MNI ASIA OPEN: Tsy Curves Bear Steepen Post-ADP, NFP Focus

EXECUTIVE SUMMARY

• MNI: US Payrolls Preview: Risks Of Upside Unemployment Surprise
• MNI MACRO ANALYSIS: Stagflationary Port Strikes Could Impact November FOMC
• MNI FED: Barkin - Fed Can't Declare Inflation Battle Over
• MNI SECURITY: Biden Does Not Support Attack On Iran's Nuclear Sites
• US DATA: ADP Beats But Unlikely To Alter Private Payroll Estimates

US

MNI: US Payrolls Preview: Risks Of Upside Unemployment Surprise

Executive Summary

• Nonfarm payrolls growth is expected to have firmed marginally to 150k in September although some analysts also look for upward revisions to August.
• There is a strong cluster of estimates around 150k but with a wider than recent range of views beyond that.
• The unemployment rate can again have a major role in the market reaction. Consensus sees 4.2% for a second month and whilst claims have proved resilient, we see a real risk that it tilts the other side of 4.25%.
• Powell has looked to temper expectations of a second 50bp cut but the market still prices 35bp of cuts for the Nov 6-7 FOMC with core PCE inflation recently tracking a little below 2% annualized.
• A scenario with the u/e rate firmly rounding to 4.3% and payrolls growth of circa 100k could be sufficient for a material step towards pricing in 50bp but the elections on Nov 5 remain a key unknown.
• Note that there is no expected strike impact with this month’s data but there could be significant disruption for the October report on Nov 1, just a few days ahead of the Nov FOMC. 

PLEASE FIND THE FULL REPORT HERE: USNFPOct2024Preview1.pdf

MNI MACRO ANALYSIS: Stagflationary Port Strikes Could Impact November FOMC

• Dockworkers at dozens of East and Gulf Coast ports initiated a strike on Monday night that risks a new round of shocks to
  the US supply chain and broader economy. It's the first such strike since 1977, which makes historical comparisons of the
  economic impact difficult (2014-15 saw a prolonged labor disruption on the West Coast).
• The near-term impact looks relatively limited, though it could play a key role in the next FOMC decision in November. We
  should note that current betting-market implied odds (Polymarket) put the probability of a deal by next Friday (Oct 11) at
  80%, with 96% probability it will be over by end-month - but if these expectations are wrong, the implications are worth
  considering.

MNI FED: Barkin - Fed Can't Declare Inflation Battle Over

Reuters has run headlines from Richmond Fed’s Barkin (’24 voter) ahead of his scheduled appearance at 1215ET. They don’t appear too surprising considering AP published an interview with him Sep 26 on the need for a two-phase approach to easing policy. He said at the time that “With inflation and unemployment being so close to normal levels, it's okay to dial back the level of restraint, somewhat...I'm not yet ready to declare victory on inflation. And so I wouldn't dial it back all the way" to neutral.

• "FED'S BARKIN: HALF-PERCENTAGE-POINT RATE CUT IN SEPTEMBER WARRANTED BECAUSE RATES WERE 'OUT OF SYNC' WITH DECLINE IN INFLATION AND THE UNEMPLOYMENT RATE NEAR ITS SUSTAINABLE LEVEL
• BARKIN: FED CAN'T DECLARE INFLATION BATTLE OVER, SAYS HE EXPECTS LITTLE FURTHER DROP IN CORE PERSONAL CONSUMPTION EXPENDITURES PRICE INDEX UNTIL NEXT YEAR
• HALF PERCENTAGE POINT OF CUTS SHOWN AS THE MEDIAN FED POLICYMAKER PROJECTION FOR THE REST OF THIS YEAR WOULD ALSO TAKE 'A LITTLE BIT OF THE EDGE OFF' RATES
• HE IS WATCHING CLOSELY HOW LOWER INTEREST RATES INFLUENCE HOME AND AUTO SALES TO SEE IF DEMAND RISKS OUTRUNNING SUPPLY" - Reuters

NEWS

MNI SECURITY: Biden Does Not Support Attack On Iran's Nuclear Sites

Reuters carrying comments from US President Joe Biden on the situation in the Middle East. Biden says, "he does not support an attack on Iran's nuclear sites," and notes that the US and G7 are working on a joint statement on Iran.

