US TSYS: Rebound Continues As Oil, Equities Falter
The Treasury curve bull flattened Tuesday in the return of post-holiday cash trading, with futures extending the rebound from Monday's lows.
- A sharp drop in oil prices starting late Monday on an apparent de-escalation in Iran-Israel tensions helped underpin a 20+ tick rally in front TYs through mid-morning trade Tuesday. WTI front futures fell 3.8% Tuesday.
- Supporting factors included a softer-than-expected Canadian CPI report and a miss in the latest Empire Manufacturing Survey (albeit offset by stronger details under the hood), equities surrendered Monday's gains after multiple earnings reports globally disappointed (chipmaker ASML, luxury goods' LVMH, UnitedHealth) with S&P eminis off 0.8%.
- The risk-off tone in equities helped underpin November Fed rate cut pricing, for which Fed Funds futures extended to a post-Oct 7 high (implying ~98% of a 25bp cut, vs ~88% Monday).
- On that note, SF Fed's Daly reiterated it was a "reasonable thing" to cut one or two more times by the end of the year - overall a relatively cautious tone, in keeping with Monday's appearance by Gov Waller.
- The Tsy curve bull flattened on the day, with TY futures touching the highest levels since Oct 9 - last up 19.5/32 at 112-15 (L: 111-31 / H: 112-15.5) - initial resistance comes in at the Oct 9 high of 112-21.
- In cash, vs Friday's close: 2-Yr yield is down 0.8bps at 3.9475%, 5-Yr is down 4.9bps at 3.8525%, 10-Yr is down 7.5bps at 4.0258%, and 30-Yr is down 9.6bps at 4.3143%.
- Atlanta Fed Pres Bostic speaks after the close (1900ET). Wednesday's schedule includes September import/export prices - which feed into the Fed's preferred PCE inflation gauge - and a Fox interview of Vice President Harris.
NEWS
FED (MNI INTERVIEW) The Federal Reserve can get a few more rate cuts under its belt before officials need to pin down where interest rates will ultimately land, former Cleveland Fed President Loretta Mester told MNI, adding economic data since the September FOMC meeting have shifted the risks to the outlook but not baseline expectations. "The baseline is we've gotten to a point now where we're within striking distance of both parts of the mandate, and now it's time to move rates toward a more neutral stance," she told MNI's FedSpeak podcast, adding there's good reason to think the neutral rate is higher now than before Covid.
FED (MNI) San Francisco Fed President Mary Daly said Tuesday if inflation continues to gradually fall and the labor market remains broadly in place then it would be a "reasonable thing" for the central bank to cut one or two more times by the end of the year. "It's clear the direction of change is down," she said in Q&A at a New York University event. "The question is what's the pace?"
CANADA (MNI) Canada needs fiscal restraint and a good starting place is for Prime Minister Justin Trudeau to reject the threat from Quebec separatists of forcing a snap election unless the Liberals spend billions more on seniors' benefits, former finance minister John Manley told MNI. “You’re always best to do the right thing, and I think in this case the right thing is really evident," said Manley, who served under former Liberal Prime Minister Jean Chretien. “In the past when we had a lot more people working in relation to the number of people over 65 it was affordable. It no longer is."
OVERNIGHT DATA
MNI: CANADA SEP CPI INFLATION -0.4% M/M, +1.6% YY
- Canadian inflation slowed to the lowest in three-and-a-half years in September, down more than economists predicted on a drop in gasoline prices, and coming below the central bank's 2% target for the first time since the price surge during the pandemic rebound.
- The consumer price index slowed to 1.6% from a year ago, Statistics Canada said Tuesday from Ottawa, lower than August's 2.0% and the market consensus for a 1.8% increase. Gasoline prices led the moderation, down 11% versus the prior 5% decline.
- Core indexes tracked by the Bank of Canada had already fallen to the lowest since 2021 in the prior report and remained slightly elevated in September with the trim index at 2.4% and the median index at 2.3%.
US DATA: Empire State Details Stronger Than Headline Suggests
MNI: US NY FED EMPIRE STATE MFG INDEX -11.9 OCT
- The Empire State Manufacturing Survey's General Business Conditions headline index came in well below expected at -11.9 in October (3.6 survey), the lowest since May 2024 and a sharp pullback from 11.5 in September. September marked the first above-zero reading in 10 months, so a pullback in current conditions is perhaps unsurprising - thought not to this extent. However, the details looked much stronger than the headline suggests, from both an employment and inflation perspective.
