MNI EUROPEAN MARKETS ANALYSIS: Assessing Fed Hike Size Ahead Of More Key U.S. Data

US TSYS: A Touch Firmer In Light Overnight Trade

An early bid in Tsy futures extended on the cash Tsy re-open, with Asia-Pac participants reacting to Thursday’s unwind of some of the post-CPI Fed rate hike premium, which came as two of the more hawkish FOMC voters (Waller & Bullard) outlined their current preference for a 75bp rate hike to be deployed later this month (FOMC dated OIS pricing for the July meeting has eased back to ~83bp of tightening vs. a peak of ~93bp as a result of the comments). TYU2 last deals 0-01+ shy of session highs, +0-04+ at 118-20+, operating in an 0-09 range thus far, while cash Tsys sit 0.5-2.5bp richer across the curve, bull steepening, with the belly outperforming. Note that wider futures volumes are very limited, with TYU2 not even hitting ~35K lots of turnover.

• Soft GDP data out of China would have done the bid no harm, but there was no market reaction to the figures. The post-GDP NBS press conference saw China reaffirm the idea that its economic bounceback from May is not on firm ground, stressing that it will do what is required to make sure that the economy operates “within a reasonable range,” while being a little more explicit re: the challenges it faces (both structural & cyclical). The attainment of the country's annual GDP growth target looks to be a huge challenge at present, with wider recession worries in the U.S. & Europe, coupled with domestic property market headwinds and the country’s zero COVID strategy providing the most obvious obstacles to growth.
• Retail sales data and the inflation expectations component of the latest UoM sentiment survey will headline during NY hours (after Waller and Mester flagged those releases as potential trigger points for a larger rate hike later this month). Fedspeak from Bullard (’22 voter), Bostic (’24 voter) & Daly (’24 voter) is also scheduled, with the potential for further impromptu Fedspeak apparent ahead of the pre-FOMC blackout period, which gets underway on Saturday.

JGBS: Bull Flattening The Order Of The Day

The uptick in wider global core FI markets observed since late morning NY trade on Thursday provided some support for JGB futures during the Tokyo session, with the contract last at unchanged levels, unwinding overnight losses in what has been a fairly sedate end to the week.. Cash JGB trade sees the long end lead the bid (lifers putting cash to work?), with the major benchmarks little changed to ~5bp richer on the day (note that swap spreads are tighter across the curve, meaning that receiver side swap flow has likely been aiding the JGB bid). There hasn’t been much in the way of meaningful domestic news flow to trade off, leaving wider market gyrations at the fore. Looking ahead, BoJ Rinban operations headline locally on Monday.

AUSSIE BONDS: Solid Apr-27 Supply Sees 5s Lead The Bid

ACGBs unwound their earlier twist flattening, with cash ACGBs running 0.5-3.0bp richer across the curve. 5s outperformed after the solid round of ACGB Apr-27 supply, while the maturity of ~A$24.8bn of ACGB Jul-22 today possibly contributed to some richening in the front end as well, as cash is redistributed. YM is +2.0, operating around best levels after bettering its overnight highs, while XM is flat on the day, off best levels after breaching its own post-Sydney highs earlier. Bills run 3 to 5 ticks richer through the reds.

• The latest round of ACGB Apr-27 supply went very well, with the recent stabilisation in the Aussie bond space and previously-flagged micro relative appeal of the line contributing to its smooth digestion. The weighted average yield printed 2.66bp through prevailing mids (per Yieldbroker), with the cover ratio coming in at 3.99x, comfortably above the 3.00x level (a solid cover ratio in post-QE times).
• The AOFM issuance slate announced for next week provoked little reaction in Aussie bonds, with A$1.5bn of ACGBs and A$2.5bn of notes on offer.
• Hiking expectations for the RBA’s Aug meeting have continued to taper from Thursday’s extreme, aided by a similar move in pricing surrounding the July FOMC meeting in the U.S.. STIR markets now price in ~56bp of tightening for the RBA’s Aug meeting, a pullback from the ~64bp peak witnessed on Thursday. TD Securities has joined Goldman Sachs and Nomura in calling for a 75bp hike for August (and 50bp for Sep), while Westpac and CBA both see a 50bp hike on the cards for Aug (followed by a 25bp and 50bp hike in Sep, respectively).
• RBA Governor Lowe is due to speak on a panel over the weekend, although the topic will be CBDCs and cryptocurrencies, limiting the scope for comments surrounding the economy and monetary policy settings.

