MNI US MARKETS ANALYSIS - 10y Clears 5%, Undermining Equities

US TSYS: 10Y Treasury Yield Clears 5% For First Time Since 2007

• Treasuries have bear steepened ahead of the NY crossover, seemingly a reversal of hedging ahead of the weekend after limited meaningful regional escalation in the Israel-Hamas conflict since then.
• Cash benchmarks trade 4.5bp to 9bp cheaper, with 10s leading the sell-off having finally breached 5% for the first time since 2007 after coming close multiple times last week. They registered a high of 5.0187%, currently at 5.006%.
• 2s10s in the process touched fresh recent highs of -10.5bps, highs since Jul-2022.
• TYZ3 trades at 105-15 (-17) just off lows of 105-12+ although it stopped short of testing support of 105-10+ (Oct 19 low) seen during the Chair Powell’s Q&A at the Economic Club of NY last week. Next support would be at 104-25 (2.0% 10-dma envelope). Volumes are solid at 375k after the lack of headline flow and a HK holiday.
• Today’s docket is extremely light, with only the Chicago Fed’s National activity index at 0830ET and no Fedspeak amidst the media blackout.
• Bill issuance: US Tsy $75B 13W, $68B 26W bill auctions (1130ET).

STIR FUTURES: Fed Rate Path Reverses Pre-Weekend Softening

• Fed Funds implied rates have overnight reversed most of Friday’s decline, with little by way of headline drivers to offset a lack of meaningful regional escalation in the Israel-Hamas conflict plus a latest BoJ sources piece.
• Cumulative hikes: +0.5bp Nov, +5.5bp Dec and +9.5bp Jan to a terminal 5.43%.
• Cuts from terminal: 26bp to Jun’24 and 74bps to Dec’24, the latter off Friday’s close of 80bps having closed mid last-week at 66.5bp for fresh lows of recent months.
• The Fed is in media blackout, with upcoming FOMC appearances including Chair Powell on Wed strictly limited to non-policy opening remarks.

US MACRO: Sell-side See US Consumer Underpinning Above Trend Growth

Ahead of this Thursday's advance Q3 GDP release, sell-side broadly see the consumer solidly supporting growth across the quarter, drawing further from excess savings to do so. There are a handful of out-of-consensus calls (Danske at the lower-end, RBC at the upper-end), but most look for growth to weaken into year-end and through 2024:

• Bank of America expect growth to come in at 4.5%, with consumer spending increasing by 4.0% in 3Q. Strength in 3Q GDP is likely to be broad and not attributable to special factors, meaning the economy is beating expectations. By a long way.
• Danske Bank look for a below-consensus 3.3% q/q AR reading, and still foresee weakening towards the winter not least amid tightening financial conditions, and think the Fed is done with hiking rates.
• RBC flag the importance of this week’s advance US GDP release, for which they expect an above-consensus +5.0% read (consensus: 4.3%). They write that consumption will be the primary driver of growth this quarter, with the drawdown of excess savings countering normalizing incomes.
• Scotiabank write that the US economy is likely to continue to grow much faster than the non-inflationary speed limit, with consumer spending expected to figure prominently as a key driver ahead of the holiday shopping season.
• SEB see GDP growth accelerating to well above trend, citing the Atlanta Fed GDP Now indicating a +5.4% read. They expect to upwardly revise their 2023 GDP estimate of 2.0% but continue to see a slowdown in Q4 and during the first half of next year.
• TD Economics write that September consumer spending data could give a more important look at momentum into Q4 relative to the Q3 growth figure, and write that a moderation in both metrics would be welcome news for the Fed. They still expect one last hike, but recent tightening in financial conditions makes it a close call.

