US TSYS: Curve Resolves Bear Steeper As Implications Of Strong Data Digested
The Treasury curve bear steepened for the first time early October, as economic data continued to portray an economy that is stronger than expected.
- The curve initially leaned bear flattened with the belly underperforming as September retail sales came were stronger than expected, with the 0.7% control group reading (vs 0.3% survey) resulting in an Atlanta Fed GDPNow upgrade to 3.4% for Q3 growth vs 3.2% prior.
- Meanwhile Initial jobless claims (241k) were elevated by 2024 standards but below the 259k expected and allayed some concerns over the prior week's spike.
- Futures volumes spiked (188k TY traded, most on a data release since initial jobless claims a week ago).
- While the ECB's decision to cut rates as expected, rising pricing for an outsized cut in December buoyed the Euro short-end, helping keep its US counterpart relatively anchored in the face of the strong US data.
- The result was that the curve closed bear steeper for the first time since Oct 3: 2Y yields rose 3bp from the point of the data release to the close, having been up 5bp, while 10Y yields rose 6bp.
- Dec 10-Yr futures (TY) are last down 14/32 at 112-03 (L: 112-0 / H: 112-18). In cash, the 2-Yr yield is up 3.6bps at 3.974%, 5-Yr is up 5.5bps at 3.8988%, 10-Yr is up 7.6bps at 4.0886%, and 30-Yr is up 9.3bps at 4.3885%.
- Friday's data schedule is a little less eventful, with housing starts/building permits featuring. We get plenty of Fed speakers though, including Bostic, Kashkari, Waller, and Bostic.
NEWS
ECB (MNI ECB WATCH): The European Central Bank cut interest rates by 25 basis points for a second consecutive meeting on Thursday, saying the disinflationary process was “well on track” and sticking to its meeting-by-meeting approach. “We are going to continue doing exactly the same thing,” ECB president Christine Lagarde told a news conference, adding that the decision to cut was unanimous given lower-than-expected inflation data and a weaker economy. “I'm not sure we anticipated that 1.7%, but nor did anyone else, for that matter,” she said, referring to downwardly-revised inflation data for September, saying that the eurozone was on target to sustainably hit its 2% inflation target in 2025.
ECB (MNI BRIEF): The disinflationary process is well on track and was a main reason behind the ECB's decision to cut key interest rates, ECB President Christine Lagarde said on Thursday. Speaking after the ECB cut rates for a second consecutive meeting, Lagarde said "All information that we received were heading in the same direction. Whether you look at PMI, employment, if look services, it’s the same story, all heading in the same direction." Lagarde said the Governing Council would consider more data before the December meeting, both "soft and hard”.
ISRAEL-HAMAS (BBC): Yahya Sinwar, the leader of Hamas, has been killed by Israeli soldiers in southern Gaza, Israel has confirmed. Described by Israel and the US as the mastermind behind the 7 October attacks - when Hamas gunmen killed around 1,200 Israelis and took 251 hostages, prompting Israel's ground invasion of Gaza - Sinwar had led the armed group in Gaza since 2017. Israeli Prime Minister Benjamin Netanyahu said: "Today, as we promised to do, we settled the score with him." The Israeli military said Sinwar was among three militants killed on Wednesday during a raid on a building suspected of being used by senior Hamas figures.
GLOBAL (MNI): International Monetary Fund chief Kristalina Georgieva said governments face a "frightening" loss of fiscal space following pandemic deficits and should work hard to reduce debt loads before the next global shock. "Our forecasts point to an unforgiving combination of low growth and high debt -- a difficult future," she said Thursday in the text of a curtain-raiser speech ahead of IMF and World Bank meetings in Washington. "Fiscal space keeps shrinking. Just look at the frightening evolution of the interest to-revenue ratio." That measure has climbed to about 15% in low-income nations and over 10% in emerging-market economies like China.
