MNI ASIA OPEN: Risk-Off Prelude To Key US Labor Data

EXECUTIVE SUMMARY

• MNI POLICY: Fed Prefers Gradual Rates Easing If Jobs Allow
• US DATA: ISM Mfg Sees Mixed Details With Only Partial Bounce In Employment
• MNI INTERVIEW: US Factories Seen Contracting Thru Year-End-ISM
• MNI EM INTERVIEW: BCB To Hold Rates For Now Despite Worse Outlook
• MNI Bank of Canada Preview, Sep'24: Low Bar For A Third Cut Has Been Met
   

US TSYS: Curve Bull Flattens In Risk-Off Session

Treasuries gained Tuesday in the return from the Labor Day weekend, though core FI gains were relatively tame in comparison to the broader risk-off move in global markets.

• Almost the entirety of Treasury gains were made between 0830-1000ET, which coincided with a sharp pullback in oil prices (WTI down more than 4% on the day) as well as soft data including construction activity and ISM Manufacturing.
• While the standout market move was in equities, which saw their worst session in a month as tech names dropped (Nasdaq futures -3.4% vs -2.4% in S&P eminis), the Treasury move actually preceded the stock risk-off move, and yields hit the lows before 1100ET before trading largely sideways.
• Further Treasury gains may have been restrained in part by heavy corporate issuance, with Bloomberg reporting that this was the "busiest single sales day" on record (the day after Labor Day was also the most active of 2023).
• The Treasury curve bull flattened, keeping 2s10s from closing in positive territory for another day.
• With markets closely focused on Friday's nonfarm payrolls, attention Wednesday will be on JOLTS job openings data, with the Bank of Canada decision (likely cut) also eyed.
• Late-session levels: The Dec 24 T-Note future is up 16/32 at 114-20, having traded in a range of 113-12 to 114-07.5. The 2-Yr yield is down 4.3bps at 3.8734%, 5-Yr is down 5.9bps at 3.6439%, 10-Yr is down 7.1bps at 3.8329%, and 30-Yr is down 7.4bps at 4.122%.

NEWS

FED (MNI):  Federal Reserve officials are setting course for interest rate reductions of no more than a quarter-point at least at every other meeting starting this month, so long as the labor market doesn't hit major turbulence that requires more aggressive action. 

US (MNI): U.S. manufacturing activity will likely continue to contract in coming months but the risks of a harder landing appear smaller now that interest rates are on their way down, ISM survey chair Timothy Fiore told MNI Tuesday. 

BRAZIL (MNI): The Central Bank of Brazil is likely to maintain its Selic rate at 10.50% at upcoming meetings this year, although the chances of an interest rate hike have risen as the inflation backdrop worsens, former deputy governor of International Affairs Alexandre Schwartsman told MNI.

Bank of Canada (MNI): The BoC is more than fully priced to opt for a third consecutive 25bp cut on Wednesday to 4.25%. Analysts are on balance marginally more hawkish as 4 of 34 look for no change, although that has recently narrowed and the rest all look for a 25bp cut.  It’s a non-MPR meeting although we still of course have a press conference per this year’s new approach. Please find the full report here: BOCPreviewSep2024.pdf

OVERNIGHT DATA

• The ISM manufacturing index increased by a little less than expected to 47.2 (cons 47.5) in August after 46.8 in July.
• Two closely watched series increased on the month, prices paid and employment, but the latter was after a particularly sharp decline whilst new orders fell further into recessionary territory.
• Prices paid 54.0 (cons 52.0, note the survey of 5 responses vs 59 for the main index) after 52.9. It sees two relatively steady increases of circa 1pt after large swings earlier in the year, leaving it at its highest since May.
• Employment increased 2.6pts to 46.0 after 43.4. The latter is only a partial reversal after a heavy 5.9pt slide to what was the lowest since the depths of the pandemic and the weakest since 2009. (As always, remember that manufacturing only accounts for about 10% of payrolls).
• New orders fell 2.8pts to 44.6 after 47.4, its fourth monthly decline in the past five months to leave it at its lowest since May 2023. 

US DATA: MNI: US AUG FINAL MANUFACTURING PMI 47.9 (FLASH: 48.0); JUL: 49.6

• The S&P Global mfg PMI climbed back to 49.5 in August to reverse a slide to 47.8 in July after three months before that at 49.3-49.4.
• It leaves it technically at its highest since March but with the index last above 50 back in April 2023.
• The press release notes ocean freight shipping delays and "input cost inflation accelerated to its sharpest since April 2023, helping to drive the steepest increase in output charges for nine months."
• Going against the improvement in the overall index, "The lack of incoming new work and reduced production requirements meant firms cut their staffing levels for the second time in the past three months. The decline was also the steepest in 2024 so far, with reports of the nonreplacement of leavers and some concerns about the economic outlook leaving firms reticent to hire new workers. "
• Full S&P Global PMI press release here. 

