MNI ASIA OPEN: July UofM Survey Stronger Than  Expected

US

FED: Simple monetary policy rules suggest the Federal Reserve's interest rate stance will have finally caught up to where it needs to be to rein in inflation after another quarter-point increase in July, former Dallas Fed principal policy adviser Evan Koenig tells MNI.

• Koenig, who spent more than three decades at the Dallas Fed, had been critical of the central bank's failure to react quickly to rising inflation in the pandemic era. But with inflation projected to fall toward 3% by the end of the year, a range of policy rules including one developed by Koenig in 2019 now see a fed funds target of 5.25%-5.5% as right in the middle of their prescriptions for appropriate policy rates.
• "That’s encouraging, because in a way it suggests Fed policymakers aren’t behaving all that differently than historically, and they’re no longer behind the curve as they were for a considerable time," Koenig said in an interview.
• Whether that helps the chances of achieving a growth recession and significant reduction in inflation without a spike in unemployment -- the soft landing sought by Fed Chair Jerome Powell -- Koenig is unconvinced. "Is that the most likely outcome? I remain skeptical," he said. For more see MNI Policy main wire at 1332ET.

FED: Interest rates adjusted for inflation appear too low to cool the economy enough and get runaway inflation back under control, Richmond Fed research director Kartik Athreya told MNI.

• “You could argue real rates are low given the kind of demand that’s out there and the neutral interest rate that would go with it – we still may not quite be in meaningfully restrictive territory, at least in the shorter run,” he said in an interview.
• “Theory generally tells you that you need to react to inflation. If inflation comes in above target you still do something, almost robotically. In that neat world of models, it’s the promise to react to inflation that prevents it from happening.”
• U.S. consumer price inflation fell to 3% in the year to June, the lowest since March 2021, but core inflation remained a lofty 4.8%, more than double the Fed’s 2% official target. (See: MNI INTERVIEW: CPI Drop Won't Stall Hikes-Ex-NY Fed Economist) For more see MNI Policy main wire at 1023ET.

EUROPE

UK: Increased economic inactivity in the UK is largely due to the rise in long-term sickness and the hit to labour supply looks unlikely to be reversed rapidly enough to have any influence on near-term monetary policy setting, David Miles, a senior official at the Office for Budget Responsibility and former two-term Bank of England Monetary Policy Committee member told MNI.

• The decline in labour force participation has been a post-pandemic puzzle for the BOE, often referred to by Governor Andrew Bailey. But detailed work by the OBR suggests that the inactive are unlikely to return to work in sufficient numbers, even if health care provision is speeded up, to make any real difference to labour supply and policy setting.
• The OBR explored whether a rapid reduction in health service waiting lists would eat substantially into the stock of inactive people.
• "We spoke at length to the experts in the health department and the Chief Medical Officer about the kind of things that might get people back into labor force very quickly. Our best guest was that the vast majority of people who are isolated for self-reported health reasons were not the sorts of people who could get something fixed and then and say ‘OK, now I can go back into the labour force’," Miles said. For more see MNI Policy main wire at 1136ET.

ECB: European Central Bank interest rate hikes and the slowing German economy are further undermining already sluggish growth in much of central and eastern Europe, a leading economist told MNI.

• Despite having their own inflation targets, many Central, Eastern and Southern European countries are in practice compelled to follow policy moves by the ECB, Mario Holzner, Executive Director of the Vienna Institute for International Economics (WIIW) said in an interview, leaving them reliant on the exchange rate to help set local conditions.
  
• With the ECB raising rates by 400bps since the start of its hiking cycle, those non-euro area members most closely tied to the bloc’s supply chains have been forced to follow suit, harming growth in the process.
• “I think the ECB has got it completely wrong,” Holzner said. “Monetary policy that tries to deal with the supply shock by increasing interest rates doesn't work. It will definitely bring down growth, but it's a very costly way to reduce inflation by a little," he added. For more see MNI Policy main wire at 0735ET.