FED (MNI BRIEF): The first estimates of a new tool from the New York Fed indicate that reserves in the banking system remain abundant, suggesting the U.S. central bank's 2-year-old quantitative tightening program has room to run. "Our most recent estimates suggest that, although reserves have declined by over USD1 trillion since their peak of USD4.2 trillion in November 2021, they remain abundant," authors John Williams, Gara Afonso, Domenico Giannone, and Gabriele La Spada wrote in a new blog. Williams is president of the New York Fed and the co-authors are current and former staff economists.
OVERNIGHT DATA
US DATA: Very Strong Retail Sales Print Should Prompt Upward Growth Revisions
MNI:US SEP RETAIL SALES +0.4%; EX-MOTOR VEH +0.5%
The standout from the much-stronger-than-expected September retail sales report is the jump in the control group to 0.7% M/M vs 0.3% expected - that alone will result in upped Q3 GDP growth forecasts. It's the 3rd highest monthly print of the year and a 3-month high (0.3% prior).
- With five very solid months in a row (averaging 0.5% M/M growth), nominal control group 3M/3M (ie quarterly) annualized control group expansion is now running at 6.4% - that's the fastest for any month since Q1 2023, when real PCE goods consumption printed a 7.4% Q/Q annualized growth rate.
- Headline retail sales rose by 0.4%, up from 0.1% prior; ex-autos/gas jumped to 0.7% from 0.3% prior. Basically every retail sales category rose, excepting furniture (-1.4%), electronics (-3.3%), and gasoline (-1.6%, very much price-related).
- One surprise is that auto vehicle sales - the single largest retail category - printed only flat M/M growth, whereas most analysts had expected a bigger rebound from a soft September (-0.3%).
- Also notable was a strong 1.0% M/M growth in food services/drinking places, the fastest rate of growth since November 2023 - which as the only services consumption category in the retail sales report is a positive sign for Services PCE as well.
US DATA: Initial Claims See No Further Hurricane Impact, Michigan Reverses Spike
- MNI: US JOBLESS CLAIMS -19K TO 241K IN OCT 12 WK
- US PREV JOBLESS CLAIMS REVISED TO 260K IN OCT 05 WK
- US CONTINUING CLAIMS +0.009M to 1.867M IN OCT 05 WK
- Initial jobless claims were comfortably lower than expected at 241k (sa, cons 259k) in the week to Oct 12 – a payrolls reference week – after a typical upward revised 260k (initial 258k).
- The four-week average climbed to 236k (+4k) for mid-August levels having recently bottomed out at 224k in late September.
- There was no sign of any further hurricane impact. The six states impacted by Hurricanes Helene and Milton saw cumulative claims of 34.0k (nsa) after 36.1k the previous week (revised up from 35.5k).
- Milton made landfall on Oct 9, ahead of the Oct 12 survey end-point. That didn’t leave much time for claims to be registered but there had been scope for a further increase in lagged claims from Helene’s impact.
- The main change on the week came from Michigan (-7.8k) to mostly reverse the sharp 9.4k increase last week, with the distortion linked to auto shutdowns. This -7.8k plus -3.4k from Florida (after Helene-boosted +4.0k previously) were the largest contributions behind the -11.4k decline in national initial claims.
US DATA: Continuing Claims As Expected, Near Recent Highs
- Continuing claims meanwhile were as expected, rising to 1867k (sa, cons 1865k) in the week to Oct 5 after 1858k (initial 1861k).
- It modestly extends the recent climb back towards late July highs of 1871k that had marked the highest since late 2021.
- The non-seasonally adjusted level of continuing claims remains right at the high end of ranges for recent years, whilst the six states most heavily impacted by Hurricane Helene didn’t show any sign of an uptick in the first week that it showed up in the initial claims data.
US DATA: Industrial Production Weakness Caveated By Hurricane And Strike Hit
MNI: US SEP INDUSTRIAL PROD -0.3%; CAP UTIL 77.5%
The production and capacity utilization data were weaker than expected in September although were caveated by a large drag from the Boeing strike and two hurricanes.
- Industrial production was a touch weaker than expected in September at -0.3% (cons -0.2).
- The Federal Reserve estimates the Boeing strike and two hurricanes in September (i.e. prior to Milton) each subtracted 0.3pps to monthly growth.
