MNI ASIA OPEN: Tsys Rally as US Drawn Into Mideast Conflict

EXECUTIVE SUMMARY

• SECURITY: Republican Defense Hawks Call For Strong US Reponse To Iran
• SECURITY: Iranian Missile Strike On Israel Appears Larger Than April Attack
• SECURITY: Iran Alerted US And Russia Before Israel Missile Attack
• US DATA: Higher Job Openings vs Lower Quits

US

US TSYS: Middle East Geopol Risk Overshadows US Data

• Treasuries look to finish higher, near Friday's closing levels amid waves of risk-on/safe haven support in the first half. Treasuries initially rallied with EGBs after Israel kicked off a ground assault in southern Lebanon. Levels extended the rally back to September 20 levels as wires reported Iran had launched dozens of ballistic missiles at Israel.
• Dec'24 10Y futures climbed to 115-00.5 high, near initial technical resistance of 115-02.5 (Sep 19 high). The rally did not translate to steeper curves, however, 2s10s flattening another -1.514 to 12.470 after Monday's move off near 20.0 high.
• Treasury futures receded from session highs as IDF officials reported "no additional threats" after Iran missile attack largely intercepted in transit to Israel and Israelis allowed to exit shelters. Dec'24 10Y futures currently trade 114-23 (+14), 10Y yield currently -.0437 at 3.7372%.
• Projected rate cut pricing into year end gaining some momentum vs. this morning's levels (*): Nov'24 cumulative -34.9bp (-35.4bp), Dec'24 -70.8bp (-68.9bp), Jan'25 -102.3bp (-102.1bp).

Geopol risk overshadowed the day's ISM Mfg miss and higher than expected job openings in JOLTS data. Focus turns to Wednesday's ADP private employ data ahead of Friday's headline September jobs data.

NEWS

SECURITY: Republican Defense Hawks Call For Strong US Reponse To Iran

The Iranian missile attack on Israel appears set to transform into a major political issue in the United States ahead of next month's presidential election, with a string of Republican defence hawks calling for 'decisive' action against Iran and attributing blame to the Biden administration's soft approach to Iran. Republicans are likely to again hammer the White House for its perceived failings on Iran, including a proposed deal to unfreeze USD$6 billion in Iranian oil revenue that was blockedby the House of Representatives in November last year.

• Senator Roger Wicker (R-MI), the ranking Republican on the Senate Armed Forces Committee, said: "Iran and its terrorist proxies – Hezbollah, Hamas, and the Houthis – will never stop their campaign to eliminate Israel from the map. The Ayatollah's regime must be eliminated."
• Senator Lindsay Graham (R-SC) said in a statement: "I spoke with President Trump earlier today, and he is determined and resolved to protect Israel from the threats of terrorism emanating from Iran. I can assure you Iran attacks Israel at their own peril.... Now is the time to show unified resolve against Iran, the largest state sponsor of terrorism. We need decisive action, not just statements."
• Senator Pete Ricketts (R-NE) said: "For three and a half years, the Biden-Harris administration’s appeasement-first foreign policy has emboldened adversaries and invited aggression. Today’s attack on an American ally by Iran is a direct result of that weakness."

SECURITY: Iranian Missile Strike On Israel Appears Larger Than April Attack

The initial wave of a major Iranian ballistic missile attack on Israel appears to have concluded. Early reports suggest that the attack was on a significantly larger scale than an April attack that was successfully repelled by Israel's Iron Dome missile defence system and air support from Israel's allies. The primary focus now is whether any of the missiles penetrated Israel's air defences and whether another wave of attacks is imminent. 

• The White House said in a statement: "Biden convened a meeting with Harris and natsec team to discuss Iranian plans to imminently launch a significant ballistic missile attack against Israel. They reviewed status of U.S. preparations to help Israel defend against these attacks and protect U.S. personnel."
• Axios reports: "The Israeli security cabinet is convened at the government bunker near Jerusalem, Israeli officials said"
• The scale of the attack, with missiles appearing to have flown over densely populated civilian areas, points to a significant Israeli retaliation. The number of missiles and intensity of the missile barrage suggests that at least some of the missiles will have penetrated the Iron Dome. 

