MNI ASIA OPEN: Rate Rally Discounts Patient Fed Messaging

US

FED (MNI): Fed To Congress- Looking For Confidence Before Cuts: The Federal Reserve is "acutely aware" of the challenges of high inflation and is "strongly committed" to its 2% target, its latest semiannual report to Congress on Friday showed, highlighting rate cuts are on the horizon but more confidence in the inflation decline is needed.

• "The Committee has indicated that it does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%," the Fed said, reiterating guidance from the January decision.

FED (MNI): Fed's Logan, Waller See QT Continuing At Slower Speed: The Federal Reserve's QT program is set to continue at a slower pace until policymakers see signs in money-market spreads and volatility that bank reserves are approaching a level that meets banks' demands, top officials Lorie Logan and Christopher Waller said in back-to-back remarks Friday.

• The FOMC is set to begin discussing slowing the pace of runoffs at its March 19-20 meeting as reserves near "ample" levels, and the timing of any change will be independent of any changes to interest rates, Governor Waller said. It's also not possible to identify that ample level in advance as banks' demand for reserves vary significantly over time, Dallas Fed president Logan added.

FED (MNI): Fed Messaging Swings Boost Policy Volatility-Ex-Officials: The Federal Reserve’s embrace of transparency over the last two decades has made market expectations for monetary policy more volatile, making it more difficult for the central bank to reach its goals by causing swings in financial conditions, former Fed officials and staffers told MNI.

• "There has been a revolution in Fed communications, at least in the way it's been implemented. Conceptually, I have fully supported that but it turns out that it is far from making it easier for the market and economic actors to understand the Fed," said Randal Quarles, a former Fed governor and vice chair for supervision.

INTERVIEW (MNI): Active QT Can Aid Hikes Without Market Turmoil: Central banks which sold bonds bought during Covid-19 rather than passively letting them roll off their books saw more tightening of financial conditions and lowered their balance sheets faster with minimal market disruption, Matthew Luzzetti of Deutsche Bank, co-author of new research on the global impact of QT, told MNI.

• Post-pandemic QT across advanced economies has supported central banks’ objective of tightening monetary policy to fight inflation, lifting yields and somewhat tightening financial conditions, according to one of the first papers to analyze the new policy lever globally. All this was accomplished with limited adverse effects on market functioning so far.

FED (MNI): Fed's Daly Says AI Could Lead To Better Job Market: San Francisco Federal Reserve President Mary Daly said Friday that artificial intelligence could improve the job market and shows signs of being integrated faster than past technologies that have also led to pushback from regulators and workers.

NEWS

G20 (MNI): Yellen-US Still Strongly Committed To G20 Work Despite Lack Of Communique: US Treasury Secretary janet Yellen on wires. Asked on the failure of the G20 Finance Ministers and Central Bank Governors meeting to issue a joing communique following the conclusion of the 28-29 Feb summit, Yellen claims that "the US is still strongly committed to th G20's work", adds that the bloc is "still working cooperatively on issues of taxation, climate, and others."

US (MNI): Democrats Fear Senate Finance Republicans Poised To Sink Bipartisan Tax Bill: Democrat aides are concerned that Republicans on the Senate Finance Committee are slow-walking the House-passed bipartisan and bicameral USD$78 billion tax bill in order to "kill it" ahead of the general election, according to Semafor.

RUSSIA (MNI): Lavrov In Turkey As Ankara Pushes For Ukraine Peace Talks: Russian Foreign Minister Sergey Lavrov is meeting with his Turkish counterpart Hakan Fidan on the sidelines of the Anatalya Diplomacy Forum as Ankara seeks to push for peace talks in Ukraine and the resumption of the Black Sea Grain Initiative.

