MNI ASIA OPEN: Inflation Expectations Gain Slightly

US TSYS Weaker Tsy Inside Narrow Range, Focus on Wednesday's CPI

• Still weaker after the bell, Treasury futures are paring losses after the bell, Dec'23 10Y at 109-27 (-2.5) upper half of narrow 9bp range.
• Little in the way of data today, rates drifted near the middle of the session range following the NY Fed 1Y Inflation Expectations release: 3.63% vs. 3.55% prior. Three-year-ahead inflation expectations declined a tenth to 2.8%. Median home price growth expectations increased by 0.3pp to 3.1%, its highest reading since July 2022. Year-ahead commodity price expectations rose across the board in August.
• Treasury futures dipped after $44B 3Y note auction (91282CHY0) tails: 4.660% high yield vs. 4.647% WI - the first tail since February 7 (4.073% vs. 4.035% WI).
• Curves steeper but off early highs: 3M10Y +2.584 at -118.395, 2Y10Y +2.684 at -70.391. Moving average studies continue to highlight a medium-term downtrend. An extension lower would signal scope for 109-09+, Aug 22 low and a bear trigger. A break of this level would strengthen a bearish theme.
• Another slow day ahead, data doesn't pick up until Wednesday with the release of August CPI.

JAPAN

BOJ: The Bank of Japan is once again considering a scenario in which demand strengthens and it is able to raise its overnight lending rate from negative levels while still maintaining yield curve control in order to limit the market reaction, though this is still a low probability outcome, MNI understands.

• In recent months, the BOJ has anticipated that it will first gradually loosen and then exit from yield curve control, perhaps by next April, as wage growth firms and inflation stabilises sustainably above 2%.
• This remains the most likely scenario. But a rapid improvement in demand, exerting upward pressure on price expectations, could potentially prompt it to first raise short-term rates to 0% from the current -0.1%. This was an option it also looked at under former Governor Haruhiko Kuroda last year, at a time when other major central banks were tightening aggressively. For more see MNI Policy main wire at 0539ET.

OVERNIGHT DATA

FED INFLATION EXP: U.S. inflation expectations were largely stable in August as households grew less optimistic about their financial situations, with job loss expectations rising sharply to its highest level since April 2021, according to the latest New York Fed survey.

• Median one- and five-year-ahead inflation expectations rose a tenth in August, to 3.6% and 3.0%, respectively. Three-year-ahead inflation expectations declined a tenth to 2.8%. Median home price growth expectations increased by 0.3pp to 3.1%, its highest reading since July 2022. Year-ahead commodity price expectations rose across the board in August.
• The mean perceived probability of losing one’s job in the next 12 months rose by 2.0pp to 13.8%, its highest reading since April 2021. The median expected growth in household income fell by 0.3pp to 2.9% in August, its lowest reading since July 2021, according to the August Survey of Consumer Expectations.
• Perceptions about current and future credit conditions both deteriorated, the survey showed. The share of households reporting it is harder to obtain credit than one year ago hit a new series high.

FED: Heading towards Wednesday's CPI report for August, Bloomberg consensus puts core CPI at a median 0.2% M/M or an average 0.23% M/M.

• The Cleveland Fed nowcast meanwhile pencils in core CPI at 0.38% M/M, but with the important caveat that it has seen large overshoots in the prior two months (averaging 0.26pps) after what had been a particularly accurate run before that.
• Headline CPI is seen at very strong 0.79% M/M, also stronger than the median estimate of 0.6% M/M and average of 0.56% M/M.

