MNI ASIA OPEN: Stopgap Funding Bill Passed, Shutdown Averted

Stopgap Funding Bill Passed, US Govt Shutdown Averted, For Now

US: Markets are likely to open on a positive tone after Congress passed a stopgap funding bill Saturday evening. The Senate voted to pass the bill on a 88 to 9 margin after the House had voted 335-91.

• Later in the evening President Biden signed the H.R. 5860 bill, "which provides fiscal year appropriations to Federal agencies through November 17, 2023, for continuing projects of the Federal Government and extends several expiring authorities." LINK
• US Treasury Secretary Yellen issued a statement applauding the bipartisan measure to avoid a shutdown.

US

FED: A prolonged U.S. government shutdown could make the Federal Reserve consider a temporary policy hold so as to avoid the risk of further destabilizing market and consumer confidence in a period of heightened uncertainty, former Dallas Fed principal policy adviser Evan Koenig told MNI.

• A deadlocked Congress has yet to appropriate the funding needed to keep the federal government running at the start of the new fiscal year on Sunday, and an extended shutdown could hit confidence, consumption and disrupt financial markets ahead of the next Fed meeting from Oct 31-Nov 1. Traders last week saw a one in four chance of another quarter-point rate hike at the November meeting, though the odds have now fallen to 17%.
• "Much is likely to depend on how disruptive the shutdown proves to be. Are financial markets skittish? Does consumer confidence take a big hit? Are there prospects for a quick resolution, or are the various players digging in their heels?" Koenig said.

FED: High-frequency data sources refined during the pandemic will enable the Federal Reserve to continue to monitor trends in employment and inflation if a U.S. government shutdown delays official statistical releases at a time when officials are stressing the data-dependency of monetary policy.

• While the Fed's forecasting models are based significantly on data from the U.S. Labor and Commerce departments, Census Bureau and other official sources, the central bank’s economists could rely more heavily on private sector reports such as those from the Institute for Supply Management, intelligence from district business executives and Reserve Bank directors, as well as high-frequency data from a variety of firms to paint a picture of economic activity in real time.
• A looming shutdown Sunday threatens to delay the release of key indicators including the September employment and CPI reports -- just weeks ahead of a possible interest rate increase at the Oct 31-Nov 1 FOMC meeting.

FED: New York Fed President John Williams on Friday said the Fed is "at, or near, the peak level" of interest rates and will need to maintain a restrictive stance of monetary policy "for some time" to bring inflation back to 2%.

• "We face two-sided risks. Our decisions, as always, will be guided by the data, with our eyes squarely on our goals," he said in remarks published on the Fed bank's website. "We are doing well on our maximum employment mandate, but we still have a ways to go to fully restore price stability."
• Williams, vice chair of the FOMC, said inflation, though off last year's peak, is still too high and demand still outstrips supply. Underlying inflation has been coming down gradually, and data on rents for newly signed leases point to further declines in shelter inflation in coming months, he said. "I foresee inflation of around 3.25% for this year as a whole, declining to around 2.5% next year, before closing in on 2% in 2025." For more see MNI Policy main wire at 1246ET.

CANADA

BOC: Former Bank of Canada Governor Stephen Poloz believes borrowing costs are likely to fall next year, though a reduction in bond yields would precede any official monetary easing as the BOC and other central banks remain cautious about ensuring price expectations have been tamed, he told MNI.

• Two thirds of Canada's inflation reports over the last year have lagged market expectations and that trend is set to continue amid weaker consumer spending and a challenging job market, he said in an interview. There's growing evidence the economy is moving into choppy waters if not technical recession, Poloz said.
• “It’s going to be the bond market that would do the work for us, it doesn’t need to be the central bank that wakes up in the morning and decides oh, it’s time to cut rates,” said Poloz, now a special advisor at the Osler, Hoskin & Harcourt law firm after leaving the BOC in 2020. “What we’ll see is bonds rallying around this data flow, and at certain points central banks will see the numbers for what they are and will say it looks like we’ve done the job and then they will begin to lower rates, but I don’t know the timing.” For more see MNI Policy main wire at 1021ET.

CANADA: Canada's GDP was flat in July while a flash estimate shows 0.1% growth in August with many industries disrupted by wildfires and floods and a strike at the nation's largest port, providing little clarity to central bank officials figuring out whether the economy is slowing enough to avoid another interest-rate hike.

• Statistics Canada's July figure lags an economist consensus for a 0.1% increase. Combined with the June decrease of 0.2% the economy appears to have much less momentum than earlier this year.
• Firm conclusions beyond that are hard to pin down given the list of disruptions from extreme weather to Vancouver's port strike. That labor disruption drove chemical production down 3.6%, the leading cause of a 1.5% fall in manufacturing that was the biggest since April 2021. Air transportation also fell 2.1% as bad weather triggered major delays around the Canada Day holiday weekend. For more see MNI Policy main wire at 0832ET.