- It followed mixed revisions, with the sizeable downward revision to August (0.34% vs an initial 0.8) mostly offset by upward revisions to July (-0.62 vs -0.94) and June (0.15 vs 0.06).
- Manufacturing production meanwhile saw a larger miss at -0.4% M/M (cons -0.1) after a downward revised 0.5% (initial 0.9) and slightly smaller prior upward revisions.
- Recent run rates for both overall industrial and manufacturing production are tepid, with 3m/3m annualized rates of -0.6% and -0.4% respectively.
- That’s down from 2.5% as of June but -1.8% for March, although a Y/Y rate of -0.6% for September more clearly shows the underlying trend here. The latter is near unchanged from the -0.5% Y/Y in July, with this tepid trend not particularly new, but it’s possibly overstating recent weakness.
- Capacity utilization meanwhile was lower than expected at 77.5% (cons 77.8) after a downward revised 77.8% (initial 78.0). It’s the lowest since January and before that mid-2021 having returned close to levels just before the pandemic.
US DATA: Philly Fed Manufacturing Surprisingly Firms In October
MNI: US OCT PHILADELPHIA FED MFG INDEX 10.3
- The Philly Fed manufacturing index was higher than expected in October at 10.3 (cons 3.0) after 1.7, the opposite of Monday’s Empire survey surprising lower with -11.9 (cons 3.6) after 11.5.
- Within the Philly survey, new orders (14.2 after -1.5) and shipments (7.4 after -14.3) both almost fully reversed September’s deterioration.
- This new orders strength should be taken with a pinch of salt as the Philly measure has been an outlier to weaker regional counterparts in recent months.
- Employment soured meanwhile, back into negative with -2.2 after the 10.7 in September was the highest since July and before that Oct 2022.
- Note that whilst latest readings paint to firmly contrasting fortunes in manufacturing firms in the Philly and NY Fed surveys in October, both point to improved confidence with six-month ahead measures close to recent highs.
US DATA: Upped Atlanta Fed US GDPNow Another Risk For FOMC Projections
September's much-stronger-than-expected control group retail sales print (0.7% M/M vs 0.3% expected) saw the biggest upward revision in the Atlanta Fed's GDPNow since Oct 4's nonfarm payrolls report. Q3 GDP is now tracking 3.42% Q/Q annualized, up 0.18pp vs the prior estimate, with consumer spending (PCE) now seen contributing 2.43pp (up 0.21pp from pre-retail sales). Real PCE is now seen growing 3.6% (3.3% prior).
- Solid business inventories also contributed to the higher estimate - but the weaker-than-expected hurricane-impacted industrial production reading has dampened the nonresidential fixed investment contribution to 0.83pp (down 0.03pp), growing at a still solid 3.1% in the quarter (3.3% prev estimate).
- Not only would this be the fastest real PCE growth since Q1 2023's 4.9% (as flagged by MNI re today's retail sales data), it would be the fastest quarter of GDP growth since Q3 2023 and one of the strongest since 2021, bringing average Q/Q annual growth in the first 3 quarters of the year to 2.7%.
- For the FOMC, this could mean yet another reconsideration of the September forecasts: already the Q4 core PCE median projection (2.6%, downward rev from 2.8% in June) and Q4 unemployment rate (4.4% upward rev from 4.0% in June) look perhaps too low and too high, respectively, based on data since that meeting.
- The 2.0% GDP forecast for Q4/Q4 is also looking a little low, after the downward revision from 2.1% in the previous edition.
