MNI ASIA OPEN: Mild CPI Variance Won't Change Fed Course

US

FED: Federal Reserve officials are debating the possibility that the long-term neutral rate of interest has moved higher after the global pandemic and fiscal largesse that followed, a shift that, if confirmed, could herald a return to the considerably higher interest rates that characterized the 1990s.

• Economists generally agree the short-run natural rate -- one that neither stimulates nor depresses growth -- has risen due to excess savings during the pandemic and a lengthening of the credit channel of monetary policy transmission after borrowers locked in low fixed-rate loans during Covid. (See: MNI INTERVIEW: Fed Probably Needs A Bit More Tightening-Aikman)
• Official rates have jumped over five percentage points from zero in a year and a half with apparently little harm to the red-hot labor market and growth momentum. This raises the chance that a higher short-term r-star could transmit into the longer-run rate, signaling a more permanent change which would have to be incorporated into FOMC rate-setting calculations. For more see MNI Policy main wire at 0949ET.

EUROPE

EU: European Union officials working under the Spanish presidency are making a last-ditch attempt to secure agreement on a reworked fiscal rule regime for the bloc by the end of the year and to head off the return of the existing rules which are currently suspended until the end of 2023, officials in Brussels told MNI.

• While Germany is insisting on a minimum “safeguard” 1.0% reduction per year in debt/GDP ratios in excess of the guidelines, this has been dismissed as unsustainable by both high-debt states and the European Commission, and Spain is pushing in technical talks for a compromise under which the reduction could be averaged out over the full four to seven years of an EU debt consolidation programme.
• But while Spain argues that this would enable states to continue in programmes during periods of lower economic growth and tax revenues, officials still doubted whether it would satisfy Germany. (See MNI: Chances Rising Of Return To EU's Old Fiscal Rules In 2024) For more see MNI Policy main wire at 1127ET.

US TSYS FI Shrugs Off Early CPI Driven Volatility, Focus on Thu's PPI

• US FI markets are holding modest gains after the bell, relatively quiet after early CPI data generated volatility. Fast two-way on wide range post-data has segued to better buying with short end outperforming as markets continue to digest stronger than expected core services CPI while goods prices contracted.
• Core CPI accelerated from 0.16% to 0.28% M/M in August, with a large part of the move driven by a relative airfares contribution of +0.09pps (the PCE source for which are PPI and not CPI). Combined with other details from the report, it sees the following preliminary core PCE estimates to be updated after tomorrow’s PPI data (with core PCE due Sep 29).
• General opinion from trading desks: this morning's data does little to change Fed's policy path (no change next week but with a hawkish tone for year end if inflation percolates higher).
• Rate hike projections through year end receded: Sep 20 FOMC is 2.3% w/ implied rate change of +0.06bp to 5.338%. November cumulative of +10.4p at 5.436, December cumulative of 12.2bp at 5.454%. Fed terminal at 5.45% in Jan'24.
• Treasury futures holding modest gains after $20B 30Y auction reopen (912810TT5) tailed by 1bp: 4.345% high yield vs. 4.335% WI; 2.46x bid-to-cover vs. 2.42x in the prior month.
• Focus turns to Thursday's August PPI, Retail Sales and Weekly Claims data.

OVERNIGHT DATA

• US AUG CPI 0.6%, CORE 0.3%; CPI Y/Y 3.7%, CORE Y/Y 4.3%
• US AUG ENERGY PRICES 5.6%
• US AUG OWNERS' EQUIVALENT RENT PRICES 0.4%

• Unrounded % M/M (SA): Headline 0.631%; Core: 0.278% (from 0.160%)
• Unrounded % Y/Y (NSA): Headline 3.665%; Core: 4.349% (from 4.653%)

US DATA: Core services excl OER and primary rents accelerated to 0.37% M/M in Aug after the 0.19% M/M in Jul and 0.00% in Jun, for its strongest since Mar’23.

• In itself it’s close to the limited analyst expectations that we had seen beforehand averaging 0.34% M/M.
• However, core services excl all rent of shelter saw a stronger increase to 0.52% M/M from 0.23% and 0.06% M/M for its strongest since Sep’22. It strips out the aforementioned heavy decline in lodging away from home (its overall drag on core CPI increasing from -0.01pp to -0.05pp).
• Both measures are however boosted by a sizeable swing from airfares as noted earlier, with the airfare contribution to total core CPI swinging from -0.06pp to +0.03pp on the month.
• Whilst a smaller swing on the month, car insurance printed another very strong +2.4% M/M after 2.0% (adding 0.08pps to core CPI).

US DATA: Today’s core CPI accelerated from 0.16% to 0.28% M/M in August, with a large part of the move driven by a relative airfares contribution of +0.09pps (the PCE source for which are PPI and not CPI).