• Biden add that "there's going to be some sanctions imposed on Iran," and says he, "will be talking to [Israeli Prime Minister Benjamin] Netanyahu soon."
• US sanctions are likely to hit Iran's oil sector, representing roughly 70% of government revenue. Time notesthat Iran's oil production has doubled, "from less than 2 million barrels per day in 2019 to nearly 4 million barrels per day now," providing the treasury with a USD$100 billion revenue boost.

SECURITY: US Dep Sec State Campbell: Most Actors Do Not Seek Wider Conflict

Wires carrying comments from US Deputy Secretary of State Kurt Campbell on US interactions with Israeli counterparts and his outlook as the region braces for an Israeli response to Iran's ballistic missile attack.   

• Campbell describes the Middle East situation as, "a moment of real peril, but also some possibility," adding it is "not just Israel that is thinking about response options to Iran attack, US is too."
• Campbell notes that engagements between US and Israeli officials over the next few days are, "to try to align as much as we can perspectives" between the two allies.
• Campbell says: "Israel's security challenges and responses are legitimate but issues of escalation are very real," noting that "most actors do not seek wider, escalating conflict."

MIDEAST: Region On Edge Amid Wait For Israeli Response To Iran Missile Barrage

Following the two waves of Iranian missiles fired at Israel on 1 October, Israeli PM Benjamin Netanyahu said that Iran has "made a big mistake tonight, and will pay for it". In the efforts to protect Israel, the US fired around 12 interceptor missiles at Iranian ballistic missiles, while it is believed that the UK also deployed jets to aid in the defensive efforts.  

• This morning, Al Jazeera reports comments from Iranian Foreign Minister Abbas Araghchi stating that "We will respond strongly to any third party that supports [Israel] in any attack against US." Araghchi confirmed that “Before the attack, there was no exchange of messages,” with the US.

ISRAEL: KAN-'Harsh' Response Expected, Poss. Targeting 'Strategic Sites' In Iran

Amichai Stein at KAN posts on X: "After Israel security cabinet meet: Israel is expected to respond 'harsh' against Iran, with the possibility of targeting strategic sites in Iran". This would appear to back up earlier reports claiming that Israel will look to deliver a 'significant retaliation' against Iran following the missile barrages launched against Israeli cities on 1 October. 

• Striking 'strategic sites' is likely to refer to hitting the country's oil installations and/or its nuclear facilities. It could even extend to targeted assassinations of key figures.
• The extend of Israeli retaliation will be closely watched, not just with regards to the prospect of regional conflagration but also for potential global market flashpoints such as Iran closing off the Strait of Hormuz, a key transit point for oil supplies. The Houthi rebels in Yemen, one of Iran's regional proxies, could also look to escalate its attacks on shipping in the region. 

JAPAN: New Ministers Kick 'Asian NATO' Idea Into Long Grass

New Foreign Minister Takeshi Iwaya has said that an 'Asian NATO' is "one idea for the future,". Speaking as a presser, Iwaya said "It's difficult to immediately set up a mechanism that would impose mutual defence obligations in Asia, so it's more of a vision for the future." Asked if such a framework would be targeting China, Iwaya said "The best way would be for a defence and security co-operation relationship that spans the Indo-Pacific without excluding any specific nation,"

• New Defence Minister Gen Nakatani said separately that PM Shigeru Ishiba has not asked him to pursue the 'Asian NATO' proposal. Nakatani also said that US nuclear deterrence 'should be maintained and strengthened to ensure its reliability'.

US TSYS: Late Session Sell Pressure

• Treasuries and SOFR futures come under renewed selling in the last few minutes, still well off midmorning lows, however. Dec'24 10Y futures trade 114-14 last (-8) vs 114-07 low -- which happens to be the initial technical support (Sep 26 low) followed by 114-00.5 (Sep 4 low).
• Curves remain steeper (2s10s +2.063 at 14.375) but scaling back support amid some chunky selling in SOFR 1- and 3M futures: appr -15,000 SERX4 at 95.41, and 23,000 SFRZ4 at 95.975.
• SOFR White pack (SFRZ4-SFRU5) currently -0.010-0.025, while projected rate cuts continue to back off this morning's levels (*): Nov'24 cumulative -33.8bp (-34.4bp), Dec'24 -69.9bp (-70.5bp), Jan'25 -100.4bp (-101.9bp).
• Focus turns to Weekly Claims, Factory/Durable Goods Orders and ISM Services on Thursday, followed by Friday's headline Non-Farm Payrolls for September.