- The 6-month ahead outlook improved for the second consecutive month, to 38.7 - the best since October 2021 - from 30.6 prior. Looking through the subcomponents, it's a mixed story that doesn't fully capture the dichotomy between weak current conditions and the suddenly very optimistic outlook. New orders fell to -10.2, a 5-month low, from positive 9.5 prior; employment ("number of employees") however picked up to a 22-month high 4.1 from negative 5.7 prior, with workweeks increasing, despite weaker current activity. Per NY Fed, that's the first "increase in both employment and the average workweek for the first time in a year".
- Prices paid picked up 5.8 points to to 29.0, with prices received up 3.4 points to 10.8 - indicating a modest uptick in inflationary pressures albeit remaining at "modest" levels, per the report. And that came as the new supply availability index showed greater constraints, falling to -7.5 from -2.1.
Elsewhere, per the survey: "shipments edged lower. Delivery times were slightly shorter, while supply availability deteriorated somewhat. Inventories shrank".
US DATA: NY Fed Longer Term Inflation Expectations Lift In September
Inflation expectations in the NY Fed consumer survey for September were unchanged in the near-term but otherwise lifted, with the 5Y especially better tying in with readings seen in the U.Mich survey.
- 1Y: Unchanged at 3.0% having averaged 3% since June.
- 3Y: Increased from 2.54% to 2.66%, its highest since June.
- 5Y: Increased from 2.8% to 2.9%, its highest since May.
MARKETS SNAPSHOT
Below gives key levels of markets in afternoon NY trade:
- DJIA down 326.01 points (-0.76%) at 42732.58
- S&P E-Mini Future down 47.25 points (-0.8%) at 5858.75
- Nasdaq down 198.2 points (-1.1%) at 18298.28
- US 10-Yr yield is down 6.9 bps at 4.0317%
- US Dec 10-Yr futures (TY) are up 18.5/32 at 112-14
- EURUSD down 0.0022 (-0.2%) at 1.0886
- USDJPY down 0.5 (-0.33%) at 149.25
- WTI Crude Oil (front-month) down $2.93 (-3.97%) at $70.90
- Gold is up $12.94 (0.49%) at $2661.23
Prior European bourses closing levels:
- EuroStoxx 50 down 94.28 points (-1.87%) at 4946.73
- FTSE 100 down 43.38 points (-0.52%) at 8249.28
- German DAX down 22.1 points (-0.11%) at 19486.19
- French CAC 40 down 80.09 points (-1.05%) at 7521.97
US TREASURY FUTURES CLOSE
- Dec 2-Yr futures (TU) up 3/32 at 103-14.5 (L: 103-12.6 / H: 103-16)
- Dec 5-Yr futures (FV) up 10/32 at 108-17.5 (L: 108-9.5 / H: 108-19.3)
- Dec 10-Yr futures (TY) up 18.5/32 at 112-14 (L: 111-31 / H: 112-15.5)
- Dec 30-Yr futures (US) up 43/32 at 121-04 (L: 120-1 / H: 121-07)
- Dec Ultra futures (WN) up 63/32 at 129-1 (L: 127-12 / H: 129-6)
US 10YR FUTURE TECHS: (Z4) Bear Cycle Remains Intact
- RES 4: 115-00+ High Oct 1
- RES 3: 114-14+ High Oct 3
- RES 2: 113-17 50-day EMA
- RES 1: 112-21/113-12 High Oct 21 / Low Sep 3
- PRICE: 112-14 @ 17:10 BST Oct 15
- SUP 1: 111-22 Low Oct 10
- SUP 2: 111-14 50.0% retracement of the Apr - Sep bull cycle (cont)
- SUP 3: 110-21 2.0% 10-dma envelope
- SUP 4: 111-00 Low Jul 22
A bear threat in Treasuries remains present and despite a bounce, the contract is trading closer to last week’s lows. The latest sell-off resulted in a break of not only the 50-day EMA, but also the 112-00 handle. The move undermines the prior bullish theme and instead highlights potential for a continuation lower. Sights are on 111-14, the 50% retracement for the Apr - Sep bull leg. 113-12, the Sep 3 low, is the first key resistance.
