EXECUTIVE SUMMARY
- MNI INTERVIEW: Resilience Calls For More Fed Tightening -Tracy
- MNI: Fed Dot Plot To Show 1 More Hike, GDP Boost- Ex-Officials
- MNI Homebuilder Sentiment Slips Further In September
- MNI NY Fed Service Activity Dips In Sept But Doesn’t Move ISM Needle
US
FED: Elevated trend inflation and a more resilient economy likely warrant slightly higher real interest rates, though weakness in Europe and China and the recent rise in 10-year Treasury yields allow the Fed some breathing room to decide on its next move, former Federal Reserve Bank of Dallas special adviser Joseph Tracy told MNI.
- U.S. central bankers are weighing the trade-offs between holding rates at their current level for a bit longer -- and risk getting stuck with higher inflation and inflation expectations -- versus potentially overtightening and needing to reverse course quickly if the economy sinks into recession and inflation falls faster than expected, Tracy said.
- "In risk-management thinking, the cost of the holding rates constant is we will have to tighten more going into 2024. On the other hand if I tighten too much now, I increase the chance of a recession next fall at an awkward time around the election," he said. "Whether they wait a meeting or two to hike won't matter that much. It's down to what they learn in the interim that might inform the decision so they don't make an inadvertent error." For more see MNI Policy main wire at 1020ET.
FED: Federal Reserve officials are likely to pencil in another interest rate hike and stronger economic growth for this year in the FOMC's updated quarterly forecasts Wednesday, hedging bets on additional tightening in case inflation proves more persistent than policymakers project, former Fed officials and staffers told MNI.
- It's unclear whether the FOMC will significantly alter its June projection for 100 bps of cuts in 2024, though there is a desire to convey a "higher for longer" message, the former officials and staffers said.
- “We should expect to see in the SEP and in the rhetoric a bias toward overshooting versus undershooting. Another thing that will come through is there really is no multi-meeting strategy at this point – it’s truly meeting-by-meeting and data dependent,” said ex-Atlanta Fed President Dennis Lockhart. “The size of cuts projected for next year could appear again or it could shrink. They could begin to show holding for longer if only to be conservative and cautious.”
- “My best guess is the numbers in favor slip, but still a majority” will expect one more rate hike this year, said William Dudley, former New York Fed president. For more see MNI Policy main wire at 1151ET.
US TSYS Curves Extend Inversion Ahead Wed' FOMC Policy Annc
- Following this morning's whippy trade, intermediate to long end rates are trading near mid-session highs (TYZ3 steady at 109-16.5 vs. 109-19 high, USZ3 +7 at 118-26 vs. 118-28 high), curves flatter (3M10Y -1.769 at -115.395; 2Y10Y -4.558 at -74.996).
- No obvious headline or Block/flow driver for early moves as volumes remain exceptionally light by the close (TYZ3 <790k), more likely just repositioning ahead this Wednesday's FOMC policy announcement.
- Traders expect the Fed to keep rates on hold at this Wed's annc but with a tightener bias ahead. Rate hike projections through year end largely static: Sep 20 FOMC is .8% w/ implied rate change of +0.02bp to 5.333%. November cumulative of +7.9p at 5.410, December cumulative of 11.5bp at 5.446%. Fed terminal at 5.445% in Jan'24.
- Look ahead: Tuesday's data includes Building Permits and Housing Starts at 0830ET, US Treasury $13B 20Y Reopen Sale at 1300ET.
OVERNIGHT DATA
US DATA: The NY Fed’s services business activity index fell to -3.0 from +0.6 in September, for its lowest since June after two largely neutral months. It doesn’t have particularly notable implications for the ISM Services survey due Oct 4 after YTD improvements seen in both series.
- Details: Whilst the overall index implied only a small decrease in activity on the month, the business climate index continued to show conditions remaining notably worse than normal at -27.4 (-3pts), even if that’s relatively strong compared to levels seen in late 22/early 23.
- “Employment continued to increase slightly, and wages grew just a touch faster than last month. The pace of input price increases was little changed, while selling price increases slowed somewhat. Looking ahead, firms were not particularly optimistic, with just over a third expecting conditions to improve over the next six months.”
US DATA: The NAHB housing market index surprised lower for the month running, coming in at 45 in September (cons 49) after 50 in Aug and now down 11pts from July’s recent high of 56.
- Declines were broad-based: present sales, future sales and prospective buyer traffic all declined by 5 or 6pts on the month, whilst the regional breakdown of the main index ranged between -4 and -7pts on the month.
- The decline in the overall index takes it back to April levels, a broadly similar move to that seen in the S&P homebuilder price-to-book ratio against the backdrop of the bear steepening seen in Treasuries.