US TSYS Yields Extend Late Session Lows - Back to Mid-Feb CPI Levels

• Balanced commentary from several Fed speakers and the preview of Chairman Powell's monetary policy report to Congress next week has done little to forestall the drop in Treasury yields today.
• Falling to 4.1759% this afternoon - 10Y yield is back to pre-CPI level on February 13 as markets take the latest round of data as supportive of softer policy as inflation metrics cool: lower than expected ISM Mfg (47.8 vs. 49.5 est), Prices Paid (52.5 vs. 53.2 est) and New Orders (49.2 vs. 52.7 est); as well as U. of Mich. Sentiment (76.9 vs. 79.6 est) while expectations are in line with estimates: 1 Yr Inflation (3.0% vs. 3.0% est) 5-10 Yr Inflation (2.9% vs. 2.9% est).
• Lead quarterly Jun'24 10Y futures currently at 111-00.5 (+18.5) vs. 111-02, breached initial technical resistance of 110-26+ (20-day EMA) with next level at 111-07 (50-day EMA). Curves steeper 2s10s +2.520 at -34.543, 10Y yield 4.1798 (-.0704).
• Short end support buoyed Mid-year projected rate cut pricing: March 2024 chance of 25bp rate cut currently -5.4% w/ cumulative of -1.4bp at 5.318%; May 2024 at -24.8% vs. -18.4% late Thursday w/ cumulative -7.6bp at 5.255%; June 2024 -67.9% from -56.4% late Thursday is nearing first full 25bp cut w/ cumulative cut -24.5bp at 5.086%. July'24 cumulative meanwhile has risen to -40.4bp at 4.927%.
• Look ahead: data resumes Tuesday with S&P Global US Services PMI, ISM Services, Factory and Durable Goods Orders.

OVERNIGHT DATA

US DATA (MNI): ISM Mfg Misses On Softer New Orders and Employment: A sizeable miss for the ISM manufacturing series considering the widespread improvements in February manufacturing surveys bar yesterday’s surprise slide in the MNI Chicago PMI.

• The largest misses are in new orders (unwinding more than half of January’s sharp increase) and employment (continuing the recent trend lower to lowest since Jul’23 and before that Jul’20).
• Prices paid dip slightly vs expectation of broadly no change, but in doing so consolidates January’s very sharp 7.7pt increase to highest levels since Apr’23 and before that mid-2022.
• New orders less inventories nudges lower from 6.3 to 3.9pts but remains elevated and points to further improvements ahead.
• ISM mfg 47.8 (cons 49.5) after 49.1
• New orders: 49.2 (cons 52.7) after 52.5
• Employment: 45.9 (cons 48.5) after 47.1
• Prices paid: 52.5 (cons 53.0) after 52.9

US DATA (MNI): Mfg PMI Revised Higher In Feb, Prices Recovering Amid Stronger Demand: The S&P Global US mfg PMI was revised higher to 52.2 in the final February release (flash 51.5) after 50.7 in Jan. It’s the highest since Jul 2022. The S&P Global press release points to increased optimism (full here):

• "Manufacturing is showing encouraging signs of pulling out of the malaise that has dogged the goods-producing sector over much of the past two years. After a long spell of reducing inventories in order to cut costs, factories are now increasingly rebuilding warehouse stock levels, driving up demand for inputs and pushing production higher at a pace not seen since early 2022."

US (MNI): GDPNow Lowered To Nearer 2% After Domestic Demand Hit: The Atlanta Fed’s GDPNow for real GDP growth in Q1 has been revised firmly lower to 2.12% from the 2.96 in yesterday’s update, driven by today’s construction spending and ISM manufacturing survey.

• Revisions: personal consumption revised down from 3.0% to 2.2%, private domestic investment revised down from 3.0% to 1.1%.