STIR: Nov Cut Pricing Cemented, But Cautious Approach Sets In Further Out
Tuesday's trade saw Fed funds futures more or less fully price in a 25bp cut at the November FOMC. The 2.5bp implied fall in rates vs the prior session (FFX4 hit a 95.365 intraday high, best level since Oct 7) was a standout across the space, both in terms of the magnitude and the direction.
- For December and beyond, moves were limited to <1bp implied. with 2024 contracts a little stronger and 2025 a little weaker.
- While not triggered by any particular headline, it's reflective of potential for a follow-up 25bp cut in November despite multiple Fed speakers including Gov Waller Monday and SF's Daly today suggesting a more cautious approach, with the September Dot Plot's median 50bp of further 2025 reductions in some question.
- The underlying message however has been that most FOMC officials have been relatively open to near-term cuts, even if another 50bp appears to have been eliminated as a possibility by the latest payrolls and CPI data. They have put relatively more focus on the end-2025 outlook, and rates markets are now basically aligned with the Dot Plot (150bp cuts through 2025).
- As for a November cut: Daly said it was reasonable to cut once or twice more by year end; ex-Cleveland Fed president Mester told MNI she favored consecutive cuts ("I personally think you'd want to follow through with another cut or two").
- Latest FF-implied pricing (cumulative cuts): 25bp Nov, 46bp Dec, 66bp Jan, 121bp Jun, 149bp Dec.
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
Repo and effective Fed funds rates were little changed Friday (no data released Monday due to holiday). For Tuesday, SOFR is set to pick up 2bp to 4.83% due to "the settlement of the Treasury’s mid-month coupon auctions along with the regular Tuesday bill issues", per Wrightson ICAP - though on Wednesday they should subside again.
REPO REFERENCE RATES (rate, change from prev. day, volume - for Oct 11)
- Secured Overnight Financing Rate (SOFR): 4.81%, -0.01%, $2058B
- Broad General Collateral Rate (BGCR): 4.81%, no change, $805B
- Tri-Party General Collateral Rate (TGCR): 4.81%, no change, $772B
New York Fed EFFR for prior session (rate for Oct 11, chg from prev day):
- Daily Effective Fed Funds Rate: 4.83%, no change, volume: $94B
- Daily Overnight Bank Funding Rate: 4.83%, no change, volume: $246B
US TSYS/OVERNIGHT REPO: Reverse Repo Takeup Below $300B For First Time In Month
ON Reverse Repo facility takeup fell to $286.4B today, vs $331.7B on Friday (the number of counterparties fell to 50 from 59 prior).
- This marks the first time since September 17 that ON RRP takeup has fallen below $300B - this had been anticipated due to higher coupon settlements (3-/10-30Y Tsy auctions) increasing demand for overnight financing.
- It's plausible ON RRP takeup will remain below $300B until month-end though is largely anticipated to remain at/above low September levels throughout (~$230B).
- Note that ON RRP is seen as something of a complement to broader bank reserves by the Fed, and its trajectory will be a factor in the determination of when to end QT. Added to reserves coming in at $3.2T last week, there is no urgency to reconsider balance sheet reduction at this stage.
STIR: SOFR FIX - 15/10/24
| SOFR FIX - Source BBG/CME | ||
| 1M | 4.78385 | -0.00207 |
| 3M | 4.64745 | 0.00015 |
| 6M | 4.44266 | -0.00092 |
| 12M | 4.12030 | -0.01944 |
BONDS: EGBs-GILTS CASH CLOSE: BTPs Shine Amid Broader Rally
European yields fell sharply Tuesday, as oil prices and equities pulled back.
- Early gains came largely after an overnight drop in crude oil on Israel-Iran de-escalation.
- UK labour market data didn't suggest any firm conclusions for BoE policy (regular pay moderated while the quantity side of the data held up), while the German ZEW investor survey beat on expectations, but missed on current situation.
- Multiple negative earnings headlines across tech (ASML) and European luxury (LVMH) weighed heavily on European equities in the session, help driving a bid for EGBs, with soft Canadian CPI and a solid 30Y Gilt auction also tailwinds.