MARKETS SNAPSHOT
Key late session market levels:- DJIA up 8.46 points (0.02%) at 34625.37
- S&P E-Mini Future up 1 points (0.02%) at 4498.5
- Nasdaq down 8.7 points (-0.1%) at 13698.29
- US 10-Yr yield is down 1.8 bps at 4.3145%
- US Dec 10-Yr futures are steady at at 109-16.5 at 109-16.5
- EURUSD up 0.0023 (0.22%) at 1.0681
- USDJPY down 0.12 (-0.08%) at 147.72
- WTI Crude Oil (front-month) up $0.76 (0.84%) at $91.53
- Gold is up $7.75 (0.4%) at $1931.73
- EuroStoxx 50 down 49.17 points (-1.14%) at 4245.88
- FTSE 100 down 58.44 points (-0.76%) at 7652.94
- German DAX down 166.41 points (-1.05%) at 15727.12
- French CAC 40 down 102.68 points (-1.39%) at 7276.14
US TREASURY FUTURES CLOSE
- 3M10Y -1.968, -115.594 (L: -116.837 / H: -111.854)
- 2Y10Y -4.344, -74.782 (L: -75.222 / H: -69.69)
- 2Y30Y -5.192, -67.149 (L: -67.594 / H: -61.415)
- 5Y30Y -1.927, -6.893 (L: -7.152 / H: -4.422)
- Current futures levels:
- Dec 2-Yr futures down 1.75/32 at 101-14.25 (L: 101-13 / H: 101-16.5)
- Dec 5-Yr futures down 1.75/32 at 105-29.25 (L: 105-24.5 / H: 105-31)
- Dec 10-Yr futures up 0.5/32 at 109-17 (L: 109-08 / H: 109-19)
- Dec 30-Yr futures up 8/32 at 118-27 (L: 118-04 / H: 118-28)
- Dec Ultra futures up 13/32 at 125-14 (L: 124-14 / H: 125-14)
US 10YR FUTURE TECHS: (Z3) Key Support Remains Intact - For Now
- RES 4: 112-24+ High Jul 27
- RES 3: 112-14 High Aug 10
- RES 2: 112-00 Round number resistance
- RES 1: 110-05+/111-12+ 20-day EMA / High Sep 1 key resistance
- PRICE: 109-15 @ 1500 ET Sep 18
- SUP 1: 109-03 Low Sep 13 and the bear trigger
- 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 in Treasuries is bearish and last Wednesday’s low print of 109-03 reinforces the bearish theme. However, the recovery from Wednesday’s low was a bullish development and a hammer candle formation - a reversal signal - was confirmed at the close. If correct, this pattern suggests scope for a correction near-term. First resistance to watch is 110-05+, the 20-day EMA. On the downside, a break of 109-03 would instead resume the downtrend.
SOFR FUTURES CLOSE
- Sep 23 -0.005 at 94.603
- Dec 23 -0.020 at 94.530
- Mar 24 -0.020 at 94.630
- Jun 24 -0.020 at 94.850
- Red Pack (Sep 24-Jun 25) -0.05 to -0.03
- Green Pack (Sep 25-Jun 26) -0.02 to -0.005
- Blue Pack (Sep 26-Jun 27) steady to +0.015
- Gold Pack (Sep 27-Jun 28) +0.015 to +0.020
SHORT TERM RATES
SOFR Benchmark Settlements:
- 1M -0.00224 to 5.32484 (-0.00238 total last wk)
- 3M -0.00383 to 5.39785 (-0.00879 total last wk)
- 6M +0.00022 to 5.46606 (-0.00613 total last wk)
- 12M +0.02150 to 5.44294 (-0.00248 total last wk)
- Daily Effective Fed Funds Rate: 5.33% volume: $96B
- Daily Overnight Bank Funding Rate: 5.32% volume: $263B
- Secured Overnight Financing Rate (SOFR): 5.31%, $1.586T
- Broad General Collateral Rate (BGCR): 5.30%, $584B
- Tri-Party General Collateral Rate (TGCR): 5.30%, $570B
- (rate, volume levels reflect prior session)
FED REVERSE REPO OPERATION
NY Federal Reserve/MNI
Repo operation bounces to: 1,452.942B w/96 counterparties, compared to $1,401.403B (lowest level since November 15, 2021) 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 $2B Hyundai 3Pt Launched
Still waiting for UBS and BMO supply to launch - guidance updated, however.
