MNI EUROPEAN MARKETS ANALYSIS: Curve Flattening Continues Post-Fed

MNI BOE Preview - September 2022: Will QT be delayed?

EXECUTIVE SUMMARY

• The MNI Markets team thinks that with growth already starting to show some signs of slowing and with Bank Rate getting back to neutral (and potentially in the eyes of some additional MPC members into restrictive territory) that the limitation to upside inflation expectations from the energy price support scheme will be enough to sway the majority of MPC members to vote for a 50bp hike rather than a 75bp hike. We also think the “forceful” language will be maintained at least until the new November MPR forecasts.
• However, this is far from a foregone conclusion and since the August MPC meeting we have only heard from four MPC members.
• The MNI Markets team is concerned that the risks of a delay or alteration to the plan for active gilt sales is much higher than the market anticipates. We discuss this and the Bank of England's options if it decides not to confirm the beginning of active gilt sales this week.
• For the full document including summaries of over 20 sell side view see:MNI BoE Preview - Sep22.pdf

MNI SNB Preview - September 2022: Peer Pressure to Push 75bps Hike

EXECUTIVE SUMMARY

• The SNB are expected to raise rates further this quarter
• Tailwind of overseas rates and still lofty CPI seen pushing the benchmark positive for first time in a decade
• Most forecasts acknowledge the real risk of tightening anywhere between 50 and 100bps this month.
• Full preview here: MNISNBPrevSep22.pdf

MNI Norges Bank Preview - September 2022: Shift to Front-Loading

EXECUTIVE SUMMARY

• Bank seen raising rates by a further 50bps
• Fresh rate path projections should reflect front-loading bias
• Focus turns to any signal for magnitude of November, December hikes
• Full preview including summary of sell-side views here: MNINBPrevSep22.pdf

US TSYS: 2s10s Curve Threatens Cycle Low Post-Fed

Tsys bear flattened overnight, but operate off of extremes, with marginal support derived from the post-BoJ move in JGBs, leaving cash Tsy yields a little off of session highs. The major benchmarks run little changed to 6bp cheaper across the curve, bear flattening. TYZ2 deals m the middle of its 0-12 overnight range on solid volume of ~105K lots.

• The 2-/10-Year spread hovers close to the deepest levels of inversion witnessed in the current cycle, while the 5-/30-Year spread printed fresh cycle lows overnight.
• 2-Year Tsy yields hit fresh cycle highs as Asia-Pac participants reacted to the FOMC and faded the richening that was seen in late NY dealing.
• The above flattening has been aided by a shift higher in terminal rate pricing, which has nudged up to near 4.70%, per Fed dated OIS.
• Eurodollar futures run 3.5-17.5bp cheaper through the blues, with the reds leading the weakness.
• Overnight flow was headlined by 2x 5K block sales of FVX2 108.50 puts.
• Thursday will see weekly jobless claims data and the Kansas City Fed m’fing index reading cross during NY hours, while the BoE decision headlines a busy global central bank slate.

JGBS: Futures Bid As BoJ Stands Pat; 10-Year JGBs Back Away From Yield Cap

JGB futures are +50 ticks at 148.81 last, off best levels, but maintaining the bulk of their post-BoJ bid after the Bank chose to keep its monetary policy settings unchanged (as widely expected).

• Cash JGBs run 0.5-3.5bp richer across the curve, with 7s leading the way higher.
• 10-Year JGBs are ~2.0bp richer, backing away from the BoJ’s 0.25% yield cap after the week’s first trade in cash 10s was reported following the BoJ’s monetary policy decision.
• The BoJ also conducted an unscheduled round of fixed rate operations after the Tokyo lunch break, pointing to further resolve in maintaining their current YCC settings.
• While the BoJ’s major policy settings were unchanged, a phasing out of the COVID funding programme for SMEs (against wider expectations for a complete halt this month) provided a surprise, suggesting worry re: lingering economic weakness.
• The BoJ decision & fresh jawboning from Japanese officials resulted in some yen volatility with little by way of a meaningful reaction in JGBs observed, and USD/JPY hovering just below the Y145.00 mark at typing, after a brief show above.
• Japanese markets are closed for a holiday on Friday.