MARKETS SNAPSHOT

Below gives key levels of markets in afternoon  NY trade:
- DJIA  down 667 points (-1.6%) at 40978.75
- S&P E-Mini Future  down 123.5 points (-2.18%) at 5546.25
- Nasdaq  down 586.9 points (-3.3%) at 17147.87
- US  10-Yr yield is down 6.3 bps at 3.8405%
- US Dec 10-Yr futures (TY) are up 15/32 at 114-1    
- EURUSD  down 0.0032 (-0.29%) at 1.1041
- USDJPY  down 1.24 (-0.84%) at 145.68
- WTI Crude Oil (front-month)  down $3.27 (-4.45%) at $70.31
- Gold is  down $7.13 (-0.29%) at $2494.23

Prior European bourses closing levels:
- EuroStoxx 50  down 60.55 points (-1.22%) at 4912.52
- FTSE 100  down 65.38 points (-0.78%) at 8298.46
- German DAX  down 183.74 points (-0.97%) at 18747.11
- French CAC 40  down 71.32 points (-0.93%) at 7575.1
 

US TREASURY FUTURES CLOSE 

Curve update:
* 3M10Y  -7.244, -129.107 (L: -129.796 / H: -119.963)
* 1Y10Y  -4.594, -55.557 (L: -56.887 / H: -49.09)
* 2Y10Y  -2.739, -4.46 (L: -4.938 / H: -0.661)
* 2Y30Y  -3.033, 24.454 (L: 23.666 / H: 28.36)
* 5Y30Y  -1.468, 47.639 (L: 46.173 / H: 49.311)
Current futures levels:
* Dec 2-Yr futures (TU) up 3/32  at 103-27.75 (L: 103-23.6/ H: 103-30.5)
* Dec 5-Yr futures (FV) up 9.25/32  at 109-22 (L: 109-10 / H: 109-26.5)
* Dec 10-Yr futures (TY) up 16.5/32  at 114-2.5 (L: 113-12 / H: 114-07.5)
* Dec 30-Yr futures (US) up 37/32  at 124-9 (L: 122-17 / H: 124-21)
* Dec Ultra futures (WN) up 50/32  at 133-16 (L: 131-03 / H: 134-00)
 

US 10YR FUTURE TECHS:  (Z4) Recent Weakness Confirmed as Corrective

• RES 4: 116-00   Round number resistance  
• RES 3: 115-19   High Aug 5 and the bull trigger
• RES 2: 114-31+ 76.4% of the Aug 5 - 8 pullback
• RES 1: 114-19+ High Aug 21
• PRICE:‌‌ 113-29 @ 15:49 BST Sep 03
• SUP 1: 113-12   Intraday low    
• SUP 2: 113-00   Low Aug 8
• SUP 3: 112-21 50-day EMA       
• SUP 4: 111-28+ High Jul 17
• Treasuries traded sharply higher into the Tuesday London close, reversing any bearish signal from the print below the 20-day EMA at 113.21. This confirms recent weakness as corrective. A stronger resumption of gains would refocus attention on key resistance and bull trigger at 115-19, Aug 5 high. Initial resistance to watch is 114-19+, Aug 21 high. A deeper retracement would instead expose 112.21, the 50-day EMA. 

SOFR FIXES AND PRIOR SESSION REFERENCE RATES

REPO REFERENCE RATES (rate, change from prev. day, volume):

• Secured Overnight Financing Rate (SOFR): 5.32%, -0.01%, $2011B
• Broad General Collateral Rate (BGCR): 5.32%, no change, $767B
• Tri-Party General Collateral Rate (TGCR): 5.32%, no change, $732B
• SOFR fell back another 1bp to 5.32% on Friday for month-end. 

Reverse Repo Operation

Uptake of the New York Fed's overnight reverse repo facility fell $83B to just under $350B Tuesday, reversing the typical month-end jump (the ON RRP level was closer to $350B prior to the final 3 sessions of August when it jumped to $433B). Today's operation saw 69 counterparties, down slightly from 72 in the previous operation on Aug 30.

EGBs-GILTS CASH CLOSE: Gilts Outperform Amid Core FI Gains

Core EGBs and Gilts rallied Tuesday amid a broader global safe haven bid.