MARKETS SNAPSHOT
Below gives key levels of markets in afternoon NY trade:
- DJIA up 176.41 points (0.41%) at 43252.09
- S&P E-Mini Future down 1.25 points (-0.02%) at 5887
- Nasdaq up 6.3 points (0%) at 18382.21
- US 10-Yr yield is up 7.6 bps at 4.0886%
- US Dec 10-Yr futures (TY) are down 14/32 at 112-3
- EURUSD down 0.0034 (-0.31%) at 1.0828
- USDJPY up 0.58 (0.39%) at 150.21
- WTI Crude Oil (front-month) up $0.41 (0.58%) at $70.78
- Gold is up $18.18 (0.68%) at $2692.15
Prior European bourses closing levels:
- EuroStoxx 50 up 38.59 points (0.79%) at 4947.3
- FTSE 100 up 56.06 points (0.67%) at 8385.13
- German DAX up 150.58 points (0.77%) at 19583.39
- French CAC 40 up 91.73 points (1.22%) at 7583.73
US TREASURY FUTURES CLOSE
- Dec 2-Yr futures (TU) down 2.625/32 at 103-13 (L: 103-10.8 / H: 103-15.6)
- Dec 5-Yr futures (FV) down 7.5/32 at 108-12 (L: 108-9.3 / H: 108-19.8)
- Dec 10-Yr futures (TY) down 14/32 at 112-3 (L: 112-0 / H: 112-18)
- Dec 30-Yr futures (US) down 40/32 at 120-3 (L: 119-30 / H: 121-12)
- Dec Ultra futures (WN) down 61/32 at 127-18 (L: 127-13 / H: 129-18)
US 10YR FUTURE TECHS: (Z4) Trend Structure Remains Bearish
- RES 4: 115-00+ High Oct 1
- RES 3: 114-14+ High Oct 3
- RES 2: 113-14+ 50-day EMA
- RES 1: 112-22/113-12 High Oct 16 / Low Sep 3
- PRICE: 112-02 @ 16:43 BST Oct 17
- SUP 1: 111-22 Low Oct 10
- SUP 2: 111-14 50.0% retracement of the Apr - Sep bull cycle (cont)
- SUP 3: 111-00 Low Jul 22
- SUP 4: 110-08 2.0% 10-dma envelope
A bear threat in Treasuries remains present and the latest recovery appears to be a corrective phase - for now. A move higher is allowing a short-term oversold condition to unwind. The recent breach of the 50-day EMA and the 112-00 handle, strengthens a bearish theme and highlights potential for a continuation lower. Sights are on 111-14, the 50% retracement for the Apr - Sep bull leg. 113-12, the Sep 3 low, is the first key resistance.
STIR: Nov Cut Still Strongly Implied, But Early 2025 Cut Conviction Fades
Thursday's US macro data - highlighted by well-above expected retail sales growth, but also the reassurance of in-line jobless claims after the previous week's jump - pushed the path of Fed rates a little higher through 2025.
- Futures still imply a strong chance of a 25bp cut in November (90%), but that probability has dipped from closer to 96% yesterday. Through end-year, futures now see 42bp of cuts, vs 46bp Wednesday - suggesting that the 2x Fed cut narrative is being challenged by robust economic data. Futures have erased a full 25bp rate cut by end-2024 compared with pre-Oct 3 nonfarm payrolls (Dec 18 2024 FOMC meeting-implied was 4.16% implied, now 4.41%).
- The biggest moves are in early 2025 meeting date-implied rates, where there's 4-5bp fewer cuts now being priced, suggestive of the Fed starting to reconsider its options in the New Year.
- The implied 3.35% end-2025 rate is in line with the FOMC's Dot Plot median projection, but at 3.35% is a little less dovish (3.6bp) vs yesterday's pricing. As we noted earlier, it would probably take further significant data surprises for the FOMC to reconsider its general stance that it is eyeing a return to a perceived neutral stance.
