, the Federal Reserve's latest Beige Book published on Wednesday said. "Economic activity was unchanged, on balance, since early July, with five districts reporting slight to modest growth in activity and five others reporting slight to modest softening," the report said. "Price levels remained highly elevated, but nine districts reported some degree of moderation in their rate of increase. Employment rose at a modest to moderate pace in most districts."

SLOVAKIA (MNI): Slovakia Eyes 10-12Y Bond, Lower Issuance Target
Slovakia will look to issue a syndicated bond with a maturity of 10-12 years this autumn, the head of the country's debt and liquidity management agency ARDAL told MNI, with a reduction in the annual issuance target also possible as a result of better-than-expected budget developments.

BANK OF CANADA (MNI): Increases policy interest rate by 75 basis points, continues quantitative tightening
The Bank of Canada today increased its target for the overnight rate to 3.25%, with the Bank Rate at 3.5% and the deposit rate at 3.25%. The Bank is also continuing its policy of quantitative tightening.

INSIGHTS - 7th September 2022

JAPAN: How Has Japan's FX Language Changed Amid the USD/JPY Rally?

• With USD/JPY's incline accelerating not just in September, but across the entirety of 2022, the authorities' approach to currency has evolved. Despite the step-up in language, however, authorities look unlikely to intervene while yield spreads and FX rates remain coupled.
• https://marketnews.com/how-has-japan-s-fx-language...

CANADA: BoC Helps Drive Further Wedge Between 2Y and 10Y Can-US Yield Differentials

• 2Y GoCs have held onto most of the 4bp increase on the statement to unwind the prior rally, leaving yields +0.7bp on the day but still within yesterday's whilst awaiting for further cues from BoC's Senior Dep Gov Rogers tomorrow.
• https://marketnews.com/boc-helps-drive-further-wed...

• BAX front yields have seen a solid increase on the back of the BoC keeping the need to hike further with the risk of elevated inflation becoming entrenched and the economy continuing to operate in excess demand. BAZ2 sat +7bps on the day having pulled back from fleetingly touching a new high for the cycle.
  
• https://marketnews.com/front-bax-yields-firm-with-boc-less-so-further-out

US: Republicans Could Be Dealt Severe Blow In Florida Midterm Races

• Latest polling from the key swing state of Florida shows Republican incumbents in the races for the US Senate and governor's mansion holding slender leads over Democratic challengers. The elections outcomes could have a major impact on the US political landscape.
• https://marketnews.com/republicans-could-be-dealt-...

GILTS: 2Y Yields Drop Sharply Alongside 2023 BoE Hike Pricing

• The 2Y UK bond yield has fallen as much as 25.2bp today following commentary by key BoE officials that has left a 50bp or 75bp hike next week "on a knife edge".
• https://marketnews.com/2y-yields-drop-sharply-alon...

CHINA-RUSSIA: Xi, Putin To Meet In Uzbekistan Next Week-Russian Envoy

• Russian President Vladimir Putin will meet with his Chinese counterpart Xi Jinping on the sidelines of a conference in Uzbekistan next week according to Russian envoy to Beijing Andrey Denisov. The face-to-face meeting will be the first between the two leaders since Russia launched its invasion of Ukraine.
• https://marketnews.com/xi-putin-to-meet-in-uzbekis...

CNH: CNY Fixing Strongest On Record Relative To Estimates, But Little CNH Follow Through

• Today's fix is a -454 pip surprise in USD/CNY terms. This is the largest downside surprise since Bloomberg started compiling consensus estimates (back to 2018).
• https://marketnews.com/usd-cny-fix-not-leaning-hea...

CHILE: BCCh Review: Hawkish Surprise

• Chile’s central bank surprised markets overnight by delivering an above consensus 100bp hike to the monetary policy interest rate from 9.75% to 10.75%. The decision was not unanimous, with one of the five member board opting for a milder 75bp hike and another voting for a bold 125bp increase.
• https://marketnews.com/bcch-review-hawkish-surpris...

HUNGARY: HUF Remains Extremely ‘Cheap’ In Current Environment

• The surge in risk aversion in the past month has been weighing on the forint, which continues to trade at historically low levels despite the aggressive tightening cycle run by the NBH.
• https://marketnews.com/huf-remains-extremely-cheap...

US TSYS: Treasuries Rally Back On Growth Concerns As Attention Turns To ECB, Powell

• Treasuries have seen a sizeable rally on softer growth fears, with yields helped lower early from continued China lockdowns, the latest being Chengdu extending lockdowns from tomorrow, which have coincided with oil woes. Not a direct driver but supportive of the move has been the Fed’s Beige Book more recently showing weak growth expectations over the next six to twelve months, along with at the margin a downward revision for Atlanta Fed GDPNow from 2.6% to 1.4% for Q3.
• September FOMC pricing slightly remains up on the day at 69bps after the earlier WSJ’s Timiraos piece leaning to a 75bp rather than 50bp hike but the terminal sees a modest trimming to 3.91% in Mar’23 from highs of 3.96%.
• Yields remain within yesterday’s even larger range though, with 2YY -6.2bps at 3.441, 5YY -8.8bps at 3.364%, 10YY -8.0bps at 3.269% and 30YY -8.8bps at 3.413%.
• TYZ2 trades 17 ticks higher at 116-04, pulling back after yesterday’s clearance of a bear trigger and today’s further low of 115-13+. The recent trend has been downward, but should today’s upward momentum continue, resistance is seen at 116-26 (Sep 2 high).

