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MNI EUROPEAN MARKETS ANALYSIS: Tsys Cheapen, Lowe Leans Against Market Pricing

  • RBA Governor Lowe pushed back against the degree of monetary tightening priced into the Aussie STIR space, while flagging the likelihood of a 25 or 50bp hike at the Bank's July meeting. Lowe also flagged the Bank's expectation that inflation will hit 7% in Q422 (not the first time that number has been mentioned in recent weeks), while underscoring the fact that interest rates sit at low levels at present. Lowe also conceded that markets have been a better predictor of the cash rate than the Bank in recent times.
  • Asia-Pac hours saw the open of cash Tsy trade for the week, with cash Tsys cheapening on follow through from hawkish Fedspeak observed since Friday’s close (courtesy of Waller & Bullard), Tsy Secretary Yellen’s weekend inflation warning and general weakness in EGBs and Gilts on Monday. That leaves cash Tsys 5-7bp cheaper across the curve, with the long end leading the way lower, resulting in some bear steepening.
  • Focus turns to U.S. existing home sales, Canadian retail sales and comments from Fed's Mester & Barkin, ECB's Rehn & Kazimir, BoE's Pill & Riksbank's Skingsley.

US TSYS: Cheaper As Cash Trade Gets Underway For The Week

Asia-Pac hours saw the open of cash Tsy trade for the week, with cash Tsys cheapening on follow through from hawkish Fedspeak observed since Friday’s close (courtesy of Waller & Bullard), Tsy Secretary Yellen’s weekend inflation warning and general weakness in EGBs and Gilts on Monday. That leaves cash Tsys 5-7bp cheaper across the curve, with the long end leading the way lower, resulting in some bear steepening.

  • Tsys head into European hours a little off cheapest levels of the session, with TYU2 last dealing 0-05+ off its session base, -0-10 at 115-28.
  • Some ACGB-linked moves were witnessed during Asia-Pac dealing on the back of the latest rounds of RBA rhetoric, although the cheapening bias remained intact, aided further by an uptick in e-mini futures and crude oil.
  • 3x block buys of TYQ2 115.00 puts (2.5K lots apiece) headlined on the flow side during the overnight session.
  • Looking ahead, Tuesday will see the release of existing home sales data and the latest Chicago Fed National Activity Index print. Elsewhere, we will get Fedspeak from Mester & Barkin.

JGBS: Curve Twist Steepens

JGB futures chipped away at their overnight losses during the Tokyo session and now sit 6 ticks below yesterday’s settlement level, over 30 ticks off their overnight low, although trading conditions remain impaired.

  • There wasn’t much in the way of local news to digest after the re-open (PM Kishida & Finance Minister Suzuki offered little in the way of meaningful rhetoric), with cross-market impetus helping futures to pare some of its overnight losses during the morning
  • Cash JGBs out to 20s are generally within 0.5bp of yesterday’s closing levels, trading on the richer side, although the broader cheapening observed in the global fixed income space on Monday has seemingly facilitated ~1.5bp of cheapening for 30s and 40s, with some twist steepening in play on the curve as a result.
  • The exception to rule for paper out to 20s is 5s, with outperformance there (equating to 1.5bp of richening) aided by 5-Year JGB supply, which was absorbed smoothly enough. The low price of the auction matched broader estimates (as proxied by the BBG dealer poll), while the price tail saw a very modest widening, although remained tight in the grander scheme of things. Things were a little softer on the cover ratio side, with the bid/cover moving to the lowest level observed at a 5-Year JGB auction since the COVID-induced vol. of early ’20 (likely on the well-documented market functioning issues).
  • Wednesday’s local docket will be headline by the latest round of BoJ Rinban operations.

