MNI ASIA OPEN: Chair Powell's Semi-Annual Testimony on Tap

US

FED: It's highly doubtful Chair Powell's commentary before Congress this week (Weds and Thur) will diverge much from the message provided at last week's FOMC meeting (MNI's review is here), which was reiterated in the Monetary Policy Report published Friday ahead of Powell's appearance.

• To recap June's meeting: the decision to hold rates at 5.00-5.25% and associated communications appeared to most observers (including us) to represent a compromise between hawkish and dovish elements of the Committee. That compromise produced more hawkish than expected messaging including 50bp of further 2023 hikes signaled in the Dot Plot, which ultimately wasn't interpreted literally by the market.
• The latter more dovish interpretation was due in large part to Powell's press conference. He underscored that July's meeting was "live" for another hike, acknowledged that risks to inflation were to the upside, and said cuts could be a "couple of years out".
• But he also pointed to potential progress on inflation, saying “I would almost say that the conditions that we need to see in place to get inflation down are coming into place”, noting that the SEP forecasts imply significant disinflation in H2 2023, and that wage data seemed to be moving their way. And even though July is "live" for a hike, the ultimate level of rates and not the pace of hikes is paramount, and in any case the Fed would need time to take account for the “long and variable lags" of previous tightening and tighter credit conditions.
• We'd expect Powell to discuss all of those areas Weds and Thurs, even only if briefly. Since questions from the House panel tend to be relatively sophisticated and politically-charged, we would expect questions on the inflation outlook, but also on the prospects of a recession, the state of the banking sector (and the Fed's role as both supervisor and lender to banks). The mortgage/housing market and QT's role could come up.
• Fiscal questions may arise but nothing of impact is likely to result from them: Powell consistently bats away questions about such issues, and portrayed Treasury's post-debt limit cash rebuilt as a non-issue for system liquidity.

US/INDIA: Indian Prime Minister Narendra Modi will arrive in Washington today ahead of his White House State Visit on Thursday. After a bilateral with President Biden on Thursday, Modi will address a joint session of Congress.

• The two leaders will announce a raft of arms deals and defence agreement designed to entice Delhi out of Moscow’s orbit and position India as a counterweight to China in the Indo-Pacific.
• Reuters: “Washington and New Delhi, whose relationship was marked by mutual suspicion during the Cold War, have been moving closer for over two decades now...”
• Semfor: “Senior Biden administration officials have described India as the U.S.’s most consequential bilateral relationship for the coming century.... But it’s not clear if Modi — or any other Indian leader — truly wants to embrace this role as Beijing’s foil.”
• The most significant deal will be a technology-transfer agreement which will allow General Electric to jointly manufacture jet engines for India’s next generation aircraft. Semafor notes that, “such a sharing of advanced U.S. defense technology is rare… and signals Washington’s desire to transform India into a major strategic partner in Asia.”

EUROPE

SWITZERLAND: The Swiss National Bank could conclude its hiking cycle this week, with a 25bps hike to 1.75% the most likely outcome, a prominent former staffer told MNI.

• Inflation is nearing the 0-2% target range and any urge for stronger tightening will be tempered by the fact that rents, which make up 20% of the consumer price index, are closely linked to the mortgage reference rate, said Sarah Lein, a former senior economist at the SNB whom observers suggest may be among candidates to replace outgoing Governing Board member Andrea Maechler.
• “They still have to raise a bit to really bring inflation back down, but I could imagine if inflation continues to decline, going back more towards 1%, that with this 25 basis points we are at the terminal rate,” Lein, now professor of macroeconomics at the University of Basel, said in an interview.

UK

BOE: The Bank of England is widely expected to deliver another 25-basis-point hike at its June meeting, lifting Bank Rate to 4.75%, and the Monetary Policy Committee will face a tricky task to avoid further priming rate expectations which have surged on strong data.