SECURITY: Iran Alerted US And Russia Before Israel Missile Attack

Newswires reporting confirmation that Iran alerted both Russia and the United States, via diplomatic channels, before its ballistic missile attack on Israel this evening. 

• Reuters: "Senior Iranian official tells Reuters: Tehran had informed Russia ahead of missile attacks on Israel... US was alerted by Iran through diplomatic channels 'shortly before the attacks'.”
• The report suggests that while the attack was more intense than a similar missile and drone attack in April, it may have been calibrated to prevent escalation that could risk a direct war between Iran and the United States.
• Dr. Sara Vakhshouri at SVB Energy notes: "Iran’s retaliation on Israel was likely pre-informed, signaling a calculated move not aimed at escalating the conflict. The real risk of escalation now hinges on Israel’s response, particularly after weakening Iran’s regional proxies and undermining its defense capabilities."
• NYT notes that Daniel Hagari, the Israeli military spokesman, said the attack would have “consequences,” adding, “We have plans, and we will act in the time and place we decide.”
• White House press secretary Karine Jean-Pierre notes that President Biden and Vice President Harris, "convened two meetings with their national security team... The President directed the US military to aid Israel’s defense against Iranian attacks & shoot down missiles targeting Israel. They also reviewed preparations to protect U.S. personnel in the region."
• Politico reports: US defense official confirms US forces are "defending against Iranian-launched missiles targeting Israel." US will "provide additional defensive support and to protect U.S. forces" in Middle East.

(BBG) Euro-Zone Inflation Drops Below 2%, Backing ECB Rate-Cut
Euro-area inflation slowed below the European Central Bank’s 2% target for the first time since 2021, backing investor bets that interest rates may be lowered more quickly than previously anticipated.

OVERNIGHT DATA

US DATA: Key ISM Manufacturing Components Disappoint

• The ISM manufacturing survey slightly missed expectations in September as it moved sideways at 47.2 (cons 47.5).
• However, there were soft outturns for some notable components – it’s worth noting that surveys for those individual components are much smaller than the overall index (e.g. prices paid has 8 responses and employment 3 vs 61 for ISM mfg) but the outright declines on the month were still significant.
• Prices paid surprisingly slipped to 48.3 (cons 53.5) after 54.0, its lowest since Sep’23.
• Employment surprisingly slipped to 43.9 (cons 47.1) after 46.0, unwinding most of the August improvement to leave it close to the 43.4 in July that marked the lowest since Jun’20. As usual, this can only have limited read through to payrolls growth with manufacturing only worth about 10% of total.
• New orders meanwhile beat expectations but only increased to 46.1 (cons 45.0) after 44.6 as they remain firmly in contraction territory.
• See the below charts for these key components and how they compare with their services counterparts.

US DATA: Higher Job Openings vs Lower Quits

The JOLTS report for August saw a clash of higher than expected job openings but another step lower in quits rates for even further below pre-pandemic averages.

• Job openings surprisingly increased to 8.04m (cons 7.69m) in August after a slightly upward revised 7.71m (initial 7.67m) in July.
• The rate to unemployed increased to 1.13 after a marginally upward revised 1.08 (initial 1.07), with the increase modestly boosted by the already known small 48k decline in unemployment back in August.
• It saw this ratio to unemployment increase from what was the lowest since May-2021. It clearly remains low by recent standards having averaged 1.21 in Q2 for close to the 1.19 seen in 2019 although is still elevated compared to earlier pre-pandemic years such as the 1.00 averaged in 2017-18.
• Quits rate: 1.94% after 2.04% (initial 2.07) in July. 2019 av 2.33, 2017-18 av 2.20.
• Private quits: 2.15% after 2.26% (initial 2.28) in May. 2019 av 2.59, 2017-18 av 2.45.
• Outside of the depths of the pandemic, these are the lowest quit rates since late 2014/early 2015.