OVERNIGHT DATA

US DATA: ADP Beats But Unlikely To Alter Private Payroll Estimates
ADP employment was stronger than expected in September at 143k (cons 125k) after a slightly upward revised 103k (initial 99k) in August.

• It has had mixed success at tracking private payrolls growth, at least compared to the latter in its latest guise, undershooting private payrolls growth by 15k in August but before that overshooting by 37k in July and 58k in June.
• With a latest three-month average overshoot of 27k, we don’t expect it to materially alter current consensus of 125k for private payrolls released on Friday.

US DATA: Mortgage Applications Pause After Swift Increases
MBA composite mortgage applications dipped -1.3% last week (sa) after two particularly strong refi-driven increases of 11% and 14.2%.  

• Refis were -2.9% after 20.3% and 24.2% whilst new purchase applications increased for a sixth consecutive week with 0.7% after 1.4% (for a cumulative 14% increase).
• Refi applications have still increased more than 100% since July but are only to 63% of average 2019 levels, whereas new purchase applications have only increased 3.5% over the same period and are at 58% of 2019 levels.
• The 30Y conforming mortgage rate has levelled off at around 6.14% (a 1bp increase in the latest week after -2bps before that) for a 115bp decline since the April recent high of 7.29%.
• There remains some relative tightening though with the jumbo rate increasing 3bps after 6bps, pushing the conforming to jumbo spread  lower still to -36bps (lowest since Jun 2020). 

MARKETS SNAPSHOT

• Key market levels of markets in late NY trade:
• DJIA up 54.58 points (0.13%) at 42210.23
• S&P E-Mini Future up 4.5 points (0.08%) at 5764
• Nasdaq up 45.4 points (0.3%) at 17954.27
• US 10-Yr yield is up 5.3 bps at 3.7847%
• US Dec 10-Yr futures are down 9/32 at 114-13
• EURUSD down 0.0021 (-0.19%) at 1.1047
• USDJPY up 2.87 (2%) at 146.44
• WTI Crude Oil (front-month) up $0.84 (1.2%) at $70.65
• Gold is down $4.88 (-0.18%) at $2658.35
• European bourses closing levels:
• EuroStoxx 50 up 9.14 points (0.18%) at 4963.29
• FTSE 100 up 14.21 points (0.17%) at 8290.86
• German DAX down 48.39 points (-0.25%) at 19164.75
• French CAC 40 up 3.52 points (0.05%) at 7577.59

US TREASURY FUTURES CLOSE

• 3M10Y +4.593, -80.957 (L: -88.395 / H: -80.499)
• 2Y10Y +2.429, 14.741 (L: 11.902 / H: 16.691)
• 2Y30Y +3.299, 49.619 (L: 45.91 / H: 52.155)
• 5Y30Y +1.707, 57.842 (L: 55.957 / H: 59.479)
• Current futures levels:
• Dec 2-Yr futures down 1.5/32 at 104-4.25 (L: 104-03.125 / H: 104-07.125)
• Dec 5-Yr futures down 4.5/32 at 109-31.25 (L: 109-27.25 / H: 110-06.75)
• Dec 10-Yr futures down 9/32 at 114-13 (L: 114-07 / H: 114-26)
• Dec 30-Yr futures down 24/32 at 124-8 (L: 123-20 / H: 125-09)
• Dec Ultra futures down 1-07/32 at 133-1 (L: 132-09 / H: 134-18)

US 10YR FUTURE TECHS: (Z4) Corrective Cycle

• RES 4: 116-07   1.764 proj of the Aug 8 - 21 - Sep 3  
• RES 3: 116-00   Round number resistance
• RES 2: 115-31+ 1.618 proj of the Aug 8 - 21 - Sep 3 
• RES 1: 115-02+/23+ High Sep 19 / 11 and the bull trigger
• PRICE:‌‌ 114-12.5 @ 1317 ET Oct 1
• SUP 1: 114-07   Low Sep 26    
• SUP 2: 114-00+ Low Sep 4
• SUP 3: 113-29   50-day EMA     
• SUP 4: 113-12   Low Sep 3 and a key support

Treasuries are in consolidation mode. The bear cycle that started on Sep 11, still appears to be a correction. The trend condition is bullish and moving average studies are in a bull-mode set-up. The contract has pierced the 20-day EMA. A clear break of this average would signal scope for a deeper retracement, towards 113-29, the 50-day EMA. For bulls, a resumption of gains would refocus attention on 115-24+, the Sep 11 high and a bull trigger.