Tsys Don't Fear the Shutdown, Nor Quarter End For That Matter

• Support for Treasury futures continued to ebb in the second half, bonds steady briefly before climbing again on quarter/month end positioning. Tsys started to consolidate late morning - largely knock-on effect as EGB's pared gains ahead the weekend. Moves were not related to impending US Govt shutdown expected to start Sunday.
• Current Dec'23 10Y futures +6 at 108-01.5 vs. 107-26 low, well above initial technical support of 107-05+ 1.382 proj of the Jul 18 - Aug 4 - Aug 10 price swing. Dec'23 30Y futures tapped steady after the bell but rebounded +7 to 113-23 on quarter/month-end extension trade.
• Curves steeper with the short end outperforming, 3m10Y +1.687 at -87.756, 2Y10Y +2.326 at -46.222.
• Treasury futures had extended highs following a raft of in-line data this morning that pointed to cooling inflation metrics heading into the fall.
• Fast two-way trade reported after initial data came out largely in-line:
• • Personal Income (0.4% vs. 0.4% est)
  • Personal Spending (0.4% vs. 0.5% est, prior up-revised to 0.09%)
  • Real Personal Spending (0.1% vs. 0.0% est)
  • PCE Deflator MoM (0.4% vs. 0.5% est), YoY (3.5% vs. 3.5% est)
  • PCE Core Deflator MoM (0.1% vs. 0.2% est), YoY (3.9% vs. 3.9% est)
• Little observable reaction to lower than est. Chicago PMI (44.1 vs. 47.6 est, 48.7 prior) and after slightly higher UofM consumer sentiment at 68.1 vs. 67.7 est, 1- and 5Y inflation expectations in-line with expectations of 3.2% and 2.8% respectively.

OVERNIGHT DATA

US DATA: Core PCE came in on the soft side in August with 0.145% M/M (cons 0.2) but with the rounded 0.1 on screens looking like a larger miss and with some detailed post CPI and PPI estimates having looked for a ‘low’ 0.2 anyway.

• July was unchanged to 2.d.p at 0.22% M/M whilst June softened from 0.21 to 0.17% M/M.
• Chair Powell at last week’s FOMC talked to 3- and 6-month measures: the three-month has slowed from 2.8% to 2.2% annualized for its lowest since 2% in Dec’20, and the six-month slowed from 3.4% to 3.0% for its lowest since Mar’21.

US DATA: The supercore (services ex energy & housing) came in at 0.144% M/M in Aug after 0.466% M/M in July.

• The 3-month average slowed marginally from 3.6% to 3.5% annualized and remains off the 3.0% from June, whilst the 6-month slowed from 3.9% to 3.4% annualized for its lowest since Jan’21.
• These run rates are above the 2.2% and 3.0% in the respective 3- and 6-month rates for the overall core PCE.
• This is now an official series rather than relying on calculations. See USXISXEH Index. At typing the Bloomberg Excel add-in struggles to pull much back history in but it’s confirmed with the full series showing on the BEA.

US DATA: The Chicago Business Barometer™, produced with MNI, fell back -4.6 points to 44.1 from 48.7 in August, partially reversing the rebound seen in last month’s data.

• New Orders, Production and Employment were the biggest downside drivers while Order Backlogs limited the downward move and Supplier Deliveries also moved a little higher.
• New Orders dropped -17.6 points. This was the sixth biggest decline since the series began in 1967, and the largest since April 2020. We have also only seen one reading lower than this since June 2020.
• Production fell -6.0 points to 51.1, just about remaining in expansive territory and reversing half of the increase seen in August.
• Employment fell -3.8 points to 44.5.
• Order Backlogs increased +10.5 points to its highest level since April 2023.
• Supplier Deliveries improved +2.6 points.
• Prices Paid more than reversed last month’s large increase, falling -14.5 points to 59.5. With the exception of June 2023, this is the lowest Prices Paid reading since August 2020.
• Inventories marginally increased by +0.2 points.

MARKETS SNAPSHOT

• Key late session market levels:
• DJIA down 146.64 points (-0.44%) at 33522.57
• S&P E-Mini Future down 8 points (-0.18%) at 4329.5
• Nasdaq up 34.9 points (0.3%) at 13237.23
• US 10-Yr yield is up 0 bps at 4.5752%
• US Dec 10-Yr futures are up 5.5/32 at 108-1
• EURUSD up 0.0008 (0.08%) at 1.0574
• USDJPY up 0.12 (0.08%) at 149.43
• WTI Crude Oil (front-month) down $0.95 (-1.04%) at $90.76
• Gold is down $16.4 (-0.88%) at $1848.44
• European bourses closing levels:
• EuroStoxx 50 up 13.1 points (0.31%) at 4174.66
• FTSE 100 up 6.23 points (0.08%) at 7608.08
• German DAX up 63.08 points (0.41%) at 15386.58
• French CAC 40 up 18.82 points (0.26%) at 7135.06