• With the MPC admitting the failings of its own projections and adopting a “data-dependent” policy approach, rate curves have moved substantially higher as economic indicators point to inflation remaining elevated. Markets are now pricing in a peak in Bank Rate just below 6%, and the curve is over 100 basis points higher through Q1 2024 than at the time the Bank prepared its May Monetary Policy Report.
• One approach might be for the Committee to modify its policy statement, which In May stated that it "would continue to monitor closely indications of persistent inflationary pressures ... (and) if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required." It had previously dropped a line saying it would act "forcefully" if required.

US Tsys Ignore Stronger than Expected Housing Starts Data

• Treasury futures had sold off briefly this morning after stronger than expected Housing starts 1.631M vs. 1.4M est (1.401M prior); permits 1.491M vs. 1.425M est. Rates quickly bounced as they tracked first Gilts then Bunds earlier after German 10Y yield fell 10.9bp, the largest down-move since April 28.
• Front month 10Y Treasury futures near last Thursday's post-weekly claims highs, are currently trading +9.5 at 113-11 vs. session high of 113-17. Initial firm resistance is at 114-00, the Jun 13 high, followed by 114-06+ / 114-17 High Jun 6 / 50-day EMA.
• No significant change in rate hike expectations with short end SOFR futures holding weaker. Market confidence of a hike at the July 26 FOMC is appr 70% with an implied rate of +17.3bp to 5.258%, September and November pricing in appr 86% with cumulative of +22.5bp and 21.0 respectively at 5.3-5.295%. Dec'23 cumulative running near 12bp at 5.205%, Fed terminal at 5.30% in Oct'23 and Nov'23 at the moment.
• Focus turns to Fed Chairman Powell semi-annual testimony House Services Panel tomorrow at 1000ET, though it's unlikely Chair Powell will deviate from last week's policy messaging.

OVERNIGHT DATA

• US MAY HOUSING STARTS 1.631M; PERMITS 1.491M
  
• US APR STARTS REVISED TO 1.340M; PERMITS 1.417M
• US MAY HOUSING COMPLETIONS 1.518M; APR 1.386M (REV)

• US JUN PHILADELPHIA FED NONMFG INDEX -16.6 (a little weaker than prior -16.0)

MARKETS SNAPSHOT

• DJIA down 211.83 points (-0.62%) at 34089.45
• S&P E-Mini Future down 18.75 points (-0.42%) at 4435.5
• Nasdaq down 28.4 points (-0.2%) at 13662.05
• US 10-Yr yield is down 3.5 bps at 3.7265%
• US Sep 10-Yr futures are up 8/32 at 113-9.5
• EURUSD down 0.0009 (-0.08%) at 1.0913
• USDJPY down 0.55 (-0.39%) at 141.42
• WTI Crude Oil (front-month) down $1.28 (-1.78%) at $70.50
• Gold is down $13.38 (-0.69%) at $1937.27

US TREASURY FUTURES CLOSE

• 3M10Y -3.665, -150.864 (L: -153.964 / H: -142.794)
• 2Y10Y -1.612, -97.099 (L: -98.169 / H: -93.457)
• 2Y30Y -1.664, -88.068 (L: -89.756 / H: -83.839)
• 5Y30Y -0.713, -14.135 (L: -15.573 / H: -11.104)
• Current futures levels:
• Sep 2-Yr futures up 1.875/32 at 102-5.875 (L: 102-01.375 / H: 102-08.125)
• Sep 5-Yr futures up 5.25/32 at 107-30.25 (L: 107-18.75 / H: 108-03.5)
• Sep 10-Yr futures up 8/32 at 113-9.5 (L: 112-23 / H: 113-17)
• Sep 30-Yr futures up 22/32 at 128-1 (L: 126-12 / H: 128-11)
• Sep Ultra futures up 27/32 at 137-14 (L: 135-09 / H: 137-29)

US 10YR FUTURE TECHS: (U3) Bear Threat Remains Present

• RES 4: 115-19 High May 18
• RES 3: 115-00 High Jun 1 and a key resistance
• RES 2: 114-06+ / 114-17 High Jun 6 / 50-day EMA
• RES 1: 114-00 High Jun 13
• PRICE: 113-11+ @ 1500ET Jun 20
• SUP 1: 112-12+ Low Jun 14 and the bear trigger
• SUP 2: 112-00 Low Mar 10
• SUP 3: 111-14+ Low Mar 9
• SUP 4: 110-27+ Low Mar 2 and key support