NZGBS: Curve Flattens, Swap Spreads Widen

The NZGB curve moved from bull flattening, to bear flattening to twist flattening on Thursday, largely taking its cues from gyrations in Tsy markets, leaving yields 5bp cheaper to 2bp richer come the bell.

• Swap rates were higher across the curve, with swap spreads running wider as a result. A reminder that some have suggested that the swap spread widening observed over the last couple of session could be a result of the impending round of WGBI inclusion for NZGBs.
• Local data, in the form of a wider than prior trade deficit in the month of August and an uptick in the Westpac consumer confidence reading, which still remains well below the breakeven 100.0 mark, had no tangible impact on the space.
• RBNZ terminal rate pricing has crept up towards 4.60% vs. 4.50% seen Wednesday, likely on spill over from a similar post-FOMC move in OIS pricing surrounding the Fed.
• Comments from RBNZ Deputy Governor Hawkesby failed to touch on monetary policy, as expected, given the topic of the address.
• Friday’s domestic data docket is empty. Further out, the monthly ANZ business and consumer confidence readings provide the major points of interest on next week’s NZ docket.

FOREX: USD Firm Post-Fed, BoJ Dovishness & Intervention Risk Generate JPY Volatility

The greenback advanced on regional reaction to the 75bp rate hike/reaffirmation of hawkish bias by the Fed, with risk assets staying under pressure. Cash Tsy curve bear flattened and e-mini futures softened as the BBDXY index climbed to a fresh all-time high of 1,329. The U.S. dollar outperformed all its G10 peers save for the Swiss franc as risk aversion lingered.

• The yen was volatile after the BoJ kept its ultra-loose monetary policy settings and dovish forward guidance unchanged. Spot USD/JPY took out the Y145.00 mark on its way to a new multi-decade high of Y145.37, which was followed by a sharp reversal. This raised questions on whether the sharp pullback was driven by an FX intervention or profit taking amid heightened intervention risk. Japan's FX czar Kanda later clarified that the authorities have not stepped in yet, but could conduct a stealth intervention.
• Risk-off flows and a spillover from yuan weakness applied pressure to the Antipodeans, which sit at the bottom of the G10 pile. AUD/USD fell through the $0.6600 figure, while NZD/USD approached $0.5800, with both lodging fresh cyclical lows.
• Spot USD/CNH showed above CNH7.1 even as the PBOC extended its run of stronger-than-expected yuan fixings to a record, while today's strengthening bias (fixing vs. sell-side estimate) also broke a record.
• Regional liquidity is thinner towards the end of the week. Financial markets in Australia were closed for a national day of mourning to mark the death of Queen Elizabeth II. Japan is set to observe a public holiday tomorrow.
• A marathon of central bank meetings takes centre stage today. Data highlights include U.S. current account balance & jobless claims, while the speaker slate features ECB's Schnabel, BoE's Tenreyro, as well as Riksbank's Floden & Ohlsson.

FX OPTIONS: Expiries for Sep22 NY cut 1000ET (Source DTCC)

• EUR/USD: $0.9900(E1.7bln), $0.9950-55(E963mln), $1.0000(E4.2bln), $1.0050(E1.2bln)
• USD/JPY: Y137.00($1.0bln), Y143.45($570mln)
• GBP/USD: $1.1490-05(Gbp1.2bln)
• USD/CAD: C$1.3150($840mln), C$1.3200($665mln), C$1.3420($740mln), C$1.3450($613mln)
• USD/CNY: Cny7.00($2.5bln)

ASIA FX: USD/Asia Print Cycle Highs Despite Another Stronger-Than-Expected PBOC Fix

The Fed's decision to raise interest rates by 75bp and flag a steeper tightening path going forward kept the U.S. dollar afloat, while sapping strength from Asia EM FX. A stronger than expected PBOC fix failed to arrest yuan depreciation, while focus turned to monetary policy reviews by Bank Indonesia and Bangko Sentral ng Pilipinas.

• CNH: Offshore yuan extended losses after the PBOC set its yuan reference rate 850 pips below sell-side estimate. This extended the current streak of firmer-than-expected fixings to a record 21 days, albeit the actual mid-point was set at a new cyclical high of CNY6.9798. Spot USD/CNH showed above the CNH7.1 for the first time since 2020.
• KRW: Spot USD/KRW crossed above KRW1,400 for the first time since 2009, inviting a fresh round of verbal interventions from South Korean officials, with FinMin Choo vowing to take all necessary measures to tackle one-sided FX moves. The won paced losses in the Asia EM basket, cementing its position as the worst regional performer this year.
  
