MNI ASIA OPEN: US Sees Solid Growth, But Large Budget Deficit
EXECUTIVE SUMMARY
US TSYS: Light Bull Steepening Sees Yields Fall Slightly For The Week
The Treasury curve bull steepened slightly Friday, with 10Y yields falling on a weekly basis for the first time since mid-September.
- Futures softened in overnight trade with early twist steepening, with short-ends supported by a dovish ECB sources article by Reuters.
- But Tsys bottomed and remained well within the week's ranges, and rallied just before 0830ET in the only notable price movement of the session. There was no obvious trigger of the move, which coincided with another sharp pullback in oil prices following this week's earlier downside geopolitical shocks.
- The curve bull flattened slightly in the rally, only to re-steepen slightly toward the close. After hitting session highs (109-09+), TYs pulled back and traded in a 5-tick range the rest of the day, with volumes on the light side (about 90% of the 5-day average).
- Housing starts/permits activity came in weaker than expected, underlining that residential construction remains one of the economy's clear weak points but not really casting much doubt over the overall ongoing economic expansion (Atlanta's GDPNow remained at 3.4% for Q3).
- FedSpeak was relatively limited: Atlanta Fed Pres Bostic said “I’m not in a rush to get to neutral" on rates - recall he'd previously said he's looking for one more rate cut this year. Fed cut pricing was little changed on the day (around 1-2bp lower through early 2025).
- Dec 10-Yr futures (TY) up 5.5/32 at 112-07 (L: 111-29.5 / H: 112-09.5). In cash, the 2-Yr yield is down 2.8bps at 3.944%, 5-Yr is down 2.6bps at 3.8728%, 10-Yr is down 1.8bps at 4.073%, and 30-Yr is down 1bps at 4.3799%. 5Y/ 10Y and 30Y yields fell around 3bp each on the week (first drop for those since w/e Sept 13).
- With a limited docket of impactful events on next week's schedule, focus will be on weekly jobless claims data and flash PMIs, with appearances by FOMC members Logan and Schmid featuring Monday, and the Fed's Beige Book out Wednesday.
NEWS
US FISCAL (MNI): The United States saw a USD1.833 trillion federal budget deficit in 2024, according to Treasury Department data Friday rounding out the fiscal year, at 6.4% of gross domestic product, up from 6.2% in 2023. It is the third highest deficit in history and it’s been 23 years since tax revenue exceeded spending. In all, the government collected a record USD4.9 trillion in revenue and spent USD6.75 trillion, putting the deficit at USD1.83 trillion for the year that ended September 30, according to the Treasury Department, up from USD1.70 trillion last year.
EU (MNI): European Parliament vetting of nominees for the next European Commission from Nov 4 to 12 is likely to highlight opposition to any further joint EU funding or any fresh major initiatives to reduce carbon emissions, parliamentary sources told MNI. Only a major crisis would galvanise support for additional funding, despite the call for this made by former ECB chief and Italian prime minister Mario Draghi in his recent report on European competitiveness, while the green regulatory tide seems to have reached its high-water market even if there is no backsliding on Green Deal legislation, one senior source said.
FED (MNI): Atlanta Federal Reserve President Raphael Bostic said Friday the central bank is in no rush to lower interest rates to a more neutral stance, citing a robust labor market and still-declining inflation. Bostic said he expects inflation to converge to 2% next year and noted "labor markets are strong. They're a little weaker than they were a year ago, but they're not weak." He repeated he sees the neutral rate somewhere in a range between 3% and 3.5% and showed support for a patient approach to setting the policy rate. "We are not in a rush to neutral," he told the Mississippi Council on Economic Education Forum.
CHINA (MNI): China will continue diversifying investment of its over USD3 trillion foreign exchange reserves and facilitate forex transactions for foreign direct investment (FDI), while advancing the opening up of the bond market, Zhu Hexin, head of State Administration of Foreign Exchange, told a forum on Friday. The use of foreign exchange reserves will boost support for major projects and other initiatives alongside the Belt and Road Initiative (OBOR), he said, noting the Qualified Foreign Investor (QFI) system will be optimized to support the growth of long-term and policies to facilitate cross-border financing will be optimized, with more small and micro enterprises included in the policy scope to broaden financing channels.
POLITICAL RISK (MNI POLITICAL RISK): Biden and Harris both issued statements renewing calls for a ceasefire in Gaza following the death of Hamas leader Yahya Sinwar. White House National Security Advisor Jake Sullivan noted that a "major obstacle has been removed" but conceded “I have long since given up on making predictions or drawing timelines," about a ceasefire.