Treasury futures remain in a downtrend and last week’s move lower confirmed a resumption of the trend. Support at 112-29+, the May 26 / 30 low has been cleared. This signals scope for the 112-00 handle, the Mar 10 low. Further out, bearish price action suggests scope for a move towards 110-27+, the Mar 2 low and a key support. Short-term gains are considered corrective. Initial firm resistance is at 114-00, the Jun 13 high.

SOFR FUTURES CLOSE

• Jun 23 -0.008 at 94.778
• Sep 23 -0.020 at 94.670
• Dec 23 -0.010 at 94.805
• Mar 24 +0.010 at 95.120
• Red Pack (Jun 24-Mar 25) +0.025 to +0.050
• Green Pack (Jun 25-Mar 26) +0.035 to +0.050
• Blue Pack (Jun 26-Mar 27) +0.030 to +0.050
• Gold Pack (Jun 27-Mar 28) +0.050 to +0.055

SHORT TERM RATES

SOFR Benchmark Settlements:

• 1M +0.00084 to 5.07713 (+.06141 total last wk)
• 3M +0.01341 to 5.22025 (-.04254 total last wk)
• 6M +0.01923 to 5.30860 (+.00326 total last wk)
• 12M +0.03626 to 5.26658 (+.08215 total last wk)

US DOLLAR LIBOR: Latest settlements:

• O/N +0.01015 to 5.07529%
• 1M -0.00857 to 5.15414%
• 3M +0.00600 to 5.52029% */**
• 6M +0.01757 to 5.67400%
• 12M +0.00272 to 5.89786%
• * Record Low 0.11413% on 9/12/21; ** New 16Y high: 5.55743% on 6/12/23

• Daily Effective Fed Funds Rate: 5.08% volume: $129B
• Daily Overnight Bank Funding Rate: 5.06% volume: $285B

• Secured Overnight Financing Rate (SOFR): 5.05%, $1.405T
• Broad General Collateral Rate (BGCR): 5.04%, $619B
• Tri-Party General Collateral Rate (TGCR): 5.03%, $600B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

NY Fed reverse repo usage is back below $2T again, the current figure is at $1,989.489B w/ 102 counterparties, compared to $2,011.556B in the prior session. The high for 2023 stands at $2,375.171B on Friday March 31, 2023; all-time record high of $2,553.716B reached December 30, 2022.

PIPELINE: $1.25B Sempra Energy 2Pt Launched

• $7.1B to price Tuesday
• Date $MM Issuer (Priced *, Launch #)
• 06/20 $1.85B #General Motors $1.35B 5Y +185, $500M 10Y Tap +235
• 06/20 $1.5B #Barclays 11NC10 +340
• 06/20 $1.25B #Sempra Energy $550M 3Y +123, $700M 10Y +180
• 06/20 $1B #CBRE Services 11Y +245
• 06/20 $1B #Federal Farm Credit Bank 3Y +10
• 06/20 $500M #Inversiones CMPC WNG 10Y +240
• Expected to issue Wednesday
• 06/21 $Benchmark Export Development Canada 3Y SOFR+26a

EGBs-GILTS CASH CLOSE: All Gilt Bets Are Off Ahead Of CPI

Gilts led a global bond rally Tuesday, with caution receding ahead of Wednesday's pre-market UK CPI reading.