EGBs-GILTS CASH CLOSE: UK 2s Rally, Bunds Stronger Pre-ECB

The UK curve bull steepened violently Wednesday as BoE rate hike expectations were pared back, while EGBs were relatively steady with peripheries outperforming ahead of Thursday's ECB decision.

• 2Y UK yields were briefly poised for their biggest drop since 2009, with more than one 25bp hike priced out of the BoE hiking path at one point with senior BoE officials' TSC testimony were seen leaving a 50bp or 75bp hike next week "on a knife edge".
• Pricing is about the same now for the ECB (preview here) and BoE Sept meetings, at 65-66bp.
• The German curve bull flattened, while periphery EGB spreads fell ahead of the ECB, led by BTPs.
• Thursday is shaping up as very busy, both with the ECB meeting, and potentially more info on the UK fiscal package to be unveiled (which would impact BoE pricing).

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

• Germany: The 2-Yr yield is down 1.3bps at 1.105%, 5-Yr is down 4bps at 1.374%, 10-Yr is down 6.1bps at 1.577%, and 30-Yr is down 7.8bps at 1.681%.
• UK: The 2-Yr yield is down 20.2bps at 3.001%, 5-Yr is down 11bps at 2.917%, 10-Yr is down 6.7bps at 3.034%, and 30-Yr is down 4.4bps at 3.369%.
• Italian BTP spread down 7.1bps at 229.1bps / Greek down 2.1bps at 257.9bps

US OPTIONS: Mixed Call Structures And Vol Trades

• EDZ2 96.00/96.25/96.50c fly sold at 3.5 and 3.25 in 20k
• SFRZ2 96.87c, sold at 3.5 in 1k
• SFRZ3 96.50^, sold at 124/123.5 in 1.5k
• TYX2 118 call, bought for 29 in 10k

EU OPTIONS: Euribor Liquidation Pre-ECB

Wednesday's Europe rates / bond options flow included:

• DUV2 107.90/107.70/107.50/107.30p condor, bought for 2.75 in 5k
• DUV2 108.20/107.70ps 1x1.5, bought for 9.5 up to 10.5 in 15k
• RXV2 139.50/138.50ps, bought for 11 in 4.7k
• RXX2 139/135/131 put fly sold at 26.5 in 1.75k
• ERH3 97.87/98.00/98.75c ladder, bought for -1 (receive) in 11k
• ERU2 99.125/98.25/98.375c fly, sold at 2.5 in 2k
• ERZ2 98.125/98.25/98.375/98.50c condor, sold at 2.5 in 5k
• 0RU2 97.375/97.625/97.875c fly, sold at 7 in 2.75k

FOREX: EURUSD Strong Bounce Off Lows, EURJPY Approaches Cluster Resistance

• Lower energy prices on the continent (notably European natgas futures falling around 11%) have bolstered risk sentiment on Wednesday, strengthening equity markets and providing firm support for the Euro.
• EURUSD has recovered around 125 pips from the lows to trade back at parity amid the more positive backdrop with a potential position squaring dynamic also in play ahead of tomorrow’s ECB meeting.
• Interestingly, there are 2.2B of expiries at 1.0000 for tomorrow’s NY cut, which has the potential to be magnetic in the immediate aftermath of the ECB’s decision and press conference.
• The USD index looks set to post 0.5% losses with a relatively dovish Fed’s Brainard providing a further boost to equities and weighing further on the greenback in late trade ahead of the APAC crossover.
• Despite this USD turnaround, coinciding with 145.00 capping the USDJPY price action, EURJPY continues to hug session highs and it is worth noting the pair is approaching strong cluster resistance, with four daily highs between 144.18-28. This week’s impulsive gains reinforce current bullish conditions for the pair and the move higher maintains a positive price sequence of higher highs and higher lows.
  • The next two levels of note on the topside would be 145.00 (psychological round number) and then 145.48, Jan 1, 2015 high.

FX OPTIONS: Expiries for Sep08 NY cut 1000ET (Source DTCC)

• EUR/USD: $0.9800(E1.6bln), $0.9850-65(E1.2bln), $0.9900(E889mln), $1.0000(E2.2bln)
• USD/JPY: Y140.00($1.7bln)
• GBP/USD: $1.1400(Gbp593mln)
• USD/CAD: C$1.3200($540mln)
• USD/CNY: Cny6.8000($1.3bln)

COMMODITIES: WTI Hits Eight-Month Low On Demand Concerns

• Crude oil has tumbled today on expectations of softer demand, with China oil imports falling 1mbpd and further regions being put into lockdown, most recently Chengdu from Sep 8, coming at the end of the US driving season, seeing WTI hit an eight-month low.
• WTI is -5.6% at $82.01, which having cleared the key support at $85.37 (Aug 16 low) is homing in on support at $81.88 (Feb 25 low).
• The current most active strikes for the session for CLV2 has been $75/bbl puts.
• Brent is -5.2% at $87.99, clearing the key bear trigger of $89.06 (Jul 14 low) and next eyeing $87.50 (Mar 15 low).
• Gold meanwhile is +0.8% at $1715.36 as it finds respite from a weaker dollar and lower Tsy yields. It remains within yesterday’s range though with resistance at the intraday high of $1726.7 after which sits $1735.5 (20-day EMA).