MNI ASIA MARKETS ANALYSIS - Reversal Of Post-Weekend 'Pivot' Rally

MNI Global Macro Outlook-Oct 2022: Laying The Pivot Groundwork

MNI's October Global Macro Outlook meeting looked at the potential for a dovish central bank "pivot" in the face of growth headwinds and financial market volatility.

• Central bank (largely, Fed) "pivot" speculation is overblown, but the debate has (rightfully) been advanced by multiple factors.
• For full analysis, please see email or PDF here

US TSYS: Late Rally Doesn’t Materially Change Sizeable Re-Cheapening

• Cash Tsys see some late unwinding of the day’s cheapening, extending as SPX reversed a nearly 2% intraday drop.
• Moves help more than unwind the additional sell-off after ISM services strength but front end yields are still +5.5bps with solid increases in 2023 Fed rate expectations, especially in 2H23 with terminal at 4.5% and Dec’23 at 4.2%.
• Largest increases are seen in 10YY, currently +11.5bps and with strong increases in real yields seeing a notable retracement of Monday’s rally with breakevens modestly dipping and remaining relatively close to YTD lows.
• TYZ2 trades -29 at 112-19, off lows of 112-08+ that didn’t trouble support at 111-20+ (Sep 21 low).
• Multiple Fed speakers headline tomorrow’s docket including Governors Cook and Waller.

US: Inflation Breakevens Resilient To Commodity Price Climb

• Climbing real yields are behind today’s cheapening in Treasuries, with 5Y and 10Y real rising 12-13bp.
• The counterpart to that the 5Y inflation breakevens consolidating a 20bp climb off last week’s lows of 2.12%, but at 2.32% it remains below pre-taper levels and relatively resistant to the recent climb in commodities prices (Bloomberg commodity price index +4.5% this week, including WTI +10%).
• With markets expecting Fed Funds to hit a terminal 4.5% in Mar’23 before 4.2% in Dec’23, it shows market expectations remaining anchored without meeting the SEP median dot of 4.6% for end-2023.

5Y breakeven (yellow), 5Y real (green) and DXY (pink)Source: Bloomberg

FOREX: Greenback Stages Strong Recovery Amid Rising US Yields

• The US Dollar staged a significant recovery on Wednesday, with the USD Index paring the majority of Tuesday’s losses, rising 1.10% as we approach the APAC crossover. The bounce came amid the yields on US 10-year rising roughly 15 basis points back to 3.76%.
• G10 losses were concentrated in GBP and EUR. After briefly printing a fresh high of 1.1495 on the London open, cable came under consistent pressure, reaching an intra-day low of 1.1227 and continuing the string of multi-big figure intra-day ranges for the pair. This works against the week's bullish tone, but still keeps prices comfortably off the recent multi-decade low at 1.0350, Sep 26 low. Initial firm support is seen at 1.1025, the Sep 30 low.
• Additionally, and perhaps more significantly from a technical standpoint, EURUSD faded off the bear channel top Wednesday (intersecting at 0.9998), erasing much of the Tuesday strength into the close. Note too that the 50-day EMA intersects just above, at 1.0004. A break of these resistance points would strengthen bullish conditions and highlight a more significant reversal. Initial support to watch is 0.9806, Tuesday's low.
• Relative outperformance was seen in NZD following a hawkish turnout from the RBNZ decision. The bank raised rates by 50bps - as expected - but confirmed the bank also examined a 75bps step to tackle stubborn inflation. Similar relative strength was seen in AUD (-0.30%) as the firm intra-day bounce in major equity indices underpinned more constructive price action in antipodean fx.
• Labour market data may determine the longevity of the greenback recovery, with the release of September NFP this Friday. For tomorrow, we have BOJ Gov Kuroda and BOC Gov Macklem scheduled, along with multiple Fed speakers on the docket. The minutes of the latest ECB meeting will also be released.

US DATA: No Sign Of Slowdown In Surprisingly Resilient ISM Services 

• Overall index dips from 56.9 to 56.7 (cons 56.0) in contrast to Monday’s more pronounced slowdown in manufacturing activity (-1.9pts to 50.9).
• Mfg does tend to lead services ahead of slowdowns but the report more strongly pushes back on recession fears for now.
• Employment of 53.0 is the highest since March and sees a further recovery off Jun-Jul contractions whilst prices paid are technically the lowest since Jan’21 but it’s a slow decline, easing from 71.5 to 68.7 vs 2019 av of 57.5.
• Tsys see a sizeable further cheapening, led by 5Y and 10Y of the major benchmarks for +14bps on the day.

