MNI US MARKETS ANALYSIS - 2yr Yields Within Range of Tues Highs

US TSYS: Recent Cheapening Sees Back Little Changed With FOMC Eyed

• Cash Tsys have seen some cheapening pressure as the US comes in, taking to lows for the day seen just after the open before a bid developed through Asia hours despite a lack of drivers.
• Benchmark tenors remain off yesterday’s lows but the recent move is reminiscent of Tuesday's sell-off having more than reversed the CPI-induced rally with no single headline driver but potentially helped by China cutting short-term rates and hopes of further stimulus, decent increases in near-term bill issuance and front end Gilts slumping.
• 2YY +0.5bp at 4.671%, 5YY +0.5bp at 3.996%, 10YY +0.4bp at 3.817%, 30YY +0.9bp at 3.929%.
• TYU3 trades 4+ ticks higher at 112-26 off joint day lows of 112-24. Having cleared key support at 112-29+ yesterday, initial support is seen at those lows of 112-20+ which stopped short of 112-16 (Fibo retracement of Mar 2 – May 4 rally).
• Fed: FOMC announcement (1400ET), Chair Powell press conference (1430ET)
• Data: PPI lands at 0830ET with the usual implications for core PCE due Jun 30, plus weekly MBA data (1200ET)
• Bill issuance: US Tsy $46B 17W bill auction (1130ET)

STIR FUTURES: Fed Rate Path Consolidates CPI Moves Ahead Of FOMC

• Fed Funds implied rates have consolidated yesterday’s post-CPI move, with a hit to pricing for today’s decision and July’s meeting before decent increases later in the year and into January, with just 15bp of cuts from the Sept terminal to year-end.
• Recent intraday 2-3bp increases for year-end pricing only unwinds a drop through Asia hours.
• Cumulative changes from 5.08% effective: just +2.5bp for today (unch on the day), +17.5bp Jul (unch), +20bp Sep (unch), +14bp Nov (unch), +4.5bp Dec (+0.5bp), -8bp Jan (-0.5bp).

MNI Fed Preview - How To Communicate A Hawkish Hold

• The FOMC’s tightening cycle is likely to “skip” June’s meeting, with the Committee signaling that it currently expects to hike in July.
• In an effort to maintain a hiking bias, the Statement’s forward rate guidance is likely to remain unchanged, with the updated economic projections showing that an additional rate hike is expected by year-end.
• Click here for Full preview including summary of sell-side views

Analysts CPI Takes Ahead Of FOMC Decision

• Ahead of today's FOMC, Citi remains the most hawkish of the 20 analysts below and still see a 25bp hike as a base case in firm contrast to market pricing, although TD also don’t rule it out.
• Those calling for no more hikes from current levels include ABN, ING, Nomura, Pantheon and Unicredit.

MNI ECB Preview: Tightening Towards The Stop

• The ECB will hike rates by 25bp and confirm the previous decision to end APP reinvestments in July.
• Absent a sharp drop in core inflation, we would expect the ECB to hike again in July.
• Even if the ECB were to raise rates further in September, this would likely be the last turn of the screw.

As other ECB watchers have commented, the June policy decision has been well-telegraphed: the deposit rate will almost certainly increase by 25bp and the previous decision to end APP reinvestments in July will be confirmed. The communication since the May meeting indicate that the dovish members concede that there is still some room to raise rates, while the more hawkish members are no longer calling for larger hikes (50bp+). Continuing to hike by a more modest 25bp is the compromise position that the GC seem to be aligning around.

For the full publication, please see: https://roar-assets-auto.rbl.ms/files/54106/MNI%20...

EUROZONE ISSUANCE UPDATE

German auction results

• E4bln (E3.339bln allotted) of the 2.30% Feb-33 Bund. Avg yield 2.43% (bid-to-cover 1.62x).