| Meeting | Current FF Implieds (%) | Prior Sess. (Oct 16) | 1d Chg (bp) | Cumulative Change From Current Rate (bp) | Incremental Chg (bp) |
| Nov 07 2024 | 4.61 | 4.59 | 1.3 | -22.5 | -22.5 |
| Dec 18 2024 | 4.41 | 4.37 | 4.1 | -42.4 | -19.9 |
| Jan 29 2025 | 4.22 | 4.18 | 4.7 | -60.8 | -18.4 |
| Mar 19 2025 | 3.99 | 3.94 | 4.8 | -83.9 | -23.1 |
| May 07 2025 | 3.82 | 3.77 | 4.7 | -101.2 | -17.3 |
| Jun 18 2025 | 3.65 | 3.61 | 3.8 | -117.8 | -16.6 |
| Jul 30 2025 | 3.56 | 3.52 | 4.0 | -127.5 | -9.7 |
| Sep 17 2025 | 3.46 | 3.42 | 3.9 | -136.7 | -9.2 |
| Oct 29 2025 | 3.41 | 3.37 | 3.5 | -142.5 | -5.8 |
| Dec 10 2025 | 3.35 | 3.32 | 3.6 | -147.8 | -5.3 |
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
Repo/EFFR Rate Run: SOFR Set To Tick Up After Lull Last Week
Repo and effective Fed funds rates were little changed Friday (no data released Monday due to holiday). For Tuesday, SOFR is set to pick up 2bp to 4.83% due to "the settlement of the Treasury’s mid-month coupon auctions along with the regular Tuesday bill issues", per Wrightson ICAP - though on Wednesday they should subside again.
- Wrightson ICAP also believe that due to Treasury coupon settlements (3-/10-30Y Tsy auctions), demand for overnight financing will ramp up today, meaning ON RRP takeup will fall below $300B today (was $331.7B prior), which would mark the first time that's happened since Sept 17.
REPO REFERENCE RATES (rate, change from prev. day, volume - for Oct 11)
- Secured Overnight Financing Rate (SOFR): 4.81%, -0.01%, $2058B
- Broad General Collateral Rate (BGCR): 4.81%, no change, $805B
- Tri-Party General Collateral Rate (TGCR): 4.81%, no change, $772B
New York Fed EFFR for prior session (rate for Oct 11, chg from prev day):
- Daily Effective Fed Funds Rate: 4.83%, no change, volume: $94B
- Daily Overnight Bank Funding Rate: 4.83%, no change, volume: $246B
ON RRP Takeup Declines Again, Could Stabilize On GSEs
Takeup of the NY Fed's overnight reverse repo facility fell for a 3rd consecutive session to $262.2B, That compares to $331.7B at the end of last week, and the quarter/month-end peak of $465.6B on September 30.
The decline this month in ON RRP takeup is expected to slow and potentially reverse in coming sessions: one key factor is the expected regular influx of cash in the next week from the Government Sponsored Enterprises (Fannie and Freddie).
US: SOFR FIX - 17/10/24 - Source BBG/CME
- 1M 4.75915 -0.02174
- 3M 4.61740 -0.01495
- 6M 4.41536 -0.01646
- 12M 4.08911 -0.02099
BONDS: EGBs-GILTS CASH CLOSE: Curves Steepen As ECB 50bp Cut Seen In Play
European curves steepened Thursday as the ECB cut rates as expected but strong US economic data put pressure on the long end of the curve.
- The ECB decision (25bp cut) and press conference itself brought few surprises, with Lagarde noncommittal on future decisions. The usual post-meeting Bloomberg and Reuters sources stories pointed to another cut in December as likely.
- For markets, judging from implied rates, the debate is over whether it will be 25bp or 50bp (the latter now ~16% priced vs zero pre-meeting).
- That kept the short-end underpinned, even as much-stronger-than-expected US retail sales (and improved initial jobless claims) applied pressure on long-end Treasuries which spilled over globally.
- On the day, the German curve twist steepened, with the UK's bear steepening.
- Periphery EGB spreads tightened on the increasingly dovish implied ECB rate outlook.
- Unscheduled ECB Governing Council member comments will be awaited over the next day - otherwise, on the schedule, UK retail sales data features Friday.
Closing Yields / 10-Yr Periphery EGB Spreads To Germany
- Germany: The 2-Yr yield is down 2.4bps at 2.146%, 5-Yr is up 0.8bps at 2.05%, 10-Yr is up 2.4bps at 2.208%, and 30-Yr is up 4.4bps at 2.523%.
- UK: The 2-Yr yield is up 1.2bps at 4.031%, 5-Yr is up 2bps at 3.946%, 10-Yr is up 2.5bps at 4.089%, and 30-Yr is up 2.3bps at 4.615%.