SOFR FUTURES CLOSE 

• Dec 24 -0.010 at 95.965
• Mar 25 -0.020 at 96.480
• Jun 25 -0.030 at 96.785
• Sep 25 -0.035 at 96.940
• Red Pack (Dec 25-Sep 26) -0.04 to -0.04
• Green Pack (Dec 26-Sep 27) -0.04 to -0.035
• Blue Pack (Dec 27-Sep 28) -0.045 to -0.035
• Gold Pack (Dec 28-Sep 29) -0.05 to -0.045

SOFR FIXES AND PRIOR SESSION REFERENCE RATES
​​​​​​​
SOFR Benchmark Settlements:

• 1M +0.00701 to 4.85655 (+0.01245/wk)
• 3M -0.01129 to 4.59824 (+0.00489/wk)
• 6M -0.00140 to 4.284262(+0.02077/wk)
• 12M -0.00333 to 3.81791 (+0.03483/wk)

US TSYS: Repo Reference Rates

• Secured Overnight Financing Rate (SOFR): 5.05% (+0.09), volume: $2.395T
• Broad General Collateral Rate (BGCR): 4.92% (+0.04), volume: $801B
• Tri-Party General Collateral Rate (TGCR): 4.92% (+0.04), volume: $771B
• (rate, volume levels reflect prior session)

STIR: FRBNY EFFR for prior session:

• Daily Effective Fed Funds Rate: 4.83% (+0.00), volume: $85B
• Daily Overnight Bank Funding Rate: 4.83% (+0.00), volume: $206B

FED Reverse Repo Operation

RRP usage inches back up to $383.398B this afternoon from $375.221B prior. Compares to $239.386B on Monday September 16 2024 -- the lowest level since early May 2021. Number of counterparties at 67 from 58 prior.

PIPELINE

PIPELINE: $1.75B Canada Pension Plan 3Y SOFR Priced

• Date $MM Issuer (Priced *, Launch #)
• 10/02 $1.75B *Canada Pension Plan (CPPIB) 3Y SOFR+45
• 10/02 $1.75B Taqa 7Y +85, +12Y +105
• 10/02 $1B Caesars Entertainment 8NC3
• 10/02 $1B *MuniFin 5Y SOFR+46
• 10/02 $Benchmark Keysight 10Y +145a
• 10/02 $Benchmark Nama 7Y Sukuk +170a
• 10/02 $Benchmark Goodman US Finance 10Y +165a
• 10/02 $Benchmark Kazakhstan +10Y investor calls

EGBS

BONDS: EGBs-GILTS CASH CLOSE: Geopolitical Risk Premium Reversal

Bunds and Gilts retreated Wednesday, conceding most of Tuesday's late gains.

• Yields rose fairly steadily throughout the session, in an apparent unwinding of Tuesday's Israel-Iran geopolitical risk premium. Solid US private payrolls data weighed on the space in the afternoon, with heightened sensitivity ahead of Friday's US nonfarm payrolls report.
• Data was limited; Eurozone unemployment was in-line with expectations, though Spain saw a smaller-than-expected rise in unemployment.
• Both the UK and German curves bear steepened, with Gilts underperforming - exacerbated by a relatively soft 5Y auction.
• OATs outperformed (10Y/Bund -1.1bp), as more details of French fiscal tightening plans emerged including on sizeable spending cuts added to "temporary" tax raises.
• Periphery EGB spreads were little changed after some widening earlier in the session.
• A speech by ECB's Schnabel will be watched after the cash close for potential signals for an October cut (currently 95% priced - we go through the latest analyst expectations for the ECB rate path in our Eurozone Inflation Insight released today).
• Thursday's calendar is highlighted by the UK DMP data which has become one of the most watched releases for BoE MPC members looking at firms’ expectations for hiring, wage growth and price growth. We also get final September services PMIs.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 2bps at 2.04%, 5-Yr is up 4.6bps at 1.921%, 10-Yr is up 5.6bps at 2.092%, and 30-Yr is up 5.5bps at 2.416%.
• UK: The 2-Yr yield is up 6.2bps at 4.017%, 5-Yr is up 7.8bps at 3.895%, 10-Yr is up 8.4bps at 4.025%, and 30-Yr is up 8.1bps at 4.594%.
• Italian BTP spread down 0.3bps at 132.9bps / Spanish down 0.5bps at 79.3bps.

THURSDAY DATA CALENDAR