Politics Week: BOC Meeting May Return Focus To Cost of Living Pains

• Bank of Canada is expected to hold its key lending rate at the highest since 2001 at 5% on Wed with inflation still near 4%. Governor Macklem's press conference may deliver politically uncomfortable message the economy may be tipping towards recession and he's not yet prepared to discuss any rate cuts.
• Foreign policy still major concern, with PM Trudeau on Friday saying India's push to remove 40 diplomats violates international law. Earlier Trudeau said India's government may have been involved in the murder of a Canadian Sikh activist earlier this in in British Columbia.
• Canada's response to Israel-Gaza conflict also looms large; different Liberal MPs have shown tensions within the party around the issue. Trudeau says Israel has the right to defend itself but international humanitarian rules must guide its response.
• Finance Minister Freeland says fall fiscal update is coming and she met with private sector economists on Friday.
• New Democrats propping minority Liberal govt have increased criticism of Trudeau's housing plan but given no indication of a non-confidence vote.
• Polling aggregator 338Canada shows Conservatives likely to win a majority government if an election were held now. Election is due in 2025 under a traditional four-year mandate.
• Sample headlines: The Liberals win points on housing policy, but it might not change the politics (Globe and Mail); Majority — including two-in-five past Liberal voters — say Trudeau should step down (National NewsWatch)

RATINGS: No Change for Italy at S&P, Moody’s Move UK to Stable Outlook

Sovereign credit rating reviews of note from after hours on Friday include:

• Fitch affirmed Slovenia at A; Outlook Stable
• Moody's affirmed the United Kingdom at Aa3; outlook changed to stable from negative
• S&P upgraded Greece to BBB-; Outlook Stable
• S&P affirmed Italy at BBB; Outlook Stable
• S&P affirmed the Netherlands at AAA; Outlook Stable
• S&P affirmed the United Kingdom at AA; Outlook Stable

EUROPE ISSUANCE UPDATE: 

7/15-year EU Bond Auction Results:

• E2.203bln of the 3.125% Dec-30 EU-bond. Avg yield 3.533% (bid-to-cover 1.22x)
• E2.257bln of the 3.375% Oct-38 EU-bond. Avg yield 4.017% (bid-to-cover 1.09x).

• E515mln of the 1.25% Apr-33 Green OLO. Avg yield 3.477% (bid-to-cover 1.63x)
• E1.225bln of the 3.00% Jun-33 OLO. Avg yield 3.586% (bid-to-cover 1.24x)
• E1.08bln of the 3.30% Jun-54 OLO. Avg yield 4.14% (bid-to-cover 1.27x)

FOREX: Yield Pressure Limits EUR/USD Gains, Focus on Tail-End of the Week

• The single currency is modestly the best performer, with EUR/USD narrowing in on the post-Powell highs posted on Thursday. 1.0616 marks the first upside level, a break above which opens 1.0640 and the 50-dma of 1.0684. The renewed run higher in US yields is helping limit gains in the pair. The US 10y yield is narrowing in on 5.00% again, pressure that's underpinning the USD index and limited losses toward recent lows of 105.975.
• High beta, growth-tied currencies are the poorest performers, suffering alongside equities to prompt EURSEK and USDSEK to both trade around 0.4% higher on the day, while NOK pairs are around 0.3% higher. EURNOK approaches the Jul 6 high at 11.7770 while EURSEK eyes the 50-day EMA at 11.6906 (having breached the 100-day EMA at 11.6584 already).
• Focus remains on USD/JPY's ability to sustain gains north of Y150.00. Upon resumption of trade after the weekend, USD/JPY surged to briefly print Y150.11 - but gains were limited and swiftly reversed back below the handle. The price action reinforces the cautious nature that markets have adopted to the Japanese authorities' ability to limit gains in the pair.
• The quiet Monday docket should keep the focus on geopolitical risks - the conflict in Israel remains a key focus, with the Israeli military making limited incursions into the Gaza Strip in attempts to secure hostages and cut off Hamas operatives from access to aid. Datapoints pick up from tomorrow, with global PMI numbers crossing ahead of the ECB decision and advance Q3 GDP data on Thursday.

FX OPTIONS: Expiries for Oct23 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0535-50(E1.5bln), $1.0600(E629mln), $1.0660-75(E1.5bln)
• USD/JPY: Y148.75($1.6bln), Y149.00($1.4bln), Y149.20($775mln), Y149.50($1.4bln), Y150.00($1.5bln), Y150.25-35($1.0bln), Y150.50($659mln)

BONDS: Core FI Yields Push Higher and Curves Steepen, Peripheral Europe Tightens on Ratings

As we have covered all morning, there hasn’t been much in the way of headline counter to the lack of meaningful escalation in the Israel-Hamas conflict and latest BoJ sources piece.