US TREASURY FUTURES CLOSE

• 3M10Y +0.811, -88.632 (L: -96.427 / H: -88.427)
• 2Y10Y +1.088, -47.46 (L: -52.367 / H: -47.245)
• 2Y30Y +2.099, -33.49 (L: -39.546 / H: -33.176)
• 5Y30Y +2.472, 10.414 (L: 6.841 / H: 11.3)
• Current futures levels:
• Dec 2-Yr futures up 1.375/32 at 101-11.125 (L: 101-09.375 / H: 101-13.375)
• Dec 5-Yr futures up 4.25/32 at 105-10.75 (L: 105-05.5 / H: 105-18)
• Dec 10-Yr futures up 5.5/32 at 108-1 (L: 107-26 / H: 108-14.5)
• Dec 30-Yr futures up 5/32 at 113-21 (L: 113-15 / H: 114-24)
• Dec Ultra futures up 7/32 at 118-17 (L: 118-08 / H: 119-27)

US 10Y FUTURE TECHS: (Z3) Corrective Recovery

• RES 4: 111-12+ High Sep 1 key resistance
• RES 3: 110-10 50-day EMA
• RES 2: 109-20 High Sep19
• RES 1: 108-17/109-03+ Low Sep 27 / 20-day EMA
• PRICE: 108-03 @ 1530 ET Sep 29
• SUP 1: 107-05+ 1.382 proj of the Jul 18 - Aug 4 - Aug 10 price swing
• SUP 2: 106-23 1.50 proj of the Jul 18 - Aug 4 - Aug 10 price swing
• SUP 3: 106-14+ 2.0% Lower 10-dma envelope
• SUP 4: 106.00 Round number support

The bear trend in Treasuries remains intact and the contract traded lower Thursday, before finding some support. The extension this week confirms a resumption of the downtrend and maintains the bearish price sequence of lowers and lower highs. Sights are on 107-05, a Fibonacci projection. On the upside initial firm resistance is seen at 109-03+, the 20-day EMA. A break would signal a possible base. For now, gains are considered corrective.

SOFR FUTURES CLOSE

• Dec 23 +0.005 at 94.550
• Mar 24 steady00 at 94.620
• Jun 24 +0.010 at 94.815
• Sep 24 +0.020 at 95.090
• Red Pack (Dec 24-Sep 25) +0.025 to +0.050
• Green Pack (Dec 25-Sep 26) +0.055 to +0.055
• Blue Pack (Dec 26-Sep 27) +0.040 to +0.050
• Gold Pack (Dec 27-Sep 28) +0.035 to +0.040

SHORT TERM RATES

SOFR Benchmark Settlements:

• 1M +0.00440 to 5.31899 (+0.00148/wk)
• 3M +0.00072 to 5.39550 (-0.00417/wk)
• 6M -0.00366 to 5.46727 (-0.01228/wk)
• 12M -0.00858 to 5.46626 (-0.01937/wk)

• Daily Effective Fed Funds Rate: 5.33% volume: $104B
• Daily Overnight Bank Funding Rate: 5.32% volume: $259B

• Secured Overnight Financing Rate (SOFR): 5.31%, $1.535T
• Broad General Collateral Rate (BGCR): 5.30%, $538B
• Tri-Party General Collateral Rate (TGCR): 5.30%, $530B
• (rate, volume levels reflect prior session)

FED REVERSE REPO OPERATION

Repo operation surges to 1,557.569B w/107 counterparties, compared to $1,453.366B 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.

FOREX USD Regains Some Lustre Through European Close

• The USD drift extended further in early Friday trade, pushing the likes of EUR/USD and GBP/USD back toward the week's best levels before the trade began to reverse across US hours, with the greenback undeterred by a softer MNI Chicago PMI headline as well as lower prices paid and new orders subindices.
• GBP flipped from being one of the session's more solid performers to now being bottom of the table alongside JPY, CHF and CAD. NZD was the best performing currency in G10, benefiting from a pullback in oil prices after the recent rally and the modest steadying of risk sentiment evident in the softer greenback and steadier global equity market.
• NZD/USD showed back above the 50-dma to touch 0.6049, but faltered on the approach to the 100-dma of 0.6082.
• The majority of sell-side month-end FX rebalancing models all pointed to USD buying into the month-end fix, so markets clearly remained wary of underlying USD demand across US hours.
• Focus in the coming week turns to the RBA, NBP and RBI rate decisions. The release of the September Nonfarm Payrolls report remains unclear, with the government shutdown this weekend potentially delaying the release beyond the originally scheduled October 6th.

MONDAY DATA CALENDAR

Date	GMT/Local	Impact	Flag	Country	Event
30/09/2023	0130/0930	***		CN	CFLP Manufacturing PMI
30/09/2023	0130/0930	**		CN	CFLP Non-Manufacturing PMI
30/09/2023	1400/1500			UK	BoE's Cunliffe Speaks in Leeds
01/10/2023	0145/0945	**		CN	IHS Markit Final China Services PMI
01/10/2023	0145/0945	**		CN	IHS Markit Final China Manufacturing PMI