US TSYS Markets Roundup: Treasury Yields Bounce Ahead Fed Blackout

• Treasury futures drifting near session lows after a higher open Friday. Quiet second half trade after US rates mirrored moves in EGBs as Bunds and Gilts also reversed gains into the European close.
• Early volatility FI markets saw fast two-way trade after Import Prices fell 0.2% vs. -0.1 est, while Export Prices receded -0.9% vs. -0.1% est. Bonds lead a reversal to lower levels after initially trading higher.
  
• Treasury futures extend lows after preliminary July University of Michigan survey came out stronger than expected across the board: 1Y inflation surprisingly increased to 3.4% (cons 3.1) after 3.3%; 5-10Y inflation increased a tenth to 3.1% (3.0), back at the top end of the 2.9-3.1% range seen since Aug’21 and one tenth off a high since 2011; sentiment also increased to 72.6 (cons 65.6) from 64.4.
  
• Curves held mostly flatter, with the exception of 3M10Y +4.050 at -159.157 after flattening sharply Thu. Tsy 2s10s bear flattened over 6bp to -93.643, after climbing to -82.676 high in the prior session.
• Year end rate hike projections firmed up on the heavy short end selling, November cumulative of 32.3bp (vs. 27.2 low Thu) at 5.399%, December cumulative 26.3bp (vs. 19.9bp Thu) at 5.339%. Fed terminal holding at 5.395% in Nov'23.
• Reminder, the Federal Reserve enters policy blackout at midnight tonight, runs through July 27, the day after the next rate announcement.

OVERNIGHT DATA

• US JUN IMPORT PRICES -0.2%
  
• US JUN EXPORT PRICES -0.9%; NON-AG -0.9%; AGRICULTURE -1.6%

US DATA: A Fifth Consecutive Monthly Decline For Non-Oil Import Prices. Non-petroleum import prices dipped by slightly more than expected in June at -0.32% M/M (cons -0.2%) after an unrevised -0.16% M/M. It’s the fifth consecutive monthly decline for non-oil import prices, which have now fallen in 12 of the past 14 months. As such they continue to offer a disinflationary impulse that came ahead of the more recent significant easing in supply chain pressures per the NY Fed’s GSCPI.

US: The preliminary July U.Mich survey was stronger than expected across the board:

• 1Y inflation surprisingly increased to 3.4% (cons 3.1) after 3.3%.
• 5-10Y inflation increased a tenth to 3.1% (3.0), back at the top end of the 2.9-3.1% range seen since Aug’21 and one tenth off a high since 2011.
• Sentiment also increased to 72.6 (cons 65.6) from 64.4.
• Worth noting that the interview period ran June 26th- July 12th, so is unlikely it captured any expectations response to Wednesday's lower-than-expected CPI report.

• CANADIAN MAY MANUFACTURING SALES +1.2% MOM
• CANADA MAY FACTORY INVENTORIES -0.6%; INVENTORY-SALES RATIO 1.69

MARKETS SNAPSHOT

• DJIA up 135.45 points (0.39%) at 34529.73
• S&P E-Mini Future down 2.25 points (-0.05%) at 4540.75
• Nasdaq down 19.8 points (-0.1%) at 14115.99
• US 10-Yr yield is up 5.1 bps at 3.8145%
• US Sep 10-Yr futures are down 15/32 at 112-18.5
• EURUSD up 0.0008 (0.07%) at 1.1234
• USDJPY up 0.71 (0.51%) at 138.76
• WTI Crude Oil (front-month) down $1.49 (-1.94%) at $75.39
• Gold is down $0.23 (-0.01%) at $1960.31

• EuroStoxx 50 up 8.35 points (0.19%) at 4400.11
• FTSE 100 down 5.64 points (-0.08%) at 7434.57
• German DAX down 35.96 points (-0.22%) at 16105.07
• French CAC 40 up 4.74 points (0.06%) at 7374.54