- Italian BTP spread down 2.1bps at 120.5bps / Spanish down 1.3bps at 70.7bps
FOREX: USD Index Extends October Rally to 3%, USDJPY Back Above 150.00
- The dollar index has firmed again today, extending its impressive rally across October to 3%. The greenback was underpinned by firmer-than-expected US retail sales data and below consensus initial jobless claims which has notably boosted USDJPY back above the 150.00 handle, to highs of 150.30.
- The recent break of the 50-day EMA, marks a bullish development that undermines a bearish theme and highlights a stronger reversal. Sights are on 150.76, the 50% retracement of the Jul 3 - Sep 16 bear leg.
- Elsewhere, the ECB rate cut and press conference closely matched expectations which has allowed the Euro’s bearish momentum to continue during today’s session. EURUSD fell as low as 1.0811, extending the move below initial support and narrowing the gap to both the 1.0800 mark and 1.0778, the Aug 1 low, and next key support.
- Euro weakness was broad based, with EURGBP breaching the week’s low to reach a low of 0.8319, just 8 pips above key support at 0.8311, the lowest level for the cross since April 2022.
- EURAUD (-0.75%) is a standout underperformer on the session following the stronger-than-expected Australian employment data. The cross has now slipped below 1.6200 and markets will remain focused on the key medium-term inflection point at 1.6000.
- In emerging markets, USDMXN briefly rose above 20.00 and looks set to an impressive 4 day winning streak, which has seen the week’s range stretch to over 4%. Price action highlights a dominant uptrend and a continuation higher would expose key resistance and the bull trigger at 20.2181, the Aug 5 high.
- Friday’s focus will be on China activity data before UK retail sales figures for September and US building permits.
| Date | GMT/Local | Impact | Country | Event |
| 18/10/2024 | 2330/0830 | *** |  JP | CPI |
| 18/10/2024 | 0200/1000 | *** |  CN | GDP |
| 18/10/2024 | 0200/1000 | *** | CN | Fixed-Asset Investment |
| 18/10/2024 | 0200/1000 | *** | CN | Retail Sales |
| 18/10/2024 | 0200/1000 | *** | CN | Industrial Output |
| 18/10/2024 | 0200/1000 | ** | CN | Surveyed Unemployment Rate M/M |
| 18/10/2024 | 0600/0800 | ** |  SE | Unemployment |
| 18/10/2024 | 0600/0700 | *** |  GB | Retail Sales |
| 18/10/2024 | 0800/1000 | ** |  EU | EZ Current Account |
| 18/10/2024 | 0900/1100 | ** | EU | Construction Production |
| 18/10/2024 | 1230/0830 | ** |  US | WASDE Weekly Import/Export |
| 18/10/2024 | 1230/0830 | *** | US | Housing Starts |
| 18/10/2024 | 1330/0930 | US | Atlanta Fed's Raphael Bostic | |
| 18/10/2024 | 1400/1000 | US | Minneapolis Fed's Neel Kashkari | |
| 18/10/2024 | 1610/1210 | US | Fed Governor Christopher Waller | |
| 18/10/2024 | 1630/1230 | US | Atlanta Fed's Raphael Bostic | |
| 18/10/2024 | 1800/1400 | ** | US | Treasury Budget |
| 21/10/2024 | 0600/0800 | ** |  DE | PPI |
| 21/10/2024 | - | EU | ECB's Lagarde and Cipollone participate in IMF/World Bank Meetings | |
| 21/10/2024 | 1255/0855 | US | Dallas Fed's Lorie Logan | |
| 21/10/2024 | 1530/1130 | * | US | US Treasury Auction Result for 13 Week Bill |
| 21/10/2024 | 1530/1130 | * | US | US Treasury Auction Result for 26 Week Bill |
| 21/10/2024 | 1700/1300 | US | Minneapolis Fed's Neel Kashkari | |
| 21/10/2024 | 2105/1705 | US | Kansas City Fed's Jeff Schmid |