MNI US MACRO WEEKLY (MNI):Heavy declines in oil prices and deepening global central bank easing expectations helped limit the near-term upside impact on the implied Fed rate path from a week of mostly stronger-than-expected US data. The healthy data included a firm retail sales beat, a surprise decline for initial jobless claims and industrial production ultimately holding up well considering both hurricane and strike impacts. These saw the Atlanta Fed’s Q3 GDP tracking estimate rise 0.2pp from last week to 3.4%, a fresh high. A lack of major releases and FOMC support for a skip, barring Atlanta Fed’s Bostic (’24 voter) who penciled in only a single cut over the two meetings left this year, sees low odds for such a move. Nevertheless, Fed Funds futures don’t fully price back-to-back 25bp cuts for Nov and Dec meetings, with risks tilted to a skip rather than a 50bp cut since the payrolls report earlier this month.
OVERNIGHT DATA
ECONOMIC ACTIVITY: Residential Construction To Drag Heavily On US Growth In H2
US housing construction activity continued to stagnate in September, maintaining one of the seemingly few negative themes in US growth.
- Permits (-2.9% M/M vs -0.7% survey) and starts (-0.5% vs 0.4% survey) fell more than expected, with downward revisions to prior, underscoring the slowdown since 2022 from which time permits (1,428k in Sept) and starts (1,354k) have fallen by over one-quarter.
- The slowdown is largely driven by multi-units, for which starts have fallen from over 800k at the peak to 458k. Single-family permits- which are twice as numerous (970k) - are actually steadying out at around 1mn annualized, but the pullback in multifamily units is driving construction lower quickly.
- Completions (1,680k annualized) are peaking, but this reflects the long lags in the building process, and the total number of units under construction (1,484k, lowest since Oct 2021) is clearly heading lower (at a -5% Q/Q annualized pace in Q3), again driven by multi-units.
- The dichotomy between single family and multi-unit activity is largely down to interest rates. Higher funding rates make large-scale residential investment more costly vs rental yields, particularly with such large supply coming online, whereas high mortgage rates and low-rate lock-ins by homeowners have reduced existing home sales to multi-decade lows and encouraged homebuilders to cater to single-family building.
- That could change in time with lower Fed rates (and if higher supply translates to lower rents, that should help spur further easing), but as this week's MBA mortgage applications data showed (largest drop since April 2020), short-end rate relief doesn't necessarily translate to the longer end of the curve.
- Thursday's release of the Atlanta Fed's GDPNow showed residential construction is due to subtract 0.4pp from growth in Q3 - at a rate of -10.1% Q/Q annualized, the biggest drop since 2022, vs 3.4% for overall GDP (after -2.8% in Q2). That projection is only likely to be revised downward.
- Additionally, like other key areas of the economy, residential construction looks likely to be disrupted in Q4 by hurricane activity. At best, growth looks to be flat in the quarter.
MARKETS SNAPSHOT
Below gives key levels of markets in afternoon NY trade:
- DJIA up 32.52 points (0.08%) at 43272.3
- S&P E-Mini Future up 20 points (0.34%) at 5906
- Nasdaq up 114.3 points (0.6%) at 18484.22
- US 10-Yr yield is down 1.6 bps at 4.075%
- US Dec 10-Yr futures (TY) are up 5/32 at 112-6.5
- EURUSD up 0.0033 (0.3%) at 1.0865
- USDJPY down 0.73 (-0.49%) at 149.47
- WTI Crude Oil (front-month) down $1.29 (-1.83%) at $69.41
- Gold is up $25.84 (0.96%) at $2718.94
Prior European bourses closing levels:
- EuroStoxx 50 up 38.97 points (0.79%) at 4986.27
- FTSE 100 down 26.88 points (-0.32%) at 8358.25
- German DAX up 73.98 points (0.38%) at 19657.37
- French CAC 40 up 29.32 points (0.39%) at 7613.05
US TREASURY FUTURES CLOSE
- Dec 2-Yr futures (TU) up 2/32 at 103-14.375 (L: 103-12.1 / H: 103-14.7)
- Dec 5-Yr futures (FV) up 3.75/32 at 108-14.5 (L: 108-9.3 / H: 108-16.3)
- Dec 10-Yr futures (TY) up 5/32 at 112-6.5 (L: 111-29.5 / H: 112-9.5)
- Dec 30-Yr futures (US) up 6/32 at 120-6 (L: 119-18 / H: 120-16)
- Dec Ultra futures (WN) up 5/32 at 127-20 (L: 126-24 / H: 128-4)
US 10YR FUTURE TECHS: (Z4) Bearish Outlook
- RES 4: 115-00+ High Oct 1
- RES 3: 114-14+ High Oct 3
- RES 2: 114-01+ High Oct 4
- RES 1: 112-22/113-12 High Oct 16 / Low Sep 3
- PRICE: 112-06+ @ 16:40 BST Oct 18
- 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 has allowed 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: Fed Cuts Only Slightly Priced Out On The Week, End-2025 Stays Anchored
Despite a small pullback Friday, the implied Fed funds path through 2025 showed slightly fewer cuts than it did at the start of the week.