• IDR: The rupiah was the most resilient currency in emerging Asia, but spot USD/IDR still printed its best levels since 2020. Focus was on the imminent rate decision from Bank Indonesia, with the Board of Governors expected to raise the 7-Day Reverse Repo Rate by 25bp.
• MYR: USD/MYR refreshed 24-year highs with post-FOMC impetus dominating ahead of tomorrow's CPI data to be released out of Malaysia.
• PHP: The peso plunged to all-time lows in the interim between the Fed's policy review and the today's rate decision from the BSP. Governor Medalla said the central bank "will do what's necessary to achieve a target-consistent inflation path," as the policy rate is still "accommodative."
• THB: Spot USD/THB showed at its highest point since 2006 as participants awaited more details on the planned meeting between BoT and MoF officials to discuss currency depreciation.

EQUITIES: Fresh Lows All Round In Asia

Asia-Pac equity indices have maintained the bulk of their early weakness, tracking a negative, tech-led decline on Wall St., with the MSCI Asia-Pacific index on track to close at levels last seen in May ‘20.

• The Hang Seng (-1.9%) leads losses, falling to levels not witnessed since Oct ‘11 on losses across most constituents. Tech struggled, with the Hang Seng Tech Index (-2.1%) hitting fresh six-month lows, just above all-time lows made in mid-March since its creation in Jul ‘20.
• The Nikkei 225 deals 0.8% softer at writing, hitting fresh two-month lows at writing. Index heavyweights Fast Retailing (-1.4%) and SoftBank Group (-2.2%) contributed the most to drag, adding to losses observed across every industry sector.
• E-minis deal between 0.4-0.8% softer apiece, back from as much as 0.8-1.4% lower earlier, but continuing to operate around multi-month lows at typing.

GOLD: Just Off Wednesday’s Lows As Dollar Resumes Ascent

Gold deals ~$14/oz softer to print ~$1,659/oz, more than unwinding the ~$9/oz higher close on Wednesday, operating a little above its post-FOMC lows as the USD (DXY) has recorded fresh cycle highs while nominal U.S. Tsy yields have pushed higher in Asia.

• To recap, gold whipped from fresh two-year lows ($1,654.0) to session highs ($1,688.0) in the wake of the Fed’s policy decision, briefly breaking out of its pre-FOMC trading range (between $1,660-1,680) in the process.
• While the Fed raised rates by 75bp as widely expected, focus for gold has been on the Dot Plot, with a revision to the latter building on the “higher for longer” narrative re: rates.
• Elsewhere, the rise in tensions between Russia and the west continues to spur little by way of haven demand for gold, with this week’s crowded slate of central bank action likely taking precedence.
• From a technical perspective, gold remains in a clear downtrend. Initial support is seen at $1,640.9 (Aug 8 2020 low), with a breach of that level exposing further support at $1,610.5 (1.00 proj of the Jun13-Jul21-Aug10 swing), while initial resistance is seen at $1,688.9 (Sep 1 low).

OIL: Working Away From Lows; Chinese Fuel Export Quota Eyed

WTI and Brent are $0.50 firmer apiece, consolidating a little above recent lows as the bearish impetus from Wednesday’s decline in crude has moderated.

• To recap, both benchmarks gave up early gains of as much as $2-3 apiece (derived from Russian Pres. Putin announcing a partial mobilisation of the Russian military), dipping below neutral levels after the Fed raised rates by 75bp (keeping in mind wider worry re: a Fed-led economic slowdown), before falling to fresh session lows on the EIA’s weekly inventory data.
• To elaborate on the latter, EIA data pointed to a below-expectations build in crude stocks, a surprise build in gasoline and distillate inventories, and an increase in Cushing hub stocks, largely corroborating reports of the API’s inventory estimates on Tuesday.
• Elsewhere, participants will be keeping an eye on news of fuel export quotas from the Chinese authorities as Chinese crude stockpiles have declined.
• The above comes amidst rising expectations from some quarters for a larger quota to support the flagging economic growth outlook, possibly improving the outlook for crude demand, while adding to global oil product supplies