FOREX: Greenback, Aussie Show Marginal Weakness

Price action across G10 FX space was rangebound and ultimately non-linear, with the space struggling for a uniform direction amid fairly light headline flow. China's activity indicators were a mixed bag, but Q2 GDP missed expectations and the NBS was downbeat in its commentary on the data.

• Spot USD/CNH took some time to unwind its initial losses and move into positive territory, but yesterday's best levels remain some way of. China's Q2 economic growth missed expectations, industrial production fell roughly in line with forecasts, retail sales topped estimates and unemployment dropped. Despite some incremental positives, meagre growth means it will be difficult for China to meet its +5.5% Y/Y growth target for this year.
• The Aussie dollar underperformed its major peers at the margin. Iron ore consolidated Thursday's sharp losses linked to reports of Chinese homebuyers boycotting mortgage payments.
• The BBDXY index meandered just shy of cyclical highs printed on Thursday, as the dust settles after this week's hawkish Fed repricing. The greenback was among the worst G10 performers.
• U.S. retail sales, industrial output, Empire M'fing & flash Uni. of Mich. Survey take focus on the data front. The list of central bankers due to speak today includes Fed's Bostic, Bullard & Daly as well as ECB's Rehn.

FX OPTIONS: Expiries for Jul15 NY cut 1000ET (Source DTCC)

• EUR/USD: $0.9950(E523mln), $1.0150(E564mln), $1.0200(E1.2bln)
• GBP/USD: $1.1890-00(Gbp644mln)
• USD/JPY: Y137.50-60($590mln)
• AUD/USD: $0.6900($1.0bln), $0.7000(A$515mln), $0.7120(A$515mln)
• USD/CAD: C$1.3000($1.3bln), C$1.3100($694mln), C$1.3150($551mln), C$1.3230-50($797mln)
• USD/CNY: Cny6.6500($1.8bln), Cny6.7200($510mln)

ASIA FX: China's Q2 GDP Miss Spoils Mood In Asia, Won Underperforms

Disappointing Chinese Q2 GDP data dented sentiment in Asia as the session progressed, prompting the ADXY Index (BBG/J.P. Morgan Asia Dollar Index) to swing into a loss.

• CNH: Spot USD/CNH gradually unwound initial losses as participants parsed local activity data. The economy expanded at the slowest pace since the outbreak of the COVID-19 pandemic, making it increasingly difficult for China to meet its full-year growth target. Retail spending held up relatively well in June, while industrial output matched expectations. Unemployment dropped, but the jobless rate among young people rose to a record.
• KRW: The won went offered across the board, showing characteristic sensitivity to offshore yield dynamics. The news that SK Hynix was mulling cutting its 2023 capex by 25% may have amplified pressure to the won. Spot USD/KRW rose to its best levels since 2009, while USD/KRW 1-month NDF narrowed in on yesterday's cycle highs.
• IDR: The rupiah drew some incremental support from Indonesia's latest trade data, which revealed an above-forecast trade surplus. The resumption of palm oil exports was critical in boosting exports. USD/IDR 1-month NDF slipped in reaction to the data, but staged a decent rebound later in the session, as risk sentiment soured.
• PHP: The Philippine peso lost ground, with comments from BSP Gov Medalla drawing attention. The official said that another rate hike in August remains a possibility (after an off-cycle 75bp rate rise announced yesterday), but the odds of a 50bp move are now much reduced, but further course of action will be data-dependent.
• MYR: Spot USD/MYR kept creeping higher, running as high as to MYR4.4510, the highest point since March 2017. Headwinds for the domestic palm oil sector may have helped wound the ringgit.
• THB: The baht plunged to its worst levels since 2006, likely encouraged by the BoT which has been signalling a hands-off approach in the recent days. On Thursday, the central bank played down potential for an off-cycle rate review, after the BSP & MAS unexpectedly tightened monetary conditions.