- Implied rates from Nov through Dec 2025 meeting dates fell between 0.5-1.7bp on the day, mostly focused on Jul-Sep-Oct 2025 but with no significant change in the overall outlook. There's still a 96% implied probability of a 25bp cut on Nov 7, with 100bp total through the next 5 meetings to May, and roughly 150bp through end-2025.
- Versus a week earlier, though, there are now 4-5bp less in cuts seen through April 2025. This is largely due to stronger-than-expected data seen largely in the form of September retail sales. However November cut pricing actually firmed slightly, influenced in part by growing rate cut bets in Europe, where the ECB is now seen as having a nearly 50% probability of cutting by 50bp at its December meeting.
- As we have noted repeatedly, even with these shifts through early 2025, medium-term implied pricing (end-2025 at 3.35%) remains well-anchored at around the 3.25-3.50% FOMC Dot Plot median at end-2025 - a theme reinforced again today by Atlanta Fed Pres Bostic who while conveying a cautious tone on near-term cuts, repeated that he sees neutral rates somewhere between 3-3.5%.
US TSYS/OVERNIGHT REPO: SOFR Softens, Should Ease Further Friday
SOFR softened very slightly Thursday from elevated levels Tues-Weds, dipping 1bp to 4.85%. This was largely expected after the Treasury coupon settlement-related uptick earlier in the week. While SOFR is a volume-weighted median, the skew of SOFR percentile rates remains somewhat elevated (99th percentile minus 1st 17bp, 75th minus 25th 10bp, compared with respectively 14bp/ 6bp at the same time last month post-FOMC).
- SOFR is expected to subside further today in part due to an influx of GSE cash (the 18th is Fannie / Freddie Mae Monthly P&I Remittance day). This should also be reflected in an uptick in ON RRP facility takeup today.
- Effective Fed funds rates remained unchanged.
REPO REFERENCE RATES (rate, change from prev. day, volume):
- Secured Overnight Financing Rate (SOFR): 4.85%, -0.01%, $2334B
- Broad General Collateral Rate (BGCR): 4.84%, no change, $826B
- Tri-Party General Collateral Rate (TGCR): 4.84%, no change, $794B
New York Fed EFFR for prior session (rate, chg from prev day):
- Daily Effective Fed Funds Rate: 4.83%, no change, volume: $96B
- Daily Overnight Bank Funding Rate: 4.83%, no change, volume: $249B
US: SOFR FIX - 18/10/24 - Source BBG/CME
- 1M 4.75906 -0.00009.
- 3M 4.63163 0.01423.
- 6M 4.44371 0.02835.
- 12M 4.13231 0.0432.
US TSYS/OVERNIGHT REPO: ON RRP Takeup Dips, No Threat To Reserve Abundance Yet
Overnight reverse repo facility takeup fell to $259.9B Friday, the 4th consecutive daily decline but only marginally lower than $262.2B Thursday.
- There had been some expectations that this would start rebounding as GSE funds entered the market, but this may have to wait until Monday.
- As we noted Thursday, there are no major signs that reserves are anything but abundant - and above the threshold at which the Fed would consider halting QT.
- Overall, reserves + ON RRP totaled $3.5T as of Wednesday (per Thursday's Fed weekly balance sheet release), which is well above levels thought to be scarce (starting somewhere around $3T). In the last 4 weeks, reserves are up $12B, with dealer ON RRP down $34B.
BONDS: EGBs-GILTS CASH CLOSE: Short-End, BTPs Gain On Upped 50bp ECB Cut Pricing
The German and UK curves bull steepened Friday with periphery EGBs outperforming as near-term ECB cutting prospects mounted.
- European core FI got off to a weak start, after UK retail sales printed above-expected. But those data were not seen as a major driver for the BoE, and the lows were set in the morning. Global instruments rebounded for most of the European afternoon session, with softer oil prices and US housing construction data adding tailwinds.
- Throughout, the main story of the session was the rising possibility of an outsized ECB cut in December, as Reuters reported that some policymakers wanted to soften guidance on rates at Thursday's meeting.
