MNI ASIA OPEN: Retail Sales Softer Than Projected

US

FED: Federal Reserve officials are increasingly worried lags from monetary policy have shortened compared to past interest rate hiking campaigns, raising the specter that the central bank’s aggressive tightening to date has already largely taken effect and is still not enough to cool the economy and tame inflation.

• More dovish voices on the Federal Open Market Committee have argued the full policy impact from the 500 basis points of rate hikes starting in March 2022 has yet to be felt. If they’re right, then pausing rate increases soon is a prudent course of action to give officials time to assess the magnitude of such effects.
• However, if lags are shorter and past policies have already filtered through the economy, that means the Fed will have to respond to possible future signs of stubborn inflation with more rate hikes. (MNI INTERVIEW: Fed Will Likely Hike Rates Above 6%-Plosser)
  
• One key difficulty in assessing the length of interest rate lags is that the Federal Open Market Committee had not hiked this rapidly since the Great Inflation of the 1970s -- or from such an accommodative stance. Since then, Fed messaging has become far more transparent, making it likely that financial markets react more quickly to the tighter policy stance. For more see MNI policy main wire at 1225ET.

FED: The Atlanta Fed GDPNow was revised up again for Q2, to 2.4% from 2.3% on Jul 10, for one of its highest readings for Q2 aside from very early iterations.

• Analyst estimates continue to lag, with 1.3% on the Bloomberg ECFC function and 1.8% in the early stages of the survey for the Q2 release on Jul 27.
• Tracker changes: Real PCE revised up to 1.2% to 1.4% and government spending from 2.4% to 2.8%, partially offset by gross private domestic investment growth revised down from 10.5% to 9.4%.
• It also tracks a slightly smaller drag from net exports, trimmed from -0.72pps to -0.67pps.

US TSYS Markets Roundup: Curves Bend Flatter Late, Hike Projections Firm

• Rates trade mixed after the bell, well off early session highs after June Retail Sales comes out weaker than expected at +0.2% vs. +0.5% est (May up-revised to +0.5%, however, from 0.3%). Tsys gained slightly after Industrial Production comes out lower than expected (-0.5% vs. 0.0% est) May IP down-revised to -0.5% vs. -0.2%.
• Futures receded, curves bending flatter as support gradually waned (partially tied to larger than expected $8.5B Wells Fargo 2-part issuance, additional rate locks weighing on 5s-10s through the second half, 2s10s -2.877 at -96.865. Sep'23 10Y futures at 112-22 (-1) holding above initial technical support of 112-07.5 (Jul 13 low).
• Projected rate hike expectations through year end gained: July 26 FOMC is 93.6% w/ implied rate of +23.4bp to 5.313%. September cumulative of +27.4bp at 5.352%, November cumulative of 32.6bp at 5.404%, and December cumulative of 27bp at 5.348%. Fed terminal holding at 5.41% in Nov'23.
• Focus turns to release of Building Permits and Housing Starts data tomorrow, US Tsy $12B 20Y Sale re-open.

OVERNIGHT DATA

• US JUN RETAIL SALES +0.2%; EX-MOTOR VEH +0.2%
  
• US MAY RETAIL SALES REVISED +0.5%; EX-MV +0.3%
• US JUN RET SALES EX GAS & MTR VEH & PARTS DEALERS +0.3% V MAY +0.5%
• US JUN RET SALES EX MTR VEH & PARTS DEALERS +0.2% V US JUN +0.3%
• US JUN RET SALES EX AUTO, BLDG MATL & GAS +0.5% V MAY +0.5%
• US JUN RETAIL SALES CONTROL GROUP +0.6% V MAY +0.3%

• US JUN INDUSTRIAL PROD -0.5%; CAP UTIL 78.9%
• US MAY IP REV TO -0.5%; CAP UTIL REV 79.4%
• US JUN MFG OUTPUT -0.3%

• The NAHB housing market index came in as expected in July at 56, a 1pt improvement from June for a fresh high since Jun’22 as the housing market continues to improve from an index low of 31 in Dec’22.
• The overall index may remain off the 66 averaged through in 2019 but has clawed back above its long-term average of 48 drawn arbitrarily from 2000-19.
• Within the details, a 2pt drop in the future sales index to 60 was offset by a 1pt increase in present sales to 62 and the prospective buyer traffic index rising 3pts to 40, another solid step higher for its first Y/Y increase since Jan’22.
• The improvement continues to follow a strong recovery in S&P 500 homebuilders, which have seen price to book ratios bounce back in excess of 2 despite the continued pushing higher in mortgage rates close to cycle highs.