- Date $MM Issuer (Priced *, Launch #)
- 09/18 $2B #Hyundai $700M 3Y +125, $800M 5Y +165, $500M 7Y +183
- 09/18 $2B #Enbridge $750M 60NC5 8.25%. $1.25B 60NC10 8.5%
- 09/18 $1.5B #United Arab Emirates 10Y +60
- 09/18 $1B *LG Energy $400M 3Y +100, $600M 5Y +130
- 09/18 $Benchmark AerCap Ireland +3Y +140a, 7Y +175a
- 09/18 $Benchmark UBS 4.25NC3.25 +160, 6NC5 +180, 11NC10 +200
- 09/18 $Benchmark Bank of Montreal (BMO) 2Y +87, 2Y SOFR+95, 5Y +127a
- Expected to issue later this week:
- 09/19 $Benchmark World Bank IIBRD) 5Y SOFR+25a
- 09/20 $2B Worldpay 7NC3 7.5%a in addition to GB700M 7NC3
EGBs-GILTS CASH CLOSE: Yields Tick Higher, Periphery Spreads Widen
European yields rose modestly Monday, with the German curve bear flattening and the UK's bear steepening. Periphery EGB spreads widened slightly.
- ECB / BoE terminal rate expectations picked up about 2bp apiece.
- Weekend comments from various ECB Governing Council members pushed back against the idea of near-dated rate cuts.
- Greece undeperformed on the periphery, with Moody's two-notch rating upgrade to one step below IG (in line with Fitch & S&P) offset by some disappointment it was accompanied only by a 'stable' outlook.
- Final eurozone CPI is released Tuesday morning, with UK and Finnish supply eyed as well. The BoE decision looms on Thursday (and UK CPI, and the Federal Reserve decision, before that on Wednesday).
Closing Yields / 10-Yr Periphery EGB Spreads To Germany
- Germany: The 2-Yr yield is up 4bps at 3.255%, 5-Yr is up 4.3bps at 2.735%, 10-Yr is up 3.3bps at 2.708%, and 30-Yr is up 2.7bps at 2.844%.
- UK: The 2-Yr yield is up 1.2bps at 5.033%, 5-Yr is up 4.2bps at 4.575%, 10-Yr is up 3.3bps at 4.391%, and 30-Yr is up 3.1bps at 4.731%.
- Italian BTP spread up 1.9bps at 180.4bps / Greek up 2.3bps at 144.6bps
FOREX USD Index Moderately Lower In Subdued Trade
- The US dollar has moderately edged lower on Monday with the USD index registering a 0.15% decline as we approach the APAC crossover. Losses very briefly extended through the European close and the DXY printed below Friday’s lowest levels, coinciding with a small bounce for equities and the upward bias for crude futures on Monday.
- We noted last week that the DXY extended its impressive streak of consecutive weekly advances to nine with slightly higher US inflation data and firmer-than-expected activity figures underpinning the greenback strength. Given the proximity to the FOMC decision on Wednesday, greenback profit taking dynamics may be in play.
- Price action saw EURUSD briefly climb to a session best of 1.0699, and still outperforms in the G10 space, rising 0.25%. It is worth noting that moving average studies remain in a bear mode position, highlighting the market's current sentiment and sights are on 1.0611, a Fibonacci retracement. Initial firm resistance is not seen until 1.0786, the 20-day exponential moving average.
- With Canadian CPI on Tuesday, it is worth noting that USDCAD (-0.25%) has cleared a key support at 1.3490 (Sep 1 high) but has struggled to push beyond the 50-day EMA at 1.3474. Resumed progress to the downside could ultimately open 1.3352 (Aug 7 low).
- Additionally, both UK CPI and the Bank of England are scheduled this week, attention will be on GBPUSD where the trend needle continues to point south, maintaining the bearish price sequence of lower lows and lower highs. The focus is 1.2369 next, the Jun 5 low, which was tested earlier today. Below here is 1.2308, the May 25 low and a key support.
- The RBA minutes will highlight the APAC docket on Tuesday.
TUESDAY DATA CALENDAR
| Date | GMT/Local | Impact | Flag | Country | Event |
| 19/09/2023 | 0800/1000 | ** |  | EU | EZ Current Account |
| 19/09/2023 | 0900/1100 | *** | | EU | HICP (f) |
| 19/09/2023 | 0900/1000 | ** |  | UK | Gilt Outright Auction Result |
| 19/09/2023 | 1230/0830 | *** |  | CA | CPI |
| 19/09/2023 | 1230/0830 | *** |  | US | Housing Starts |
| 19/09/2023 | 1230/1430 | | EU | ECB's Elderson Speaks at Banking Union Conference | |
| 19/09/2023 | 1255/0855 | ** | | US | Redbook Retail Sales Index |
| 19/09/2023 | 1530/1130 | * | | US | US Treasury Auction Result for Cash Management Bill |
| 19/09/2023 | 1700/1300 | ** | | US | US Treasury Auction Result for 20 Year Bond |
| 19/09/2023 | 1745/1345 | | CA | BOC Deputy Kozicki speech in Regina SK. |
1926 words