US TREASURY FUTURES CLOSE

• 3M10Y +4.572, -158.635 (L: -167.968 / H: -158.374)
• 2Y10Y -6.091, -93.628 (L: -95.064 / H: -86.243)
• 2Y30Y -9.237, -83.228 (L: -84.908 / H: -72.741)
• 5Y30Y -5.942, -11.094 (L: -12.454 / H: -4.574)
• Current futures levels:
• Sep 2-Yr futures down 8.625/32 at 101-28.875 (L: 101-28.25 / H: 102-04.75)
• Sep 5-Yr futures down 14/32 at 107-18.5 (L: 107-17 / H: 107-31.75)
• Sep 10-Yr futures down 14.5/32 at 112-19 (L: 112-16.5 / H: 113-01.5)
• Sep 30-Yr futures down 17/32 at 126-15 (L: 126-11 / H: 127-06)
• Sep Ultra futures down 18/32 at 134-22 (L: 134-16 / H: 135-18)

US 10Y FUTURE TECHS: (U3) Watching Resistance At The 50-Day EMA

• RES 4: 114-06+ High Jun 6
• RES 3: 114-00 High Jun 13
• RES 2: 113-11+ 50-day EMA and a key resistance point
• RES 1: 113-03 High Jul 13
• PRICE: 112-20 @ 1300ET Jul 14
• SUP 1: 112-07+ Low Jul 13
• SUP 2: 111-03+/110-05 Low Jul 11 / 6 and the bear trigger
• SUP 3: 110-00 Low Nov 9 2022 (cont)
• SUP 4: 109-14 Low Nov 8 2022 (cont)

Treasury futures have rallied this week and are holding on to their recent gains. The medium-term trend remains down and the latest recovery is likely part of a short-term corrective cycle. The contract has cleared the 20-day EMA and attention turns to a key resistance area at the 50-day EMA, at 113-11+. A clear break of this average would strengthen a bullish theme. Key support and the bear trigger has been defined at 110-05, the Jul 6 low.

SOFR FUTURES CLOSE

• Sep 23 -0.025 at 94.605
• Dec 23 -0.065 at 94.680
• Mar 24 -0.110 at 95.010
• Jun 24 -0.160 at 95.425
• Red Pack (Sep 24-Jun 25) -0.205 to -0.175
• Green Pack (Sep 25-Jun 26) -0.15 to -0.09
• Blue Pack (Sep 26-Jun 27) -0.07 to -0.03
• Gold Pack (Sep 27-Jun 28) -0.02 to -0.01

SHORT TERM RATES

SOFR Benchmark Settlements:

• 1M +0.00830 to 5.22994 (+.05293/wk)
• 3M +0.00193 to 5.30989 (+.01451/wk)
• 6M -0.01726 to 5.37554 (-.03946/wk)
• 12M -0.07252 to 5.25401 (-.20041/wk)

• Daily Effective Fed Funds Rate: 5.08% volume: $122B
• Daily Overnight Bank Funding Rate: 5.07% volume: $269B

• Secured Overnight Financing Rate (SOFR): 5.06%, $1.445T
• Broad General Collateral Rate (BGCR): 5.04%, $607B
• Tri-Party General Collateral Rate (TGCR): 5.04%, $591B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

The latest operation falls to $1,740.777B (lowest since early May'22), w/ 98 counterparties, compared to $1,767.432B 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: Rally Reverses, UK CPI Eyed Next Week

Gilts and Bunds sold off Friday as the US inflation data-induced rally of the prior two sessions partially reversed ahead of the weekend.