• There was no evident single trigger for the strong afternoon rally in core FI: factors included lower oil prices (on positive Libyan supply headlines), a drop in tech stocks as the US returned from holiday, and a miss in US data (construction activity and ISM manufacturing).
• A few comments from ECB officials ahead of next week's decision didn't have a major market impact: Nagel said he wouldn't commit in advance on whether he would vote for a cut; Simkus sees a "clear case", however an October cut is "quite unlikely".
• Eurex futures volumes were dominated by Sep/Dec rolls, which are by now at least halfway complete.
• Both the UK and German curves bull flattened. Gilts outperformed global peers, with 15-year Gilt syndication seeing solid demand.
• Periphery EGB spreads closed wider against the risk-off backdrop, with BTPs underperforming.
• Wednesday's schedule includes final August services PMIs and Eurozone PPI, as well as an appearance by ECB's Villeroy.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 4.1bps at 2.38%, 5-Yr is down 5.4bps at 2.171%, 10-Yr is down 6.1bps at 2.277%, and 30-Yr is down 7.3bps at 2.507%.
• UK: The 2-Yr yield is down 4bps at 4.082%, 5-Yr is down 5.2bps at 3.882%, 10-Yr is down 6.5bps at 3.99%, and 30-Yr is down 5.7bps at 4.51%.
• Italian BTP spread up 3.1bps at 146.7bps  / Greek up 2.9bps at 105.5bps  
   

FOREX: AUDJPY Slumps 1.8% as Risk Sentiment Sours

• Curves bull flattening in core fixed income markets and aggressive weakening for global equity benchmarks have contributed to significant risk off trade in currency markets Tuesday, with AUD the notable laggard in the space and the Japanese Yen top of the G10 pile.
• As such AUDJPY is 1.8% lower on the day and has notably erased an entire week’s worth of gains in one swoop. The 50-day exponential moving average, and the 100.00 mark proved a very strong resistance area for the cross and today’s weakness sees the pair trade back below the 20-day average.
• Further weakness may be dependent on whether AUDUSD can extend its current corrective pullback and make a meaningful break below its firm support between 0.6714-0.6670, 20- and 50-day EMA values.
• Yen strength on Tuesday was underpinned by comments overnight from BoJ Governor Ueda reiterated Tuesday that the central bank will continue to raise interest rates if the economy and prices perform as expected.
• USDJPY’s trend structure is bearish, and risk sentiment has underpinned this theme, with the pair trading as low was 145.16, an impressive 200 pips off session highs. Below here, support does not come in until 143.45, the Aug 26 low.
• Looking ahead, the Bank of Canada is more than fully priced to opt for a third consecutive 25bp cut on Wednesday to 4.25%. USDCAD is 0.4% higher on the session and our analyst notes that the most recent shallow retracement appears to be a flag formation - a bearish continuation pattern. Sights are on 1.3358, a Fibonacci retracement. On the upside, initial firm resistance to watch is at 1.3594.
• Elsewhere on Wednesday, Australian GDP and US JOLTS data will be in focus.

MNI (NEW YORK)

Date	GMT/Local	Impact	Country	Event
04/09/2024	0130/1130	***	AU	Quarterly GDP
04/09/2024	0700/0900		EU	ECB's Elderson at Joint European Banking Authority and ECB conference
04/09/2024	0900/1100	**	EU	PPI
04/09/2024	1100/0700	**	US	MBA Weekly Applications Index
04/09/2024	-	***	US	Domestic-Made Vehicle Sales
04/09/2024	1230/0830	**	US	Trade Balance
04/09/2024	1230/0830	**	CA	International Merchandise Trade (Trade Balance)
04/09/2024	1255/0855	**	US	Redbook Retail Sales Index
04/09/2024	1345/0945	***	CA	Bank of Canada Policy Decision
04/09/2024	1400/1000	**	US	Factory New Orders
04/09/2024	1400/1000	***	US	JOLTS jobs opening level
04/09/2024	1400/1000	***	US	JOLTS quits Rate
04/09/2024	1400/1000		US	MNI Connect Video Conference on the U.S. Fiscal Policy Outlook
04/09/2024	1430/1030		CA	BOC Governor Press Conference
04/09/2024	1800/1400		US	Fed Beige Book
05/09/2024	0130/1130	**	AU	Trade Balance
05/09/2024	0545/0745	**	CH	Unemployment
05/09/2024	0600/0800	**	DE	Manufacturing Orders
05/09/2024	0730/0930	**	EU	S&P Global Final Eurozone Construction PMI
05/09/2024	0830/0930	**	GB	S&P Global/CIPS Construction PMI
05/09/2024	0830/0930		GB	BOE DMP Data
05/09/2024	0900/1100	**	EU	Retail Sales
05/09/2024	0900/1000	**	GB	Gilt Outright Auction Result
05/09/2024	1215/0815	***	US	ADP Employment Report
05/09/2024	1230/0830	***	US	Jobless Claims
05/09/2024	1230/0830	**	US	Non-Farm Productivity (f)
05/09/2024	1400/1000	***	US	ISM Non-Manufacturing Index
05/09/2024	1430/1030	**	US	Natural Gas Stocks
05/09/2024	1500/1100	**	US	DOE Weekly Crude Oil Stocks
05/09/2024	1530/1130	**	US	US Bill 04 Week Treasury Auction Result
05/09/2024	1530/1130	*	US	US Bill 08 Week Treasury Auction Result
06/09/2024	0130/1130	**	AU	Lending Finance Details