• Combined with other details from the report, it sees the following preliminary core PCE estimates to be updated after tomorrow’s PPI data (with core PCE due Sep 29).
• JPM sees 0.17% M/M and MS sees 0.15% M/M in Aug, moderating from the 0.22% in July and 0.21% in June, back consistent at or below the 2% target for the first time since Jul’22 and before that Feb’21.
• MS go on to estimate PCE core services ex housing at 0.16% M/M after 0.46%. M/M.

• US MBA: MARKET COMPOSITE -0.8% SA THRU SEP 08 WK
• US MBA: REFIS -5% SA; PURCH INDEX -1% SA THRU SEP 8 WK
• US MBA: UNADJ PURCHASE INDEX -27% VS YEAR-EARLIER LEVEL
• US MBA: 30-YR CONFORMING MORTGAGE RATE 7.27% VS 7.21% PREV

• US REPORTS AUG BUDGET SURPLUS OF $89B VS $220B DEFICIT YR AGO
• US AUG BUDGET SURPLUS DUE TO REV ADD FROM STUDENT-LOAN REVERSAL

MARKETS SNAPSHOT

Key late session market levels:

• DJIA down 97.94 points (-0.28%) at 34545.71
• S&P E-Mini Future down 1.75 points (-0.04%) at 4511.5
• Nasdaq up 30.2 points (0.2%) at 13803.13
• US 10-Yr yield is down 3.8 bps at 4.2425%
• US Dec 10-Yr futures are up 5/32 at 110-1
• EURUSD down 0.0024 (-0.22%) at 1.073
• USDJPY up 0.37 (0.25%) at 147.45
• WTI Crude Oil (front-month) down $0.29 (-0.33%) at $88.56
• Gold is down $4.76 (-0.25%) at $1908.91

US TREASURY FUTURES CLOSE

• 3M10Y -6.031, -125.293 (L: -127.787 / H: -116.847)
• 2Y10Y +0.261, -74.15 (L: -74.846 / H: -70.628)
• 2Y30Y +2.003, -65.314 (L: -69.17 / H: -62.011)
• 5Y30Y +2.232, -5.79 (L: -11.481 / H: -3.475)
• Current futures levels:
• Dec 2-Yr futures up 1.375/32 at 101-19.625 (L: 101-11.875 / H: 101-21.125)
• Dec 5-Yr futures up 3.25/32 at 106-8 (L: 105-20.25 / H: 106-11)
• Dec 10-Yr futures up 4.5/32 at 110-0.5 (L: 109-03 / H: 110-04.5)
• Dec 30-Yr futures up 8/32 at 119-22 (L: 118-08 / H: 119-27)
• Dec Ultra futures up 9/32 at 126-24 (L: 125-05 / H: 126-29)

US 10Y FUTURE TECHS: (Z3) Bullish Hammer Candle Formation?

• RES 4: 112-24+ High Jul 27
• RES 3: 112-14 High Aug 10
• RES 2: 112-00 Round number resistance
• RES 1: 110-10 /111-12+ 20-day EMA / High Sep 1 key resistance
• PRICE: 110-02+ @ 19:37 BST Sep 13
• SUP 1: 109-03 Intraday low
• SUP 2: 109-00 Round number support
• 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 and today’s low print of 109-03 reinforces the bearish theme and signals a resumption of the downtrend. However, the recovery from the day low is a short-term bullish development. A strong close today would highlight a hammer candle formation - a reversal signal. If correct, that would suggest scope for a correction new-term. First resistance to watch is 110-10, the 20-day EMA.

SOFR FUTURES CLOSE

• Sep 23 +0.008 at 94.590
• Dec 23 steady00 at 94.545
• Mar 24 steady00 at 94.680
• Jun 24 +0.010 at 94.935
• Red Pack (Sep 24-Jun 25) +0.020 to +0.030
• Green Pack (Sep 25-Jun 26) +0.030 to +0.030
• Blue Pack (Sep 26-Jun 27) +0.025 to +0.030
• Gold Pack (Sep 27-Jun 28) +0.020 to +0.025

SHORT TERM RATES

SOFR Benchmark Settlements:

• 1M -0.00136 to 5.33220 (+0.00274/wk)
• 3M +0.00121 to 5.40943 (-0.00104/wk)
• 6M +0.00229 to 5.47350 (+0.00153/wk)
• 12M +0.01033 to 5.43164 (+0.00772/wk)

• Daily Effective Fed Funds Rate: 5.33% volume: $108B
• Daily Overnight Bank Funding Rate: 5.32% volume: $274B

• Secured Overnight Financing Rate (SOFR): 5.30%, $1.448T
• Broad General Collateral Rate (BGCR): 5.30%, $573B
• Tri-Party General Collateral Rate (TGCR): 5.30%, $561B
• (rate, volume levels reflect prior session)

FED REVERSE REPO OPERATION

Repo operation rebounds to 1,546.225B w/95 counterparties, compared to $1,493.781B in the prior session - the lowest level since early March 2022. 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: $1.15B Marriott 2Pt Launched

• Date $MM Issuer (Priced *, Launch #)
• 09/13 $1.15B #Marriott Int $450M 3Y +100, $750M 5Y +130
• 09/13 $500M #CenterPoint Energy Houston WNG 5Y +85
• 09/13 $500M Sunoco 5NC2 7%a
• Link to US$ Credit Supply Pipeline summary

EGBs-GILTS CASH CLOSE: German Short End Underperforms Again Pre-ECB

UK yields dropped sharply Wednesday, with EGB yields rising ahead of Thursday's ECB decision. The German short end was a notable underperformer for the 2nd consecutive session.