US DATA: Mfg PMI Upward Revision Doesn’t Materially Alter Larger Contraction

• The S&P Global US manufacturing PMI was revised up to 47.3 (flash and cons 47.0) in September to trim the decline from 47.9 in August. As such it maintained a move deeper into contraction territory (and its lowest since Jun 2023) but firms increased their selling prices by the most since April. Full press release here. 

   

MARKETS SNAPSHOT

• Key market levels of markets in late NY trade:
• DJIA down 103.06 points (-0.24%) at 42226.32
• S&P E-Mini Future down 44.75 points (-0.77%) at 5769.25
• Nasdaq down 253.7 points (-1.4%) at 17934.56
• US 10-Yr yield is down 4.2 bps at 3.7391%
• US Dec 10-Yr futures are up 13/32 at 114-22
• EURUSD down 0.0062 (-0.56%) at 1.1073
• USDJPY down 0.04 (-0.03%) at 143.59
• WTI Crude Oil (front-month) up $1.96 (2.88%) at $70.13
• Gold is up $26.44 (1%) at $2660.99
• European bourses closing levels:
• EuroStoxx 50 down 46.3 points (-0.93%) at 4954.15
• FTSE 100 up 39.7 points (0.48%) at 8276.65
• German DAX down 111.79 points (-0.58%) at 19213.14
• French CAC 40 down 61.68 points (-0.81%) at 7574.07

US TREASURY FUTURES CLOSE

• 3M10Y +0.107, -85.57 (L: -91.373 / H: -80.355)
• 2Y10Y -1.324, 12.455 (L: 7.819 / H: 14.757)
• 2Y30Y -1.084, 46.507 (L: 42.533 / H: 48.446)
• 5Y30Y +0.362, 56.248 (L: 53.354 / H: 57.457)
• Current futures levels:
• Dec 2-Yr futures up 2.375/32 at 104-6.25 (L: 104-04.125 / H: 104-08.875)
• Dec 5-Yr futures up 8.25/32 at 110-4.5 (L: 109-29.75 / H: 110-11.5)
• Dec 10-Yr futures up 13/32 at 114-22 (L: 114-11 / H: 115-00.5)
• Dec 30-Yr futures up 27/32 at 125-1 (L: 124-11 / H: 125-25)
• Dec Ultra futures up 37/32 at 134-8 (L: 133-09 / H: 135-11)

US 10YR FUTURE TECHS: (Z4) Monitoring Support At The 50-Day EMA

• 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:‌‌ 114-30 @ 1305 ET Oct 1
• SUP 1: 114-07   Low Sep 26     
• SUP 2: 114-00+ Low Sep 4
• SUP 3: 113-28   50-day EMA      
• SUP 4: 113-12   Low Sep 3 and a key support

Treasuries are in consolidation mode and continue to trade closer to their recent lows. The move down that started on Sep 11, still appears to be a correction. The contract has traded through the 20-day EMA, at 114-21. A clear break of this EMA would signal scope for a deeper retracement, towards 113-28, 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 +0.015 at 95.975
• Mar 25 +0.015 at 96.50
• Jun 25 +0.030 at 96.820
• Sep 25 +0.045 at 96.980
• Red Pack (Dec 25-Sep 26) +0.055 to +0.070
• Green Pack (Dec 26-Sep 27) +0.070 to +0.070
• Blue Pack (Dec 27-Sep 28) +0.075 to +0.075
• Gold Pack (Dec 28-Sep 29) +0.070 to +0.070

SOFR FIXES AND PRIOR SESSION REFERENCE RATES

SOFR Benchmark Settlements:

• 1M +0.00384 to 4.84954 (+0.00544/wk)
• 3M +0.01742 to 4.60953 (+0.01618/wk)
• 6M +0.03015 to 4.28402 (+0.02217/wk)
• 12M +0.04456 to 3.82124 (+0.03816/wk)

US TSYS: Repo Reference Rates

• Secured Overnight Financing Rate (SOFR): 4.96% (+0.12), volume: $2.523T
• Broad General Collateral Rate (BGCR): 4.88% (+0.05), volume: $790B
• Tri-Party General Collateral Rate (TGCR): 4.88% (+0.05), volume: $742B
• (rate, volume levels reflect prior session)

STIR: FRBNY EFFR for prior session:

• Daily Effective Fed Funds Rate: 4.83% (+0.00), volume: $73B
• Daily Overnight Bank Funding Rate: 4.83% (+0.00), volume: $172B

FED Reverse Repo Operation

RRP usage declines as new month/quarter end underway, latest at $375.221B this afternoon from $465.638B prior. Compares to $239.386B on Monday September 16 2024 -- the lowest level since early May 2021. Number of counterparties at 58 from 69 prior.