• US MAY BUSINESS INVENTORIES +0.2%; SALES +0.2%
• US MAY RETAIL INVENTORIES +0.7%

• Redbook: US Retail Sales -0.2% Week End Jul 15 vs Year Ago
• Redbook: US Retail Sales First 2 Weeks Jul -0.3% vs Jul Year-Ago
• US Same-Store Sales Down 0.2% Y/y in Week: Redbook

• CANADA JUN INDUSTRIAL PRICES -0.6% MOM; EX-ENERGY -0.9%
• CANADA JUN RAW MATERIALS PRICES -1.5% MOM; EX-ENERGY -0.7%

• CANADA’S JUNE INFLATION RATE IS SLOWEST SINCE MARCH 2021
• CANADA JUNE CPI +0.1% MOM VS FORECAST +0.3%, PRIOR +0.4%
• CANADA JUNE CPI 2.8% YOY VS FORECAST 3%, PRIOR 3.4%
• CANADA JUNE CPI EX FOOD & ENERGY 0% MOM; 3.5% YOY
• CANADA CORE TRIM CPI 3.7%YOY, MEDIAN 3.9%

MARKETS SNAPSHOT

• DJIA up 362.03 points (1.05%) at 34949.21
• S&P E-Mini Future up 33.5 points (0.74%) at 4587.5
• Nasdaq up 131.9 points (0.9%) at 14378.15
• US 10-Yr yield is down 2 bps at 3.7873%
• US Sep 10-Yr futures are up 0.5/32 at 112-23.5
• EURUSD down 0.0007 (-0.06%) at 1.1229
• USDJPY up 0.09 (0.06%) at 138.8
• WTI Crude Oil (front-month) up $1.57 (2.12%) at $75.72
• Gold is up $22.04 (1.13%) at $1977.16

• EuroStoxx 50 up 12.94 points (0.3%) at 4369.73
• FTSE 100 up 47.27 points (0.64%) at 7453.69
• German DAX up 56.84 points (0.35%) at 16125.49
• French CAC 40 up 27.52 points (0.38%) at 7319.18

US TREASURY FUTURES CLOSE

• 3M10Y -2.69, -162.281 (L: -173.503 / H: -161.236)
• 2Y10Y -2.598, -96.586 (L: -97.419 / H: -92.549)
• 2Y30Y -3.605, -85.398 (L: -86.496 / H: -77.923)
• 5Y30Y -1.2, -10.395 (L: -11.123 / H: -3.465)
• Current futures levels:
• Sep 2-Yr futures down 1.375/32 at 101-28.5 (L: 101-28.125 / H: 102-02.625)
• Sep 5-Yr futures steady at at 107-22 (L: 107-19.75 / H: 108-02.5)
• Sep 10-Yr futures up 0.5/32 at 112-23.5 (L: 112-19.5 / H: 113-08)
• Sep 30-Yr futures up 7/32 at 126-25 (L: 126-13 / H: 127-12)
• Sep Ultra futures up 13/32 at 135-2 (L: 134-15 / H: 135-17)

US 10Y FUTURE TECHS: (U3) Narrows Gap With 50-Day EMA

• RES 4: 114-06+ High Jun 6
• RES 3: 114-00 High Jun 13
• RES 2: 113-09+ 50-day EMA and a key resistance point
• RES 1: 113-08 High Jul 18
• PRICE: 112-28+ @ 1300ET Jul 18
• 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 added to recent gains on a soft retail sales release to print 113-08 - the best level since June 29. The against the more medium-term negative outlook, leaving the latest recovery as 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 113-09+. 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 steady00 at 94.60
• Dec 23 -0.015 at 94.680
• Mar 24 -0.030 at 95.005
• Jun 24 -0.035 at 95.405
• Red Pack (Sep 24-Jun 25) -0.03 to -0.005
• Green Pack (Sep 25-Jun 26) +0.005 to +0.025
• Blue Pack (Sep 26-Jun 27) +0.030 to +0.030
• Gold Pack (Sep 27-Jun 28) +0.025 to +0.030

SHORT TERM RATES

SOFR Benchmark Settlements:

• 1M +0.00846 to 5.25457 (+.02463/wk)
• 3M +0.00602 to 5.32614 (+.01625/wk)
• 6M +0.00409 to 5.40044 (+.02490/wk)
• 12M +0.00757 to 5.3009 (+.04648/wk)

• Daily Effective Fed Funds Rate: 5.08% volume: $112B
• Daily Overnight Bank Funding Rate: 5.07% volume: $265B

• Secured Overnight Financing Rate (SOFR): 5.06%, $1.524T
• Broad General Collateral Rate (BGCR): 5.03%, $591B
• Tri-Party General Collateral Rate (TGCR): 5.03%, $583B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

The latest operation falls to $1,716.862B (lowest since early April May'22), w/ 94 counterparties, compared to $1,728.322B 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: $8.5B Wells Fargo Launched