- EGB periphery spreads narrowed, led by 10Y BTP/Bund which posted its tightest close since mid-March amid multiple reports detailing the Italian government's fiscal consolidation plans.
- UK instruments outperformed German counterparts across most of their respective curves, with 10Y outperforming on the UK curve in a bull flattening move, and 5Y on the German curve.
- Thursday's ECB meeting remains the key event of the week, but Wednesday's early highlight is UK CPI - MNI's preview is here (PDF).
Closing Yields / 10-Yr Periphery EGB Spreads To Germany
- Germany: The 2-Yr yield is down 4.6bps at 2.211%, 5-Yr is down 5.4bps at 2.083%, 10-Yr is down 5.3bps at 2.222%, and 30-Yr is down 4.7bps at 2.514%.
- UK: The 2-Yr yield is down 4.9bps at 4.13%, 5-Yr is down 5.1bps at 4.033%, 10-Yr is down 7.6bps at 4.162%, and 30-Yr is down 10bps at 4.678%.
- Italian BTP spread down 3.2bps at 123.9bps / Greek down 1.9bps at 90.3bps
FOREX: EURUSD Remains on Back Foot, EM FX Under Pressure
- Despite a subdued session for G10 FX on Tuesday, USDJPY (-0.18%) has exhibited another 100-pip range. Early weakness down to 148.85 has been significantly pared, with the dollar broadly supported across US hours by a downtick for major equity benchmarks. USDJPY now trades back to 149.50 as we approach the APAC crossover.
- Accordingly, EURUSD has gradually edged back below the 1.0900 handle, and trades just above its two-month low of 1.0885 ahead of the ECB decision Thursday. Moving average studies are in a bear-mode position and a breach of 1.0880 (both Fibonacci retracement level and the Aug 08 low) would strengthen the likelihood of a deeper retracement towards 1.0778, the Aug 1 low and a key support.
- Canadian CPI came in a touch below expectations, prompting some analysts to adjust their BOC calls to a 50BP cut in October. Initially, USDCAD extended gains to a high of 1.3839, although this momentum faded throughout the session. Spot remains marginally in the green, and a positive close would represent a tenth consecutive session of gains. We currently stand 2.5% above the October lows and any pullback would be considered corrective and allow an overbought condition to unwind.
- EM FX weakness has been a focus point and accordingly the Chinese Yuan has been under pressure, with USD/CNH pushing back above 7.1250, weaker by around 0.60% in CNH terms as onshore speculation continues around stimulus size and needs.
- Amid this dynamic and combined with the pressure on oil prices Tuesday, particular weakness has been seen for the Mexican peso and for the entire Latin American FX complex. USDMXN has risen 1.40% and is extending its recovery from the 50-day EMA support. First resistance and a key short-term hurdle for bulls, is at 19.8295, the Oct 1 high.
- UK Inflation data for September highlights the economic calendar on Wednesday.
| Date | GMT/Local | Impact | Country | Event |
| 16/10/2024 | 2145/1045 | *** |  NZ | CPI inflation quarterly |
| 15/10/2024 | 2300/1900 |  US | Atlanta Fed's Raphael Bostic | |
| 16/10/2024 | 2350/0850 | * |  JP | Machinery orders |
| 16/10/2024 | 0600/0700 | *** |  GB | Consumer inflation report |
| 16/10/2024 | 0600/0700 | *** | GB | Producer Prices |
| 16/10/2024 | 0800/1000 | ** |  IT | Italy Final HICP |
| 16/10/2024 | 0900/1000 | ** | GB | Gilt Outright Auction Result |
| 16/10/2024 | 1100/0700 | ** | US | MBA Weekly Applications Index |
| 16/10/2024 | 1215/0815 | ** |  CA | CMHC Housing Starts |
| 16/10/2024 | 1230/0830 | ** | US | Import/Export Price Index |
| 16/10/2024 | 1230/0830 | ** | CA | Monthly Survey of Manufacturing |
| 16/10/2024 | 1840/2040 |  EU | ECB's Lagarde Speech at Banka Slovenije Dinner | |
| 17/10/2024 | - | EU | European Central Bank Meeting | |
| 17/10/2024 | 2350/0850 | ** | JP | Trade |
| 17/10/2024 | 0030/1130 | *** |  AU | Labor Force Survey |