EQUITIES: Mostly Lower In Asia; Alibaba, Mortgage Boycott Pulls Benchmarks Under

Major Asia-Pac equity indices are mostly flat to lower at typing, tracking a similar performance from Wall St.

• The Nikkei 225 bucked the broader trend of losses, dealing 0.6% firmer at writing. Index heavyweights Fast Retailing Co (+7.8%) and Nintendo Co (+2.9%) contributed the bulk of gains in the Nikkei, with the former surging after forecasting record profit for ‘22.
• The CSI300 sits a little below neutral levels at typing, with the miss in Q2 GDP figures provoking little lasting reaction in Chinese equity benchmarks. The financials (-1.4%) and property (-5.1%) sub-indices dragged the index lower for another day as the previously-flagged mortgage boycott in China continues to play out, neutralising outperformance in the consumer staples (+1.3%) and consumer discretionary (+1.7%) sub-gauges.
• The Hang Seng Index brings up the rear amongst regional peers, dealing 1.2% weaker at writing, with the financials (-1.3%) and property sub-indices (-1.2%) leading losses. China-based tech struggled, seeing the Hang Seng Tech Index deal 2.0% lower, with wider sentiment bruised by reports of an ongoing regulatory probe in large-cap Alibaba Group (-3.9%) over a data breach.
• U.S. e-minis sit 0.3% to 0.5% better off at typing, a little shy of their respective best levels made earlier in the session.

GOLD: A Little Higher In Asia; $1,700/oz Remains In View

Gold deals $4/oz firmer, printing $1,714/oz at typing. The precious metal deals a little below session highs made after the release of Chinese data, with a miss in Q2 GDP weighing against largely in-line expectations for industrial production and retail sales. Recent Dollar strength however remains in focus for bullion, which is on track for a fifth straight weekly loss.

• To recap Thursday’s price action, the precious metal hit fresh 11-month lows ($1,697.7/oz) before paring losses to close ~$25 weaker. The decline was facilitated by an uptick in the USD, with the DXY briefly hitting fresh cycle highs above the 109.00 handle, sending the broader commodity space lower as well (silver hit a two-year low on Thursday, while platinum hit a 22-month low).
• Gold’s weakness comes despite a limited unwinding of expectations for a 100bp Fed rate hike in July, with FOMC dated OIS pointing to ~82 bp of tightening priced in for that meeting (down from ~92bp on Thursday) after comments from the Fed’s Waller and Bullard supporting a 75bp move.
• From a technical perspective, gold remains in a downtrend. The move lower on Thursday has broken initial support at $1,706.8/oz (1.618 proj of the Mar 8-29-Apr18 price swing), exposing further support at $1,690.6/oz (Aug 9 ‘21 low). On the other hand, resistance remains situated at $1752.3/oz (Jul 8 high).

OIL: Seeking Direction In Asia; Biden Visits Saudi Arabia

WTI is ~+$0.50 and Brent is ~+$0.90, with both keeping within relatively tight ~$1.40 channels across Asia-Pac dealing. Brent has struggled to make meaningful headway above $100 and remains vulnerable to record a weekly close below $100 for the first time since end-Feb, with crude continuing to show weakness in recent sessions on rising recession worry and a strengthening USD.

• Both benchmarks initially edged a little lower on worry re: reduced Chinese energy demand, with news of Shanghai listing 30 “areas” (single housing compounds or clusters of apartment blocks) within the city to be subject to lockdowns (although lockdowns on 60 areas within the city were lifted on Friday), adding to surge in fresh daily COVID cases countrywide (432 for Thu vs 292 Wed).
• Keeping within the region, a BBG report has highlighted that crude refining margins across Asia are continuing to pull lower, pointing to falling demand for oil products across the region amidst higher energy prices.
• Elsewhere, U.S. President Biden is due to speak with Saudi Prince MBS at approx. 1845 IDT (1645 BST) later on Friday. Expectations for the meeting to see increased Saudi crude production remain low, with analysts having long pointed to limited spare capacity in the Gulf states.
• Separately, progress towards potential caps on the price of Russian oil remains scant (with major importer China remaining on the sidelines), with U.S. Tsy Sec. Yellen proposing on Thursday that the U.S. and the EU could waive bans on shipping insurance and financial services for Russia should the measure be adopted.