MARKETS SNAPSHOT

Key late session market levels:

• DJIA up 83.08 points (0.24%) at 34659.43
• S&P E-Mini Future up 27.5 points (0.61%) at 4538.5
• Nasdaq up 157 points (1.1%) at 13918.2
• US 10-Yr yield is up 1.8 bps at 4.2821%
• US Dec 10-Yr futures are down 3.5/32 at 109-26
• EURUSD up 0.0046 (0.43%) at 1.0746
• USDJPY down 1.26 (-0.85%) at 146.57
• WTI Crude Oil (front-month) down $0.28 (-0.32%) at $87.22
• Gold is up $2.72 (0.14%) at $1921.81

US TREASURY FUTURES CLOSE

• 3M10Y +2.919, -118.06 (L: -122.17 / H: -116.53)
• 2Y10Y +2.437, -70.638 (L: -72.504 / H: -68.637)
• 2Y30Y +4.214, -61.512 (L: -65.335 / H: -59.844)
• 5Y30Y +3.043, -3.673 (L: -7.314 / H: -2.868)
• Current futures levels:
• Dec 2-Yr futures down 0.375/32 at 101-19.625 (L: 101-18.25 / H: 101-20.375)
• Dec 5-Yr futures down 1.5/32 at 106-5.75 (L: 106-01.75 / H: 106-07)
• Dec 10-Yr futures down 4/32 at 109-25.5 (L: 109-20 / H: 109-29)
• Dec 30-Yr futures down 15/32 at 119-3 (L: 118-25 / H: 119-17)
• Dec Ultra futures down 28/32 at 125-29 (L: 125-18 / H: 126-25)

US‌‌ ‌‌10YR‌‌ ‌‌FUTURE‌‌ ‌‌TECHS:‌‌ (Z3) Support Remains Exposed

• RES 4: 112-24+ High Jul 27
• RES 3: 112-14 High Aug 10 and a key short-term resistance
• RES 2: 112-00 Round number resistance
• RES 1: 110-13+/111-12+ 20-day EMA / High Sep 1
• PRICE: 109-25 @ 11:23 BST Sep 11
• SUP 1: 109-19 Low Sep 7
• SUP 2: 109-18+/09+ Low Aug 25 / 22 and the bear trigger
• SUP 3: 108-20 1.000 proj of the Jul 18 - Aug 4 - Aug 10 price swing
• SUP 4: 107.23 1.236 proj of the Jul 18 - Aug 4 - Aug 10 price swing

The trend direction in Treasuries remains down. The latest move lower highlights a potential short-term reversal and 111-12+ marks the key short-term resistance, the Sep 1 high. Moving average studies continue to highlight a medium-term downtrend. An extension lower would signal scope for 109-09+, Aug 22 low and a bear trigger. A break of this level would strengthen a bearish theme.

SOFR FUTURES CLOSE

• Sep 23 -0.005 at 94.580
• Dec 23 -0.015 at 94.540
• Mar 24 -0.010 at 94.685
• Jun 24 steady00 at 94.955
• Red Pack (Sep 24-Jun 25) -0.01 to steady
• Green Pack (Sep 25-Jun 26) -0.01 to -0.005
• Blue Pack (Sep 26-Jun 27) -0.02 to -0.01
• Gold Pack (Sep 27-Jun 28) -0.035 to -0.02

SHORT TERM RATES

SOFR Benchmark Settlements:

• 1M -0.00113 to 5.32833 (+.00059 total last wk)
• 3M -0.00522 to 5.40525 (+0.00817 total last wk)
• 6M -0.00912 to 5.46285 (+0.01873 total last wk)
• 12M -0.02033 to 5.40359 (+0.06318 total last wk)

• Daily Effective Fed Funds Rate: 5.33% volume: $104B
• Daily Overnight Bank Funding Rate: 5.32% volume: $267B

• Secured Overnight Financing Rate (SOFR): 5.31%, $1.420T
• Broad General Collateral Rate (BGCR): 5.30%, $572B
• Tri-Party General Collateral Rate (TGCR): 5.30%, $561B
• (rate, volume levels reflect prior session)

FED REVERSE REPO OPERATION

Repo operation bounces to $1,549.111B w/94 counterparties, compared to $1,525.403B (lowest since early March 2022) 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.

EGBs-GILTS CASH CLOSE: Cheaper To Start A Busy Week

Gilts underperformed Bunds Monday for the first time in 4 sessions, with both the UK and German curves bear steepening to start the week.