• Core FI yields opened sharply higher, in part on hawkish comments by Fed Gov Waller overnight, but began rallying anew, with Gilt yields moving to fresh lows for the week.
• The rally lost steam in the afternoon though, with the reversal accelerating toward the cash close after the University of Michigan survey showed unexpectedly strong US consumer confidence and an uptick in inflation expectations.
• The UK short end underperformed Germany's as BoE hike pricing rebounded, possibly with a focus on inflation data next week; further down the curve (5s-10s), German instruments underperformed.
• Greece underperformed on the periphery, with spreads widening on the week despite a broader risk rally. Moody's review of Spain is the highlight of the ratings schedule after hours Friday.
• Next week's main event is UK CPI on Wednesday.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 5.8bps at 3.21%, 5-Yr is up 4.6bps at 2.611%, 10-Yr is up 2.7bps at 2.512%, and 30-Yr is up 0.4bps at 2.533%.
• UK: The 2-Yr yield is up 6.9bps at 5.206%, 5-Yr is up 2.1bps at 4.587%, 10-Yr is up 2.2bps at 4.444%, and 30-Yr is up 1.7bps at 4.556%.
• Italian BTP spread up 0.5bps at 165.9bps / Greek up 3.1bps at 145.2bps

FOREX USD Index Consolidates Impressive Weekly Decline Below 100.00

• The greenback halted the week’s significant selloff on Friday, with the USD index 0.15% higher on the Friday. However, the index has been consolidating below 100 having slipped 2.3% this week with the primary driver being the weaker-than-expected US inflation data on Wednesday.
• Most G10 currencies weakened against the USD on Friday, with the likes of CAD and AUD underperforming, posting declines of around 0.75%. The greenback was underpinned by some firmer data from the University of Michigan. As well as stronger sentiment figures, inflation expectations also edged higher. However, the overall mood for risk will unlikely be affected given the survey period barely crossed over with this week's US CPI read - leaving markets with the assumption that the final sentiment reading will be revised lower.
• This appears the case in EURUSD, which has notably risen again on Friday, albeit a meagre 0.08%. Nonetheless, the pair continues to extend the move above 1.1095, the Apr 26 high and key resistance. The break has confirmed a resumption of the medium-term uptrend and the focus is on 1.1274 next, a retracement point.
• Conversely, lower core yields have weighed on the Japanese Yen on Friday, with USDJPY half a percent higher on the session, having staged a solid 150-pip bounce from the overnight lows of 137.25. However, the moderate improvement pales in comparison to the impressive six big figure sell-off from the post NFP highs last Friday.
• Monday sees GDP and activity data out of China which will likely set the early mood for global markets. Inflation data from Canada, New Zealand and the UK will highlight next week’s docket as well retail sales figures from the US.

MONDAY DATA CALENDAR

Date	GMT/Local	Impact	Flag	Country	Event
16/07/2023	-			EU	ECB Panetta at G20 Finance/Central Bank meeting
17/07/2023	0200/1000	***		CN	Retail Sales
17/07/2023	0200/1000	***		CN	Industrial Output
17/07/2023	0200/1000	**		CN	Surveyed Unemployment Rate M/M
17/07/2023	0200/1000	***		CN	GDP
17/07/2023	0200/1000	***		CN	Fixed-Asset Investment
17/07/2023	0800/1000	**		IT	Italy Final HICP
17/07/2023	0815/1015			EU	ECB Lagarde speaks at ECB CESEE conference
17/07/2023	0830/1030			EU	ECB Lane chairs session at ECB CESEE conference
17/07/2023	-			EU	ECB Panetta at G20 Finance/Central Bank meeting
17/07/2023	1215/1415			EU	ECB Elderson chairs session at ECB CESEE conference
17/07/2023	1230/0830	*		CA	International Canadian Transaction in Securities
17/07/2023	1230/0830	**		CA	Wholesale Trade
17/07/2023	1230/0830	**		US	Empire State Manufacturing Survey
17/07/2023	1530/1130	*		US	US Treasury Auction Result for 13 Week Bill
17/07/2023	1530/1130	*		US	US Treasury Auction Result for 26 Week Bill