FOREX: Antipodeans on Top Ahead of Expected Fed Skip

• The Fed decision takes focus going forward, with consensus and markets looking for the FOMC to keep rates unchanged - pausing their tightening campaign for the first time in this cycle.
• Headed into the decision itself, the USD is mid-range and toward June's lower levels, but the USD index has found some support at the 100-dma of 103.043. Any post-Fed weakness would open the 50-dma below for direction at 102.613 ahead of levels last seen in early May.
• Elsewhere, AUD/USD trades in the midst of the longest streak of higher lows in six years. The pair's rally off the May31 low has seen higher lows for 10 consecutive sessions, the longest such streak since end-2017, which extended to 16 consecutive trading days and spanned a ~5% rally. Price has recently cleared 0.6733, 76.4% of the downleg in May, reinforcing current conditions and this signals scope for a test of 0.6818, the May 10 high and a key resistance.
• AUD outperformance continues to stem from more solid industrial commodities prices (China iron ore prices are up 20% off the late May low), compounding the impact of the more hawkish RBA decision.
• Outside of the Fed decision, the May PPI report will also be keenly watched, after yesterday's inflation release cleared the decks for a Fed pause later today. Markets watch for PPI to to slow moderately on a final demand basis, falling 0.1% on the month from April's +0.2%.

FX OPTIONS: Expiries for Jun14 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0700(E1.2bln), $1.0715-30(E1.8bln), $1.0750-70(E944mln), $1.0800-10(E2.5bln)
• USD/JPY: Y137.50-60($515mln), Y139.00($726mln), Y139.45-50($952mln), Y139.95-00($711mln)
• AUD/USD: $0.6690-00(A$1.3bln)
• USD/CAD: C$1.3375-85($1.0bln), C$1.3500-10($958mln)

BONDS: Bunds Bear Flatten, Bounce Capped By Impending Supply

German paper initially took its cues from U.S. Tsys, resulting in some cheapening, before a rebound from session cheaps became apparent. The bid has since run out of steam meaning that 10-Year cash Bunds closed the opening gap higher on the move, before re-cheapening a touch, with the presence of impending supply probably a limiting factor.

• The 10-Year EGB spreads that we monitor (vs. Bunds) are little changed on the day, with OATs looking through the latest comments from the French Finance Minister re: spending cuts.

GILTS: Front End Firms, Although Nowhere Near Reversing Yesterday's Aggressive Cheapening

• Gilts remain happy to operate in the range established in the first hour or so of Wednesday trade, outside of 2s, which have continued to richen. That leaves the major cash benchmarks flat to 5.5bp richer, as yesterday's aggressive bear flattening is partially unwound via bull steepening. Local headline flow has been light since the market open, leaving participants to mull over local data and recent hawkish BoE re-pricing, which, although it has edged back from extremes, sees just over 130bp of further hikes priced into the BoE-dated OIS strip.

EQUITIES: E-Mini S&Ps Extend Bull Cycle Ahead of FOMC

• Eurostoxx 50 futures traded higher Tuesday. Attention turns to resistance at 4362.00, the May 29 high. Clearance of this level would be a bullish development and signal scope for an extension higher towards key resistance at 4409.50, the Nov 18 2021 high on the continuation chart. The recent break of a number of support levels still highlights a potential bearish threat. A reversal lower would expose 4216.00, May 31 low and bear trigger.
• S&P E-minis traded higher again Tuesday and the contract is holding on to its latest gains. The break higher confirms a resumption of the uptrend and maintains the bullish price sequence of higher highs and higher lows, marking an extension of the bull cycle that started in October 2022. The focus is on a climb towards 4427.79, a Fibonacci projection. Initial firm support is at 4292.26, the 20-day EMA.

COMMODITIES: WTI Futures Hold Onto Tuesday Gains

• WTI futures continue to trade below resistance at $75.06, Jun 5 high. The pullback from this level reinforces a bearish theme and Monday’s sell-off marked an extension of the latest move lower. Support at $67.03, May 31 low, has been pierced, a clear break would open $63.90, May 4 low. MA studies are in a bear mode position highlighting a downtrend. A break of $75.06 is required to signal a reversal. S/T gains are considered corrective.
• The bear cycle in Gold remains intact. The yellow metal continues to challenge trendline support drawn from the Nov 3 2022 low. The trendline intersects at $1962.6. A clear breach of this line would reinforce bearish conditions and resume the downtrend. This would open $1903.5, 61.8% of the Feb 28 - May 4 bull cycle. Initial firm resistance is $1985.3, the May 24 high. Clearance of this resistance would signal a short-term reversal instead.