MARKETS SNAPSHOT

• Key market levels of markets in late NY trade:
• DJIA up 72.62 points (0.19%) at 39068.23
• S&P E-Mini Future up 40.75 points (0.8%) at 5144.75
• Nasdaq up 192.1 points (1.2%) at 16284.39
• US 10-Yr yield is down 7.2 bps at 4.1778%
• US Jun 10-Yr futures are up 18/32 at 111-0
• EURUSD up 0.0034 (0.31%) at 1.0839
• USDJPY up 0.12 (0.08%) at 150.1
• WTI Crude Oil (front-month) up $1.66 (2.12%) at $79.92
• Gold is up $39.89 (1.95%) at $2084.21
• European bourses closing levels:
• EuroStoxx 50 up 17.09 points (0.35%) at 4894.86
• FTSE 100 up 52.48 points (0.69%) at 7682.5
• German DAX up 56.88 points (0.32%) at 17735.07
• French CAC 40 up 6.74 points (0.09%) at 7934.17

US TREASURY FUTURES CLOSE

• 3M10Y -6.279, -120.024 (L: -120.546 / H: -109.161)
• 2Y10Y +1.703, -35.36 (L: -37.848 / H: -32.796)
• 2Y30Y +3.327, -20.866 (L: -25.498 / H: -17.895)
• 5Y30Y +3.169, 16.408 (L: 10.773 / H: 18.011)
• Current futures levels:
• Jun 2-Yr futures up 6.75/32 at 102-18.75 (L: 102-11.25 / H: 102-19.75)
• Jun 5-Yr futures up 14.5/32 at 107-11.5 (L: 106-25.75 / H: 107-13)
• Jun 10-Yr futures up 18/32 at 111-0 (L: 110-05.5 / H: 111-02)
• Jun 30-Yr futures up 26/32 at 120-2 (L: 118-15 / H: 120-02)
• Jun Ultra futures up 32/32 at 128-28 (L: 126-28 / H: 128-29)

US 10Y FUTURE TECHS: (M4) Gains Considered Corrective

• RES 4: 112-04 High Feb 7
• RES 3: 111-24+ High Feb 13
• RES 2: 111-07 50-day EMA
• RES 1: 110-25+ 20-day EMA
• PRICE: 110-26+ @ 1155 ET Mar 1
• SUP 1: 109-25+ Low Feb 23
• SUP 2: 109-14+ Low Nov 28
• SUP 3: 108-19+ 61.8% of the Oct 19 - Dec 27 bull phase
• SUP 4: 109-12+ 1.764 proj of Dec 27 - Jan 19 - Feb 1 price swing

The trend direction in Treasuries is unchanged and remains down, despite this week’s recovery. The recent move down has resulted in a print below the 110-00 handle. A clear break of this level would strengthen the bearish condition and signal scope for an extension towards 109-14+, the Nov 28 low. On the upside, initial firm resistance is seen at 111-08, the 50-day EMA. A clear breach of this average would signal a possible reversal.

SOFR FUTURES CLOSE

• Mar 24 +0.018 at 94.703
• Jun 24 +0.065 at 94.955
• Sep 24 +0.090 at 95.275
• Dec 24 +0.10 at 95.60
• Red Pack (Mar 25-Dec 25) +0.110 to +0.110
• Green Pack (Mar 26-Dec 26) +0.095 to +0.110
• Blue Pack (Mar 27-Dec 27) +0.080 to +0.090
• Gold Pack (Mar 28-Dec 28) +0.060 to +0.075

SOFR FIXES AND PRIOR SESSION REFERENCE RATES

SOFR Benchmark Settlements:

• 1M +0.00018 to 5.32262 (-0.00151/wk)
• 3M -0.00240 to 5.33112 (+0.00055/wk)
• 6M -0.00762 to 5.26731 (-0.00620/wk)
• 12M -0.01531 to 5.05654 (-0.01589/wk)

• Secured Overnight Financing Rate (SOFR): 5.32% (+0.01), volume: $1.951T
• Broad General Collateral Rate (BGCR): 5.31% (+0.01), volume: $683B
• Tri-Party General Collateral Rate (TGCR): 5.31% (+0.01), volume: $675B
• (rate, volume levels reflect prior session)