US DATA: Purchase Mortgage Applications Through Pandemic Lows

• Composite MBA mortgage applications fell to the lowest level since 1997 last week after declining -14%, whilst purchase-only mortgages – a better guide of sales activity – cleared pandemic-disruption lows for the lowest since March 2015 and within 15% of also hitting late 1990s levels.
• It comes as 30Y mortgage rates jumped from 6.52% to 6.75% (following the rise in the marginally more timely Freddie Mac mortgage rates), to now just 11bps below 2006 highs.
• Subsequent rallies in Treasuries this week should help provide some marginal respite from a week-by-week basis (10YY at 3.68% are currently 14bps below last week’s average) but nevertheless remain consistent with a further sharp slowing in housing activity.

MBA 30Y rate (white), 10Y Tsy yield (pink), spread (red) and MBA purchase applications (green)Source: Bloomberg

US DATA: ADP Points To Continued Jobs Growth Moderation

• ADP employment increased 208k (cons 200k) in Sept, a little stronger than expected when also factoring in the +53k upward revision to 185k in Aug. Tsy yields quickly retraced a small dip on the report.
• Ahead of Friday’s payrolls report, despite the upward revision, this new version of ADP continued to undershoot payrolls strength back in Jul-Aug at an average 227k for ADP vs 393k for private payrolls.
• Job changers pay growth cooled from 16.2% to 15.7% Y/Y whilst job stayers pay growth increased a tenth to 7.8% Y/Y.
• ADP press release on jobs market: “Signs that people are returning to the labor market... Employer demand remains robust and the supply of workers is improving--for now.”

CANADA: Narrowing Support For CAD From Trade Data

• The merchandise trade surplus was notably smaller than expected in Aug at C$1.5B (cons 3.5B) after a downward revised 2.4B in July (initially 4.1B), from both energy and non-energy items.
• Add in a growing service deficit (largest nominal since Mar’20 on re-opening) and the goods & service trade balance fell into a small deficit for the first time since Dec’21.
• The three-month rolling surplus narrowed to 0.9% GDP from 1.8% GDP (initially 2.4% GDP), which remains elevated vs the pre-pandemic average deficit of ~3.5% GDP but with non-energy trade deficits already at historical highs and energy products doing the heavy lifting, prone to a pullback in energy revenues.

• USDCAD saw only limited reaction on the data with strong building permits providing an offset, but the continued widening in non-energy deficits in particular could increasingly weigh on CAD, which in trade-weighted terms remains above pre-pandemic levels in contrast to its sharp decline vs the USD.

COMMODITIES: Oil Sees Further Gains As OPEC+ Plans 2mbpd Output Cut

• Crude oil sees further sizeable gains after OPEC+ agreed to cut 2mbpd from current output limits – its largest cut since 2020 - and Russia warned it may reduce its own output even further. The White House has pushed back, with Biden calling the move “unnecessary” whilst Saudi Oil Minister says policy is not a ‘one-way street’ with uncertainties going either way whilst they wait to see how markets react to the price cap.
• Goldman view the OPEC+ decision as sufficiently bullish to raise its 4Q oil price forecast $10 to $110/bbl.
• WTI is +1.5% at $87.78 for a circa 10% gain on the week to date. It clears the 50-day EMA of $87.09 and opens $89.99 (Sep 6 high).
• Brent is +1.7% at $93.40, clearing resistance at $92.4 (Oct 4 high) and opening $95.54 (Sep 5 high).
• Gold meanwhile dips -0.5% to $1717.47 as a reversion to higher US yields take the edge off the yellow metal. Support is seen at $1695.2 (former trendline resistance) whilst resistance is still nearby at $1729.5 (Oct 4 high).

BOE: No Take-Up In Long-Dated Gilt Purchase Operations

• Offers rejected GBP413.6mln - the lowest offers tabled to date.
• No surprise here - as we noted earlier following the BOE's clarification- they are using this as a backstop rather than wanting to try and control yields here.

FX OPTIONS: Expiries for Oct6 NY cut 1000ET (Source DTCC)

• EUR/USD: $0.9900-02(E1.3bln)
• USD/JPY: Y142.00($1.1bln), Y144.00($800mln), Y145.00($836mln), Y145.50($1.2bln), Y145.90-00($855mln)
• EUR/GBP: Gbp0.8700(E649mln), Gbp0.8850(E695mln)
• AUD/USD: $0.6475(A$590mln)