MNI ASIA MARKETS ANALYSIS - Euro Little Changed But Yields Surge Post ECB

US TSYS: Treasuries Continue A Week Of Swings With ECB-Led Cheapening

• Cash Treasuries have seen a reasonable bear flattening today (2YY +5.6bps, 10YY +2.3bps) with nearly all of the cheapening coming from the ECB 75bp hike announcement and then press conference.
• They only edged out further moves with Powell doing little to push back on market pricing nearing a 75bp hike (currently 71.5bps, and with GS late yesterday and Barclays today joining calls for a 75bp hike). The main hurdle remains Tuesday’s US CPI prior to the Sep 21 FOMC decision.
• TYZ2 trades 6 ticks lower at 115-31+ having rallied pre-ECB, continuing to build on its vulnerability to the downside from a technical perspective having breached the bear trigger at 115-23. Support is seen at 115-13+ (Sep 7 low).
• Fedspeak highlights an otherwise light US docket tomorrow, with appearances from Governor Waller and ’22 voter George plus Evans again (today said see’s topping out at 4% “before too long” before pausing). The media blackout will kick in at Friday midnight.

2Y Tsy yield fluctuations ever since the mixed payrolls report, Sep 2Source: Bloomberg

EGBs-GILTS CASH CLOSE: ECB Hikes 75bp, But Intrigue Lies Elsewhere

The ECB delivered a record 75bp hike today, but with that priced in beforehand, most reaction came on the non-rate intrigue.

• German Schatz yields rose sharply as the ECB surprised by removing the 0% interest rate ceiling for remuneration of government deposits. That move was seen as easing recent bond collateral shortage fears, especially at the short end.
• The usual round of post-meeting sources stories began with a BBG piece right on the cash close that saw BTPs fall sharply: ECB officials "don't exclude" another 75bp raise in October, with "QT expected to be discussed" at the Oct meeting and beyond.
• BTPs had been seen benefiting from the apparent lack of discussion of QT today, so futures sold off after the sources story.
• Overshadowed was the pullback in BoE pricing in the afternoon from session highs, as analysts dropped their inflation forecasts on gov't energy cost mitigation plans.

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

• Germany: The 2-Yr yield is up 22.9bps at 1.334%, 5-Yr is up 18.1bps at 1.555%, 10-Yr is up 14bps at 1.717%, and 30-Yr is up 9.8bps at 1.779%.
• UK: The 2-Yr yield is up 6.7bps at 3.068%, 5-Yr is up 9bps at 3.007%, 10-Yr is up 11.3bps at 3.147%, and 30-Yr is up 12.9bps at 3.498%.
• Italian BTP spread down 3.4bps at 225.7bps / Greek down 6.7bps at 251.2bps

SONIA: 34bps of hikes over 12-month removed from the peak this week

• Pricing for next week's MPC meeting is currently 64bp (down from 65bp yesterday and after spiking to 73bp following Mann's comments on Monday).
• 180bp is priced by year-end (from a high of 199bp post-Mann).
• 248bp priced by year-end (from 258bp at yesterday's close and a peak of 282bp on Monday).
• Note that since the energy plans started to break on Monday and the testimony of four MPC members ahead of the TSC yesterday, we have now erased 34bp of hikes over the next 12-months.
• Truss's statement is due imminently but it is questionable how many details we will get as this is not expected to be a formal ministerial statement, and hence there is not expected to be ensuing debate.

FED: 75bp September Pricing Firms As Powell Doesn't Push Back

Fed Chair Powell didn't deviate much from previous recent commentary in his appearance at a highly-anticipated Cato Institute event, referencing his Jackson Hole speech several times. September Fed hike pricing briefly edged higher (to just under 72bp, see chart), mainly because the Chair did nothing to push back against 75bp market pricing just prior to the FOMC blackout.

• Futures are now taking it as a given that 75bp is the path of least resistance for the meeting in 2 weeks' time, especially now the ECB's 75bp is out of the way, though of course CPI on Tuesday could throw up a surprise.
• While Powell addressed several "structural" topics (including on the framework, the dual mandate, the scarce reserves regime, cryptocurrency and other topics), ,market focus was on current policy matters. Some comments of interest included:
  • On fighting inflation in order to keep expectations well-anchored: "We need to act now, forthrightly, strongly, and keep at it until the job is done."
  • Says that longer-run infl expectations are "pretty well-anchored", but noted the "clock is ticking" re short-term expectations
  • Says that history cautions against "prematurely" loosening policy
  • On the last nonfarms payrolls report: Says there was a welcome increase in participation rate; nonetheless still 1 percentage point below pre-crisis
  • Says that below-trend growth will bring the labor market into better balance