• Date $MM Issuer (Priced *, Launch #)
• 07/18 $8.5B #Wells Fargo 6NC5 +175a, 11NC10 +205a
• 07/18 $3B *World Bank 7Y SOFR+43
• 07/18 $1.5B #Caisse de dépôt et placement du Québec (CDP) 5Y SOFR+62
• 07/18 $1B #SMBC Aviation Capital 10Y +195
• 07/18 $1B #Jefferies 5Y +200
• 07/18 $750M #AutoZone $450M 3Y +75, $300M 10Y +143
• 07/18 $500M *Shinhan Financial 5Y +110
• 07/18 $700M Panama 10Y +275
• 07/18 $Benchmark Abu Dhabi 10Y +125a
• 07/18 $Benchmark Almarai 10Y Sukuk +155a

EGBs-GILTS CASH CLOSE: German Bull Steepening On A Dovish Knot

Dovish comments from the ECB's Klaas Knot triggered a global bond rally Tuesday, ahead of next week's Governing Council decision and tomorrow's key UK CPI reading.

• Uncharacteristically dovish comments by Knot pared expectations for a hike beyond July's near-certain 25bp ("for July I think it is a necessity, for anything beyond July it would at most be a possibility but by no means a certainty").
• ECB pricing pulled back 5bp, driving bull steepening in the German curve (Schatz rallied the most since early May, with yields down 13bp).
• Periphery spreads tightened, with BTPs outperforming and 10Y hitting the tightest levels to Bund since late June.
• Gilts lagged the EGB rally, but still strengthened in a bull flattening move as BoE terminal pricing pulled back 9bp to the lowest since Jun 21.
• That price action suggested little apparent concern over yet another hawkish surprise in the UK inflation print Wednesday (0700BST) which is easily the data highlight of the week - our preview is here.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 13.1bps at 3.058%, 5-Yr is down 9.6bps at 2.483%, 10-Yr is down 9.1bps at 2.389%, and 30-Yr is down 8.1bps at 2.425%.
• UK: The 2-Yr yield is down 7.7bps at 5.091%, 5-Yr is down 8.6bps at 4.47%, 10-Yr is down 10bps at 4.331%, and 30-Yr is down 7.9bps at 4.477%.
• Italian BTP spread down 4.9bps at 162.5bps / Spanish down 2.9bps at 100.2bps

FOREX: BOJ’s Ueda Underpins USDJPY Recovery, NZD Underperforms

• Despite some intra-day volatility, overall adjustments across G10 currency markets remained limited on Tuesday with the USD index around a tenth of a percent higher as we approach the end of the session.
• The modest USD strength on Tuesday comes in the face off higher major equity benchmarks as the greenback looks to take a breather from its recent weakening trend. Perhaps the most notable intra-day move was for USDJPY, both following the US retail sales data release and after BOJ headlines hit the wires.
• The weaker headline US retail sales prompted a quick selloff to lows of 137.70, however as details of the release (including a much firmer control group) transpired, USDJPY bounced sharply to trade as high as 138.60 shortly afterwards. The pair then gradually softened back below the 138.00 mark before BOJ headlines hit the wires and prompted another bout of significant JPY selling.
• BOJ’s Ueda stated that there was still some distance to sustainably and stably achieving the central bank's 2% inflation target, signalling his resolve to maintain ultra-loose monetary policy for the time being. USDJPY traded as high 139.14 on the back of the move, before declining around 30 pips ahead of the close.
• NZD remains the poorest performer across G10, despite the buoyant equity markets. This has helped keep NZD/SEK under pressure and extend its recent losing streak. The cross has fallen in 8 of the past 9 sessions, now sitting at the lowest levels since mid-May.
• UK inflation data takes focus on Wednesday where the majority of analyst previews seen by MNI look for headline CPI to fall from 8.7%Y/y to 8.1%Y/y. Elsewhere, final Eurozone CPI will also be released, as well as US housing starts for June.

WEDNESDAY DATA CALENDAR

Date	GMT/Local	Impact	Flag	Country	Event
19/07/2023	0600/0700	***		UK	Consumer inflation report
19/07/2023	0600/0700	***		UK	Producer Prices
19/07/2023	0830/0930	*		UK	ONS House Price Index
19/07/2023	0900/1100	***		EU	HICP (f)
19/07/2023	0900/1100	**		EU	Construction Production
19/07/2023	0900/1000	**		UK	Gilt Outright Auction Result
19/07/2023	1100/0700	**		US	MBA Weekly Applications Index
19/07/2023	1230/0830	***		US	Housing Starts
19/07/2023	1430/1030	**		US	DOE Weekly Crude Oil Stocks
19/07/2023	1600/1700			UK	BoE Ramsden speech on QT - Money Macro and Finance Society
19/07/2023	1700/1300	**		US	US Treasury Auction Result for 20 Year Bond