• The UK curve leaned bull flatter on the day with outperformance in the central bank rate-sensitive 5Y segment (peak BoE hike pricing dipped to a fresh 3-month low).
• This followed a soft UK GDP print, with the US CPI data largely in line with expectations adding fresh downward impetus to global yields through the afternoon.
• The German curve twist flattened as ECB hike pricing firmed further.
• A 25bp raise Thursday briefly hit 75% implied probability after a hawkish Reuters sources piece out after market close Wednesday.
• Periphery EGB spreads widened, led by BTPs, evident of some caution ahead of tomorrow's ECB decision.
• With an otherwise quiet schedule Thursday, all attention will be on the ECB decision and the Lagarde press conference. Our meeting preview is here.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 4.3bps at 3.17%, 5-Yr is up 2.8bps at 2.682%, 10-Yr is up 0.8bps at 2.651%, and 30-Yr is down 1.4bps at 2.753%.
• UK: The 2-Yr yield is down 5.6bps at 4.985%, 5-Yr is down 7.9bps at 4.565%, 10-Yr is down 6.9bps at 4.347%, and 30-Yr is down 6.7bps at 4.664%.
• Italian BTP spread up 3.7bps at 179.6bps / Spanish up 1.6bps at 107.1bps

FOREX US CPI Induced Volatility Tempered As ECB Takes Focus

• The greenback initially spiked higher on the back of the slightly higher than expected monthly reading for US core inflation. However, the initial knee jerk moves higher then more than reversed owing to the ‘low’ nature of the unrounded headline Y/Y and core M/M beats.
• Overall, the USD index now sits close to unchanged on the day, a fairly subdued reaction given front-end treasury yields have shifted lower by around 5 basis points.
• Emphasising the lack of impact on G10 currency markets, USDJPY actually stands a touch higher on the session, although is well off a session best of 147.73. This high fell around 10 pips shy of Friday’s closing mark, a gap that has yet to be filled following the weekend’s hawkish remarks from Bank of Japan Governor Ueda.
• The resumption of the uptrend last week opens 148.40 next, the Nov 4 2022 high. On the downside, 144.45 represents the key short-term support, the Sep 1 low. A break of this level is required to highlight a short-term top.
• Liquidity matters seem to be supporting CNH which has outperformed on Wednesday, with T/N points and 1-month CNH HIBOR back towards recent highs, while 3-month CNH HIBOR has moved to the highest level seen since ’18. Technically, trend conditions remain bullish for USDCNH and the move lower in recent sessions appears to be a correction, despite price narrowing the gap with key short-term support at 7.2392, the Sep 1 low.
• With the focus for global markets turning to tomorrow’s close-call ECB rate decision, it is worth noting EURUSD has stuck to a fairly tight range this week, back above the 107.00 mark. EURUSD conditions remain bearish and the recent consolidation appears to be a bear flag formation. Moving average studies are in a bear mode set-up, highlighting the market's current sentiment and the next downside level is 1.0668 next, the Jun 7 low. Key resistance is at 1.0945, the Aug 30 high.
• Additional data of note on Thursday includes Australian employment and US retail sales for August.

THURSDAY DATA CALENDAR

Date	GMT/Local	Impact	Flag	Country	Event
14/09/2023	0130/1130	***		AU	Labor Force Survey
14/09/2023	0600/0800	***		SE	Inflation Report
14/09/2023	1215/1415	***		EU	ECB Deposit Rate
14/09/2023	1215/1415	***		EU	ECB Main Refi Rate
14/09/2023	1215/1415	***		EU	ECB Marginal Lending Rate
14/09/2023	1230/0830	**		US	Jobless Claims
14/09/2023	1230/0830	**		US	WASDE Weekly Import/Export
14/09/2023	1230/0830	**		CA	Wholesale Trade
14/09/2023	1230/0830	***		US	Retail Sales
14/09/2023	1230/0830	***		US	PPI
14/09/2023	1400/1000	*		US	Business Inventories
14/09/2023	1415/1615			EU	ECB's Lagarde speaks at Podcast
14/09/2023	1430/1030	**		US	Natural Gas Stocks
14/09/2023	1530/1130	**		US	US Bill 04 Week Treasury Auction Result
14/09/2023	1530/1130	*		US	US Bill 08 Week Treasury Auction Result