• Daily Effective Fed Funds Rate: 5.33% (+0.00), volume: $96B
• Daily Overnight Bank Funding Rate: 5.32% (+0.01), volume: $252B

FED Reverse Repo Operation

• RRP usage falls to the lowest level since May 2021 today: $441.265B vs. $502.074B Thursday. Today's drop compares to prior low of $493.065B on February 15 -- was the lowest since early June 2021 .
• Meanwhile, the latest number of counterparties slips to 73 from 83 Thursday (compares to 65 on January 16, the lowest since July 7, 2021).

EGBS/Gilts Near Flat As Markets Digest Mixed US Data

Core/semi-core EGBs and Gilts move to trade broadly flat on the day, as markets digest mixed signals from the US manufacturing PMI and ISM prints.

• A 1.5% rise in Brent crude has failed to cap a late rally in the space. Our commodities team has not noted any clear drivers for today's price action.
• Bunds are +1 at 132.66, having traded in a volatile fashion through the day. Well defined technical parameters remain intact.
• Gilts sit +17 at 98.26, through yesterday's high of 98.18. Hawkish-leaning comments from BoE's Pill ("the time for cutting Bank Rate remains some way off") had a limited impact overall.
• Periphery spreads to Bunds are wider as European equities remain short of intraday highs, following NYC Bancorp-related risk-off earlier this morning.
• ECB and BoE implied rates sit within the past week's ranges: There are 66bps of BoE cuts priced through the remainder of 2024 and 91bps of cuts priced for the ECB.
• The first full 25bps cut is priced through the August BoE meeting in the UK (26bps priced) and the July ECB meeting in the Eurozone (36bps priced).

FOREX USD Index Slips As Equities Resume Rally, AUD and NOK Outperform

• The USD index is 0.3% lower on Friday amid front-end US yields shifting lower and major US equity benchmarks extending too fresh record highs. However, the DXY remains close to unchanged on the week, having traded in a tight 0.7% range, which appears to be in keeping with one-month implied vols for the index remaining close to two-year lows.
• Equity outperformance is benefitting the higher beta currencies in G10, in particular the Norwegian krone and the Australian dollar are the standouts, rising 0.96 and 0.52% respectively.
• For AUDUSD, trend signals remain bearish and a clear break of the 50-day EMA, at 0.6567 is required to suggest scope for a stronger recovery. On the downside, the bear trigger lies at 0.6443, the Feb 13 low.
• A volatile 48 hours comes to a close in USDJPY, with the pair hugging tight to the 150.00 figure. Price action overnight saw the pair erase the entirety of Thursday’s move lower which was fuelled by some renewed verbal intervention calls from BOJ officials. After printing a low of 149.21 shortly before February’s month-end fix, the pair rallied to 150.71 on Friday, however, the greenback weakness sapped any further topside momentum. The bull trigger is 150.89, Feb 13 high.
• Swiss CPI highlights the docket on Monday next week and is made slightly more interesting by today’s announcement that SNB’s Jordan will be stepping down this year and as EURCHF prints fresh three-month highs.
• Elsewhere next week, there will be central bank decisions from the ECB and BOC, a UK budget and the March employment report from the US.

MONDAY DATA CALENDAR

Date	GMT/Local	Impact	Flag	Country	Event
04/03/2024	0030/1130	*		AU	Building Approvals
04/03/2024	0030/1130			AU	Business Indicators
04/03/2024	0700/0200	*		TR	Turkey CPI
04/03/2024	0730/0830	***		CH	CPI
04/03/2024	1600/1100			US	Philly Fed's Pat Harker
04/03/2024	1630/1130	*		US	US Treasury Auction Result for 13 Week Bill
04/03/2024	1630/1130	*		US	US Treasury Auction Result for 26 Week Bill
05/03/2024	2330/0830	**		JP	Tokyo CPI