• With a limited set of macro data on the European schedule, core FI cheapened alongside global counterparts following hawkish tones overnight from BoJ's Ueda.
• Overall though the ECB decision and US inflation data loomed over a fairly cautious session, with supply pressures also weighing including Dutch and German supply up Tuesday (EU today also announced 7Y supply).
• BoE's Mann burnished her hawkish credentials, saying that the BoE should err toward overtightening.
• Periphery EGB spreads widened - GGBs modestly outperformed on the back of DBRS’ upgrading Greece to investment grade on Friday.
• Attention turns to UK labour market data which is out first thing Tuesday morning in which evidence of further wage persistence will be eyed - MNI's preview is here.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 1.6bps at 3.097%, 5-Yr is up 1.8bps at 2.633%, 10-Yr is up 2.5bps at 2.635%, and 30-Yr is up 3.3bps at 2.768%.
• UK: The 2-Yr yield is up 1.6bps at 5.085%, 5-Yr is up 3.4bps at 4.697%, 10-Yr is up 4.4bps at 4.467%, and 30-Yr is up 6.5bps at 4.769%
• Italian BTP spread up 1.8bps at 175.7bps / Greek up 0.5bps at 135.9bps

FOREX USDJPY Consolidates Overnight Decline, EMFX Surges

• A confluence of factors led to the greenback falling out of favour on Monday, which has prompted the USD index to retrace roughly 0.55% lower to start the week.
• First of all, stronger than expected August credit data in China has provided risk sentiment with a firmer backdrop, boosting global indices, benefitting more risk sensitive currencies and weighing on the dollar. Additionally, hawkish commentary from Bank of Japan’s Ueda has prompted a substantial correction lower for USDJPY and taking the shine off the USD index as a whole. Furthermore, after the impressive string of winning sessions for the index, the close proximity to the US CPI data and next weed’s Fed decision, market participants may be taking an opportunity to lock in some profits.
• Although the daily G10 ranges have not altered much throughout US hours, there was some notable movement for USDJPY (-0.90%) which after bouncing over 100 pips from the 145.91 lows, then resumed its intra-day downtrend before settling around 146.50 as we approach the APAC crossover.
• Overall, trend conditions remain bullish for USDJPY and on the downside, 144.45 represents the key short-term support, the Sep 1 low.
• The more positive mood across markets has seen the likes of CNH and AUD consolidate gains of around 0.8% on the session, however, the emerging market fx basket has really outperformed across the US timezone.
• This has been most noticeable in USDMXN, declining 1.7% to trade back to 17.30 with some better-than-expected industrial output figures providing an additional MXN tailwind. On the downside for USDMXN, support to watch lies at the 50-day EMA which intersects at 17.1243. In similar vein, the South African Rand has risen 1.4% amid a noticeable uptick in the metals complex.
• UK unemployment and German ZEW sentiment data will highlight the economic calendar on Tuesday, however, the focus will quickly turn to US August inflation data which is due on Wednesday.

TUESDAY DATA CALENDAR

Date	GMT/Local	Impact	Flag	Country	Event
12/09/2023	2300/0000			UK	BOE's Mann to Speak in Canada
12/09/2023	0600/0700	***		UK	Labour Market Survey
12/09/2023	0600/0800	**		NO	Norway GDP
12/09/2023	0700/0900	***		ES	HICP (f)
12/09/2023	0900/1000	*		UK	Index Linked Gilt Outright Auction Result
12/09/2023	0905/1105	***		DE	ZEW Current Conditions Index
12/09/2023	0905/1105	***		DE	ZEW Current Expectations Index
12/09/2023	1000/0600	**		US	NFIB Small Business Optimism Index
12/09/2023	1255/0855	**		US	Redbook Retail Sales Index
12/09/2023	1530/1130	*		US	US Treasury Auction Result for Cash Management Bill
12/09/2023	1600/1200	***		US	USDA Crop Estimates - WASDE
12/09/2023	1700/1300	**		US	US Note 10 Year Treasury Auction Result