• That has allowed the Asia-Pac cheapening in core global FI markets to extend.
• 10-Year U.S. Tsy yields have topped 5% for the first time since ’17, with core global FI markets following suit.
• Bund futures move towards last week’s lows, while German cash yields are 2.5-7.5bp higher as the curve steepens. 10-Year yields are still ~5bp off 3%, with (participants seemingly less willing to challenge YtD highs in Bund yields when compared to U.S. Tsys and gilts.
• Peripheral outperformance has been noted, with BTPs and GGBs benefitting from Friday’s well-documented ratings updates (no change in rating/outlook for Italy at S&P and Greece attaining IG status at S&P).
• Gilt futures have registered fresh ’23 lows given the weakness seen elsewhere, with any sustained break below 91.00 set to switch technical focus to the Oct ‘22/LDI crisis lows. Benchmark 20+-Year gilt yields have hit fresh ’23 highs, with wider yields sitting 4-8.5bp higher on the day as the curve steepens. Friday’s rating news did little for gilts (Moody’s outlook tweak to stable from negative represented a removal of a legacy issue from the Truss era).
• Lower tier U.S. and Eurozone data is due as the day wears on, while EU & Belgian supply, along with BoE long end gilt sales, provide points of interest elsewhere.

EQUITIES: Index Futures Plumb New 4-Month Lows

• Equities plumbing new pullback lows a few hours out from the NY crossover, with the Dec-23 e-mini S&P touching 4219.00, the lowest since late May (or early June on the continuation contract). Moves follow the show above 5.00% for the first time this cycle, with financial conditions ratcheting higher.
• Prices have now shown below the bear trigger at 4235.50, helping trigger volumes ahead of average for this time of day, with cumulative activity ~15% above average for this time of day. Next support undercuts at 4194.75, the May 24 low.
• A weak Asia-Pac session (China lower by ~1%, Japan lower by ~0.8%) has fed directly into weak Europe trade, and thereby a poor showing from US futures.
• Focus remains on US financial conditions and the state of the yield curve (and this week's advance GDP print) as well as the busiest week of the quarter for the corporate earnings cycle, with 38% of the index set to report. Full expectations and timings here: https://roar-assets-auto.rbl.ms/files/56296/MNIUSE...

EQUITIES: Move Lower in Eurostoxx 50 Futures Last Week Reinforces Current Bearish Theme

• A bearish theme in Eurostoxx 50 futures remains in play and last week’s move lower reinforces current conditions. The contract has traded through support at 4082.00, the Oct 4 low and a bear trigger. This break confirms a resumption of the downtrend and maintains the bearish price sequence of lower lows and lower highs. The focus is on 4034, the Mar 24 low (cont). Initial firm resistance is at 4166.00, the 20-day EMA.
• S&P e-minis maintain a softer tone. Attention is on 4235.50, the Oct 4 low and bear trigger. A break of this support would confirm a resumption of the downtrend and open 4197.75, the May 24 low. The contract continues to trade below resistance at the 50-day EMA, at 4410.92. A clear breach of this average is required to strengthen bullish conditions and this would open 4479.38, trendline resistance drawn from the Jul 27 high.

COMMODITIES: Bullish Gold Targets Resistance at $2003.4 Next

• WTI futures traded higher last week and the contract remains in bull-mode condition. The latest recovery has highlighted a key support at $80.20, the Oct 6 low. The medium-term trend condition is bullish and an extension higher would expose the bull trigger at $92.48, the Sep 28 high. Clearance of this hurdle would confirm a resumption of the uptrend. For bears, a move through $80.20, would instead highlight a short-term top.
• Gold traded higher last week, extending the reversal from $1810.5, the Oct 6 low. The yellow metal has breached key resistance at $1953.0, the Sep 1 high, and $1987.5, the Jul 20 high. The break strengthens a bullish theme and opens $2003.4, a Fibonacci retracement point. Initial firm pivot support lies at $1907.7, the 50-day EMA. Clearance of this level is required to signal a short-term top and a potential reversal.