PIPELINE

PIPELINE: Corporate Debt: Dell, Accenture Guidance Update

• Date $MM Issuer (Priced *, Launch #)
• 10/01 $1.2B Latam Airlines 6Y 8%a
• 10/01 $500M IADB 2029 Tap SOFR+37
• 10/01 $500M #F&G Annuities & Life 10Y +260
• 10/01 $500M *Africa Finance Corp WNG 5Y 5.55%
• 10/01 $Benchmark Dell International +5Y +85, +10Y +115
• 10/01 $Benchmark Accenture Capital 3Y +42, 5Y +57, 7Y +67, 10Y +77
• 10/01 $Benchmark Alaska Airlines 5Y +187.5a, 7Y +212.5a
• 10/01 $Benchmark Ferguson Enterprises 10Y +150a
• Expected midweek:
• 10/02 $1B MuniFin 5Y SOFR+50a
• 10/02 $Benchmark CPPIB Capital 3Y SOFR+47a

EGBS

BONDS: EGBs-GILTS CASH CLOSE: OATs Give Up Early Outperformance On Geopolitics

European bonds rallied sharply Tuesday, with geopolitical concerns driving a safe-haven bid later in the session.

• Core FI and periphery EGBs alike enjoyed gains in the morning, led by OATs on reports of forthcoming French fiscal tightening measures.
• OATs would give up some of their gains later in the day after French PM Barnier failed to follow up with policy specifics - 10Y to Bund -2.1bp on the day, vs -5.2bp at the intraday tights.
• Global core FI soared in mid-afternoon trade with risk spreads widening as Iran launched missiles at Israel.
• Data was not a market mover: Eurozone September flash inflation had been anticipated after national-level data already released; manufacturing PMI data from Italy (below-consensus) and Spain (above-consensus) likewise failed to move the needle.
• The German and UK curves both bull flattened. Periphery EGB spreads closed mixed, but little changed overall.
• Wednesday's calendar includes Eurozone labour market data and several ECB speakers including Schnabel and Lane, as well as the record of the September BoE FPC meeting.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is down 4.8bps at 2.02%, 5-Yr is down 7.2bps at 1.875%, 10-Yr is down 8.7bps at 2.036%, and 30-Yr is down 9.8bps at 2.361%.
• UK: The 2-Yr yield is down 2.8bps at 3.955%, 5-Yr is down 4.3bps at 3.817%, 10-Yr is down 6.2bps at 3.941%, and 30-Yr is down 7.1bps at 4.513%.
• Italian BTP spread up 0.2bps at 133.2bps / Spanish down 0.5bps at 79.8bps 

FOREX

FOREX: Iran Missile Launches See Key Pairs Testing Support

Reaction to headlines that Iran has launched missile strikes on Israel has been relatively limited in FX space, not materially adding to earlier sizeable risk-off moves on the earlier, well-telegraphed warnings, but BBDXY is nevertheless at fresh session highs (+0.4%).

• EURUSD has seen session lows of 1.1048 having for now stopped just short of resting support at 1.1044 (50-day EMA) after which lies 1.1002 (Sep 11 low).
• GBPUSD is also of note, setting new recent lows of 1.3246, now down more than 180 pips from last week’s cycle high. It’s through support at 1.3269 (38.2% retracement for the upleg off the mid-September low) and tests the 20-day EMA at 1.3250 after which lies 1.3088 (50-day EMA).
• However, USDJPY remains within session ranges as a function of similar moves in FI and equities.
• CAD, buoyed by WTI surging 5% on the day on to top of US linkages, is top G10 FX performer on the day followed by JPY.

WEDNESDAY DATA CALENDAR