- Current OIS ECB meeting-dated pricing sees a 40+% probability of such an outcome, up another 6pp today, with around another half-a-25bp cut further priced through the next 2 meetings (2.57% Jan 30, vs 2.70% at Wednesday's close).
- The short end of the German curve outperformed its UK counterpart (reflecting ECB repricing), but vice-versa at the long end.
- Periphery EGBs outperformed overall, with Italy leading the pack. Rising optimism over ECB easing saw 10Y BTP/Bund closed at the tightest levels since September 2021. Note that S&P and Fitch review Italy's sovereign rating after the market close. S&P reviews Greece.
- Next week we get multiple ECB (Lagarde, Lane, Villeroy, etc) and BoE (Bailey, Mann) speakers, while the data highlight will be flash October PMIs.
Closing Yields / 10-Yr Periphery EGB Spreads To Germany:
- Germany: The 2-Yr yield is down 3.8bps at 2.108%, 5-Yr is down 3.2bps at 2.018%, 10-Yr is down 2.5bps at 2.183%, and 30-Yr is down 2.3bps at 2.5%.
- UK: The 2-Yr yield is down 3.4bps at 3.997%, 5-Yr is down 3.5bps at 3.911%, 10-Yr is down 3.3bps at 4.056%, and 30-Yr is down 2.6bps at 4.589%.
Italian BTP spread down 3bps at 117.5bps / Greek down 2.3bps at 84.6bps
FOREX: USD Index Edges Lower Friday, Set to Post 0.6% Advance This Week
- Solid price action for equities and waning topside momentum for the greenback has seen the USD index slide 0.3% on Friday. Weaker-than-expected housing starts and building permits data may have weighed at the margin, helping the DXY further ease of the recovery highs posted Thursday.
- The index remains roughly 0.6% higher on the week, as markets take a moderately more hawkish view of the Fed’s terminal rate for this easing cycle and Former President Trump laid out his positive views on potential tariffs and asserting that he’d use them to defend the dollar’s reserve currency status.
- This narrative particularly supported USDMXN this week, with the pair looking set to close 3% higher as uncertainties surrounding the US election and concerns regarding the Chinese fiscal stimulus permeate. Market participants will be cautious of further strength towards the highest levels of the year, situated at 20.2181.
- GBP continues to trade in positive territory Friday on the back of a better-than-expected set of retail sales numbers this morning, with both metrics topping expectations on both an including- and excluding-auto fuels basis.
- EUR/GBP briefly extended losses, building on yesterday's dovish momentum following the ECB decision, touching new pullback lows of 0.8295 as a result. This marks a bearish break for the cross, opening support at 0.8250 and 0.8203 beyond, however, the cross has bounced to 0.8330 as we approach the weekend close. In similar vein, EURUSD rose back to 1.0865 and stands around half a percent off the post ECB 1.0811 lows.
- Next week will be highlighted by the IMF Annual Meetings and the Bank of Canada decision.
Date | GMT/Local | Impact | Country | Event |
21/10/2024 | 0400/0500 | GB | BOE Greene's opinion piece in Financial times | |
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 | |
21/10/2024 | 2240/1840 | US | San Francisco Fed's Mary Daly | |
22/10/2024 | 0600/0700 | *** | GB | Public Sector Finances |
22/10/2024 | 0900/1000 | * | GB | Index Linked Gilt Outright Auction Result |
22/10/2024 | 1230/0830 | * | CA | Industrial Product and Raw Material Price Index |
22/10/2024 | 1230/0830 | ** | US | Philadelphia Fed Nonmanufacturing Index |
22/10/2024 | 1255/0855 | ** | US | Redbook Retail Sales Index |
22/10/2024 | 1325/1425 | GB | BOE's Bailey address at Bloomberg Global Regulatory Forum | |
22/10/2024 | 1345/1445 | GB | BOE's Greene fireside chat with Josh Lipsky | |
22/10/2024 | 1400/1000 | ** | US | Richmond Fed Survey |
22/10/2024 | 1400/1600 | EU | ECB's Lagarde in conversation with Francine Lacqua | |
22/10/2024 | 1500/1700 | EU | ECB's Lane in fireside chat at Seminar of Bank of New York | |
22/10/2024 | 1530/1130 | * | US | US Treasury Auction Result for Cash Management Bill |
22/10/2024 | 1915/2115 | EU | ECB's Large in panel discussion on cross border payments | |
22/10/2024 | 2000/2200 | EU | ECB's Lane at Columbia University seminar | |
22/10/2024 | 2015/2115 | GB | BOE's Breeden panellist at G20 cross-border payments event |