AUSSIE BONDS: Twist Steepening Post-Lowe Pushback

Governor Lowe’s address was at the fore, as he expressed doubt that the Bank would deliver the degree of tightening priced into the STIR space through year end, while explicitly flagging his preference for a discussion of a 25 or 50bp hike in July (the same discussion took place at the Bank’s June meeting). This saw STIR markets unwind a modest some of the tightening that was priced into the space, with a 47bp of tightening now priced into the IB strip when it comes to the July meeting (vs. ~57bp of tightening that was priced earlier in the day). Further out, there is a cumulative ~280bp of tightening priced into IBs through the Bank’s December meeting (vs. ~300bp earlier in the session). Note that Lowe conceded that markets have been a better predictor of the cash rate than the Bank in recent times, while he also tipped his hat to the Bank’s new expectation of 7% inflation in Q422 (a level he had alluded to in a previous address). The bid in the short end allowed ACGBs to move away from worst levels of the day, with the front end leading the bid. That leaves YM +2.5 & XM -2.0, with the cash curve pivoting around the 5- to 6-Year zone. !0s represent the weakest point on the curve.

  • Elsewhere, the Bank noted that it would probably prefer to deploy broader bond purchases as opposed to yield targeting if it had the need to do so in the future, with its review of the latter mechanism conceding that the market’s challenge and eventual breaking of the tool resulted in some reputational damage for the RBA.
  • Note that ACGBs initially softened in early Sydney dealing, extending on the overnight weakness as markets set up for the deluge of RBA communique.
  • Tomorrow’s local docket will be headlined by the latest Westpac leading index print and A$1.0bn of ACGB Apr-25 supply.

FOREX: Risk Sentiment Stays Positive, RBA Speak Moderates AUD Gains

Comments from RBA Gov Lowe tempered AUD gains driven by better risk appetite, as the official said that the Board didn't contemplate a 75bp hike to the cash rate target at its recent meeting, adding that a 25-50bp move seems to be the most likely outcome at the July meeting. Market participants responded by withdrawing hawkish RBA bets, with a 50bp hike in July no longer priced in (down to ~80% implied chance of such a move at typing).

  • AUD/USD refreshed session highs later on, as broader risk sentiment remained positive, but the pair struggled to attack its best levels from yesterday. The NOK took over as best performer in G10 FX space.
  • AUD/NZD crept higher as a quarterly Westpac Survey showed that consumer confidence in New Zealand tumbled to a record low. The rate tested yesterday's high, even as AU/NZ 2-Year swap spread slipped.
  • Safe haven currencies underperformed, with the U.S. dollar leading declines for the second consecutive day. U.S. financial markets are set to re-open after a long weekend.
  • Focus turns to U.S. existing home sales, Canadian retail sales and comments from Fed's Mester & Barkin, ECB's Rehn & Kazimir, BoE's Pill & Riksbank's Skingsley.

FOREX OPTIONS: Expiries for Jun21 NY cut 1000ET (Source DTCC)

  • EUR/USD: $1.0470-80(E824mln), $1.0575-85(E990mln)
  • USD/JPY: Y134.00($1.4bln), Y134.35-50($785mln)
  • GBP/USD: $1.2100(Gbp505mln)
  • AUD/USD: $0.7000-15(A$1.9bln)
  • NZD/USD: $0.6300(N$998mln)
  • USD/CNY: Cny6.80($990mln)

ASIA FX: PHP Continues To Underperform, Mixed Trends Elsewhere

It has been a mixed session. Some Asian currencies have struggled to follow the weaker USD seen against the majors. PHP weakness remains a feature. Those currencies that have risen have done so only modestly during today's session.