• The UK belly outperformed with yields across the curve down double-digits in the biggest rally since March. 2s reversed yesterday's losses; 10s were back to the same yield levels of 6 sessions ago after the key 4.50% level held firm.
• Some desks cited possible short covering (MNI's Europe Pi noted Gilts had been in structural short positioning), with CPI Weds and the BoE decision Thursday eyed - our preview will be published later today.
• The German curve bull flattened, helped by German PPI coming in below consensus, with 10-30Y yields down over 10bp. With the short end / ECB hike pricing anchored, 2s10s hit the most inverted level since 1992.
• ECB's Simkus told an MNI event that “I would in no way be surprised" if the ECB opted to hike in September, with a July hike already "pretty much clear".
• EGB periphery spreads widened amid a broader risk-off asset move, with Portugal underperforming.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 5.3bps at 3.107%, 5-Yr is down 9.5bps at 2.525%, 10-Yr is down 11.2bps at 2.405%, and 30-Yr is down 11.1bps at 2.488%.
• UK: The 2-Yr yield is down 13bps at 4.953%, 5-Yr is down 17.6bps at 4.509%, 10-Yr is down 15.5bps at 4.337%, and 30-Yr is down 10.3bps at 4.454%.
• Italian BTP spread up 2.2bps at 162.6bps / Portuguese up 2.4bps at 66.7bps

FOREX: AUD Consolidates Post RBA Minutes Decline, USDJPY Resistance Holds

• A 50 pip round trip for the USD index following yesterday’s US holiday culminates in the DXY trading broadly unchanged on the session. Mixed performance across G10 sees the majority of currencies decline against the greenback, although the Japanese Yen outperforms amid the lower core yields.
• AUD is the clear laggard across G10 currency markets following the overnight RBA minutes. Despite the RBA not showing explicit dovishness, market sentiment appears to have been influenced by subtle changes in wording regarding the necessity of additional tightening, along with the finely balanced decision on whether to raise interest rates or maintain the status quo.
• AUD extended losses as risk off flows weighed and breached support at $0.6810 to trade as low as 0.6753 during the US session. The next support level is $0.6727 the June 12 low.
• Gilts led a global bond rally Tuesday, with caution receding ahead of Wednesday's pre-market UK CPI reading. Lower core yields have benefitted the Japanese Yen specifically allowing JPY to move to the top of the G10 FX pile, with USD/JPY the best part of 60 pips lower on the day at 141.40 at typing. Initial technical resistance in the form of the 21 Nov ‘22 high (142.25) held to the pip before the pullback.
• The aforementioned UK CPI on Wednesday brings attention back on to GBP ahead of the BOE decision on Thursday. Despite the gilt move weighing on GBPUSD all the way down to 1.2714, a late bounce shows that the pair is broadly consolidating its impressive advance last week. Moving average studies remain in a bull-mode condition reflecting current trend conditions and the topside focus is on 1.2877, the Apr 25 2022 high. Initial firm support is at last Thursday’s 1.2630 low.
• Worth pointing out that EURSEK has extended its move to the upside and in the process, has printed fresh all-time highs at 11.8164, increasing the year’s advance to around 5.7%.
• Aside from UK inflation data, Canadian retail sales will also cross before Fed Chair Powell will deliver the Semi-Annual Monetary Policy Report in congress.

Wednesday Data Calendar

Date	GMT/Local	Impact	Flag	Country	Event
21/06/2023	2301/0001	*		UK	XpertHR pay deals for whole economy
21/06/2023	0600/0700	***		UK	Public Sector Finances
21/06/2023	0600/0700	***		UK	Producer Prices
21/06/2023	0600/0700	***		UK	Consumer inflation report
21/06/2023	0600/0800	**		SE	Unemployment
21/06/2023	0830/0930	*		UK	ONS House Price Index
21/06/2023	1100/0700	**		US	MBA Weekly Applications Index
21/06/2023	1230/0830	**		CA	Retail Trade
21/06/2023	1255/0855	**		US	Redbook Retail Sales Index
21/06/2023	1345/1545			EU	ECB Schnabel Panels Discussion at Landesvertretung Hessen
21/06/2023	1400/1000			US	Senate Hearing on Fed Nominees
21/06/2023	1400/1000			US	Fed Chair Jerome Powell
21/06/2023	1625/1225			US	Chicago Fed's Austan Goolsbee
21/06/2023	1700/1300	**		US	US Treasury Auction Result for 20 Year Bond
21/06/2023	1730/1330			CA	BOC minutes from last rate meeting