FOMC Sept 2022 OIS Implied Pricing Intraday (Times are BST)Source: BBG, MNI

FOREX: Euro Little Changed Following ECB, CHF Tops G10 Leaderboard

• Despite the unanimous decision to hike all three key interest rates by an unprecedented 0.75%, the ECB’s lower growth projections weighed on the Euro in the latter half of Thursday trade.
• It is worth noting that the Euro was trading at elevated levels following a firm bounce on Wednesday ahead of the meeting and despite a move down to 0.9931 during President Lagarde’s press conference, EURUSD has risen back towards parity as we approach the APAC crossover.
• The pair had a notable amount of expiries at parity for Thursday’s NY cut and the lack of any game changing guidance from the ECB has kept the daily adjustment at a subdued -0.1%.
• Outperforming on Thursday was the Swiss franc, with EURCHF down 0.68%. While the bolder action from the ECB may prompt analysts to expect a more aggressive approach from the SNB, senior members of the SNB board reiterated their decision will be determined by the developing data. SNB officials did, however, credit the strong Swiss franc for helping keep the nation’s inflation rates lower than the rest of the euro zone, underpinning the relative CHF strength on Thursday.
• Little new information from Fed Chair Powell leaves the greenback at close to unchanged levels for the session. Markets will instead turn their focus to next week’s US CPI print, which may prove pivotal in determining the next stage of the Fed’s policy strategy.
• Chinese CPI/PPI data is due overnight and Canadian employment data will headline tomorrow’s North American docket.

MNI BoC Review, Sep'22: Maintaining Optionality

• The Bank hiked 75bps as expected to an above-neutral 3.25%, signalling further rate hikes ahead but also assessing how much higher they have to go as the effects of tightening feed through.
• Some analysts pushed near-term, and therefore terminal, rate expectations higher on the back of this but the clear growing data dependency now that in restrictive territory takes over.
• Local onus is on Senior Dep Gov Rogers speaking later today, whilst after that there are still two sets of CPI and labour market reports as well as two further BoC speeches, including from Governor Macklem, prior to the October BoC decision and its fresh round of forecasts.
• See the full note including reviews from 11 sellside analysts here: https://marketnews.com/mni-boc-review-sep-22-maintaining-optionality

CANADA: CPI Buffer From Higher CAD Would Be Nice - Rogers

• In Q&A, BoC Senior Dep Gov Rogers said a CPI buffer from a higher Canadian dollar would be nice when asked in relation to no longer having the offset from an appreciating currency under improved terms of trade (ToT) – full comment here.
• The unusual move to specifically jawbone the currency helped see USDCAD stick near session lows at 1.3110 before breaking lower to 1.3086 as WTI hit session highs. However, it is still up almost 3% from August lows, having yesterday come close to testing key resistance at the July 14 high of 1.3224, clearance of which would have opened late 2020 levels - first chart.

Source: Bloomberg

• Using WTI as a crude proxy for the ToT, the second chart below shows how correlation with the JPM CAD broad nominal effective exchange rate sits at +0.2, low but not unprecedented.
• In noting “I was reading some commentary yesterday, there is an expectation for the Canadian dollar to go up, we will see if that happens. It would be nice to get that buffer”, it was possible in reference to medium-term constructive views for CAD from Barclays and ING or similar, with the latter looking for 1.25 by early next year but with external woes dominating in the near term (per our BOC Review)

Mortgage Rates Outclimb Treasuries As They Hit New 2008 Highs

• Mortgage rates continued to jump higher today, rising another 23bps to 5.89% for a 90bp increase from early August levels (Freddie Mac 30Y). Through the prior Jun 23 high of 5.81%, it’s a fresh high since 2008.
• This has outstripped a ~70bp ramp higher in 10Y Tsy yields over the same period, continuing to show the speed at which a re-tightening of financial conditions (Goldman noted a fresh peak in the FCI yesterday) is feeding through to the real economy.
• Despite this re-tightening of conditions and the implications this could have on growth, 2s10s remains off flats, currently at -20bps versus prior lows of -50bps.

30Y Freddie Mac rate (yellow), 10Y Tsy yield (pink), 2s10s spread (green)Source: Bloomberg

FX OPTIONS: Expiries for Sep09 NY cut 1000ET (Source DTCC)

• EUR/USD: $0.9900-10(E2.2bln), $0.9950(E1.2bln), $1.0000(E1.2bln), $1.0075-00(E1.3bln)
• USD/JPY: Y139.00($1.0bln)
• USD/CAD: C$1.3100($616mln)
• USD/CNY: Cny7.00($2.5bln)