  • CNH: USD/CNH has moved lower today but couldn't test sub 6.6700. The low came not long after the stronger than expected CNY fix. There is more talk of stimulus measures, particularly related to housing, but they look more micro rather than macro based. China equities are firmer but are lagging the better regional trend.
  • KRW: Spot USD/KRW is back below 1290, but hasn't seen strong downside momentum. The first 20 days export data for June was disappointing in headline terms, but the details were better. The BoK warned its inflation forecast, updated just last month, may already be out of date. A 50bps hike at the July meeting can't be ruled out, but Governor Rhee is not following a predetermined path.
  • INR: USD/INR is back above 78.00, but volatility remains very low. The recovery in oil prices has pushed the rupee slightly weaker in early trade today, while bond yields have firmed as well. Local equities are up close to 1.5%.
  • SGD: The Singapore government unveiled a S$1.5bn package to tackle inflation pressures for low income households. The authorities also warned of higher inflation pressures in coming months ahead of Thursday's data for May. The SGD NEER continues to trend higher, although we are getting close to the top end of the MAS policy band.
  • IDR: Spot USD/IDR has shed 25 figs so far as broader greenback sales have resumed. We remain above 14800 though. Participants look ahead to the monetary policy decision from Bank Indonesia, coming up this Thursday, with some calling for the inauguration of a tightening cycle.
  • PHP: USD/PHP has continued to push higher today. Spot is up a further 0.50% to 54.335. Bangko Sentral ng Pilipinas is set to raise interest rates on Thursday, but consensus is split about the magnitude of the hike. Most expect a 25bp move, but a considerable minority still anticipates a 50bp rate rise. Yesterday's comments from incoming BSP chief Medalla decreased the odds of an outsized hike. The official said that a 25bp hike was "most likely" in light of the central bank's philosophy of "gradualism." See our full preview here.

EQUITIES: Higher In Asia; Eight-Day Losing Streak Eyed

Virtually all Asia-Pac equity indices are higher at typing, bucking a mixed lead from Wall St. Energy-linked equities caught a bid amongst strength in major energy benchmarks, leading broader gains across the region with the MSCI Asia Pacific Index on track to snap an eight-session streak of losses.

  • The Nikkei 225 deals 2.2% firmer at typing, extending a move off of three-month lows made on Monday. Japanese equities outperformed regional peers amidst the latest bout of JPY weakness, with USD/JPY holding a little below multi-decade highs through Asia-Pac dealing.
  • The Hang Seng Index trades 1.4% higher at writing, on track for a third straight day of gains on strength in the Financials and Property sub-indices. The Hang Seng Properties Index sits 1.9% better off, with the sector benefitting from lingering tailwinds arising from a slew of Chinese cities signalling supportive policy changes in recent days. The Hang Seng Tech Index outperformed the broader Hang Seng, dealing 2.0% higher at typing.
  • The CSI300 lagged major regional peers by comparison, dealing 0.3% firmer at typing, with worry from some quarters re: the country’s ongoing COVID outbreak evident. To elaborate, while daily case counts nationwide have remained low, an outbreak in the South of the country in Macau and nearby tech hub Shenzhen (albeit a more limited outbreak) have prompted fears of stringent pandemic control measures to be taken in those regions, with only relatively shallow gains observed across much of the CSI300’s sub-indices.
  • The ASX200 trades 1.5% higher at writing, with a broad bid in mining stocks, tech names, and financials contributing the most to gains in the index. Broader market sentiment received a lift as RBA Governer Lowe signalled intent to debate rate hikes of 25 or 50bp for July, ruling out the potential for a 75bp hike (flagging data-dependence). Mining equities caught a reprieve on Tuesday as various benchmark metals reversed earlier losses, with benchmarks for copper and aluminium on track to break a multi-session streak of losses.
  • U.S. e-mini equity index futures sit 1.4% to 1.7% better off, broadly on track to snap a two-day streak of losses at typing.

GOLD: Holding Steady In Asia; Hugging $1,840/oz Ahead Of Week’s Fedspeak

Gold sits $3/oz better off to print $1,842/oz, trading comfortably within Monday’s range at typing in fairly limited Asia-Pac dealing.

  • The precious metal has struggled to make headway above $1,850/oz in recent sessions, with the USD (DXY) remaining range bound a little below recently-made, multi-decade highs, and U.S. real yields continuing to operate around elevated levels as well.
  • Earlier remarks from St. Louis Fed Pres Bullard highlighted that the Fed must meet market expectations for rate hikes as part of the process to rein in inflation, noting that July FOMC dated OIS currently price in a ~100% chance of a 75bp hike in that meeting (up from ~80% on Friday), with 205bp now priced in for the remaining four meetings of calendar ‘22.
  • Debate re: a Fed-induced recession has likely continued to provide support for bullion despite the prospect of higher rates, with ex-Treasury Secretary Larry Summers on Monday repeating calls for Volcker-style monetary tightening to combat “secular stagflation”.
  • Looking ahead, apart from previously-highlighted Fedspeak from the Fed’s Barkin (‘24 voter) and Mester (‘22 voter) later on Tuesday, Fed Chair Powell is due to testify before the Senate Banking Committee on Wednesday, where he is expected to touch on inflation.
  • From a technical perspective, gold remains vulnerable in the wake of the steep sell-off seen on Jun 13. Previously flagged support and resistance levels remain intact, at $1,787.0/oz (May 16 low) and $1,889.1/oz (trendline resistance from Mar 8 high) respectively.

OIL: Higher In Asia As Stagflation Worry Eases; Supply Picture Shows Potential Improvement

WTI is ~+$2.50 and Brent is ~+$1.40 at writing, operating a little below their respective best levels made on Monday. Both benchmarks have extended a move off of recent lows following the sharp $7 - $8 tumble seen last Friday, with participants focused on worry re: stagflationary risks and the corresponding decline in energy demand.

  • To recap, comments from U.S. Pres Biden that a recession is not “inevitable” helped major crude benchmarks rebound from worst levels on Monday, with Brent rising from a one-month low in the process.
  • Keeping within the U.S., Biden is expected to announce a decision this week to potentially suspend a federal gasoline tax, following Yellen’s remarks on Sunday that a gasoline tax holiday was an idea “worth considering”. This however comes as U.S. gasoline inventories have declined for over two straight months (EIA data), with stockpiles >10% below their five-year seasonal averages.
  • A BBG report has pointed to Russian exports of seaborne crude to Europe hitting two-month highs last week, suggesting that some European resistance to buying Russian crude has ebbed. Crude exports to Asia are continuing to rise (mainly to China and India), with overall Russian crude production reportedly down by 300K bpd against pre-invasion levels (as stated by Russian DPM Novak late last week).
  • Elsewhere, Iran has reportedly dropped a major sticking point in stalled indirect nuclear negotiations with the U.S., with source reports from the London-based Middle East Eye stating that Tehran has dropped its requirement that the Iranian Revolutionary Guard Corps (IRGC) should be removed from the U.S.’s list of terror groups - a previously highlighted “red line” for the Iranians. The U.S. was said to have not responded to the offer yet.

UP TODAY (Times GMT/Local)

21/06/20220715/0815UKBOE Pill at Institute of Accountants Economic Summit
21/06/20220800/1000**EU EZ Current Acc
21/06/20221000/1100**UK CBI Industrial Trends
21/06/20221215/1315UK BOE Tenreyro Seminar at Goethe University
21/06/20221230/0830**CA Retail Trade
21/06/20221230/0830**US Philadelphia Fed Nonmanufacturing Index
21/06/20221400/1000***US NAR existing home sales
21/06/20221500/1100US Richmond Fed's Tom Barkin
21/06/20221530/1130*US US Treasury Auction Result for 26 Week Bill
21/06/20221530/1130*US US Treasury Auction Result for 13 Week Bill
21/06/20221600/1200US Cleveland Fed's Loretta Mester
21/06/20221930/1530US Richmond Fed's Tom Barkin
MNI London Bureau | +44 0203-865-3809 |
MNI London Bureau | +44 0203-865-3809 |

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