Highlights:
- 5y Treasury supply in focus amid quiet session for data
- UK looks to reset relations with Europe via trip to Berlin
- BoE's Mann set to appear, however policy-tied commentary likely limited
US TSYS: Mostly A Touch Firmer, 5Y Supply Headlines A Quieter Docket
- Treasuries broadly consolidate yesterday’s rally in a move aided by soft labor conditions in the Conf. Board consumer survey, declines in WTI futures and a decent 2Y auction.
Cash yields sit between 0.3bp higher (3s) and 0.9bp lower (20s), whilst 2s10s sees a level shift to just -5bps after the new 2Y benchmark from yesterday’s auction. - TYU4 has recently pushed above yesterday’s levels with a high of 113-21 (+ 04+) but remains below resistance at 114-03 (Aug 6 high). The trend needle continues to point north.
- TYZ4 meanwhile has clawed ahead as the most actively traded contract, testing yesterday’s high of 114-07+.
- Data: MBA mortgage data (0700ET) - a quiet docket before tomorrow's 2nd national accounts release for Q2.
- Note/bond issuance: US Tsy $28B 2Y FRN re-open - 91282CLA7 (1130ET), US Tsy $70B 5Y note sale - 91282CLK5 (1300ET)
- Fedspeak: Bostic on economic outlook (1800ET)
- Bill issuance: US Tsy $60B 17-week bills (1130ET)
STIR: Holding Bulk Of Yesterday’s Labor Conditions Inspired Decline
- Fed Funds implied rates for near-term meetings have seen mixed changes overnight, with September a little lower (-0.5bp) but December higher (+1bp). They broadly hold yesterday’s decline helped by soft labor conditions in the Conf. Board consumer survey.
- Cumulative cuts from 5.33% effective: 34bp Sep, 68bp Nov, 103bp Dec, 133bp Jan and 195bp June.
- Yesterday’s minutes to the Fed's discount rate meetings in July showed the directors of the NY and Chicago Feds voted to reduce the primary credit discount rate by 25bp to 5.25% (the other regional Feds voted to maintain the level at 5.50%). This is held by the regional directors rather than presidents though it's fair to say that the NY and Chicago Fed presidents (Williams and Goolsbee) are certainly on the more dovish end of the FOMC and may well have been some of the members who - in the language of the minutes - "could have supported" a rate cut at the July meeting.
- Bostic (’24 voter) speaks on the economic outlook late on at 1800ET (moderated Q&A). He said Aug 23 that “we’re close” when asked about starting to normalize policy and that it may make sense to pull forward his view on rate cuts (which had been for a single cut late in 2024 but since increasingly open to a September move) whilst warning about “passive tightening” via lower inflation.
- His further comments did however mention a range of scenarios from not cutting to 50bp cuts, and we expect further data dependent commentary ahead.
STIR: OI Points To Mix Of Long & Short Setting In SOFR Futures On Tuesday
The combination of open interest data and yesterday's twist steepening in SOFR futures points to long setting dominating through the greens and short setting dominating in the blues.
- Weakness in crude oil futures and soft labor market components in the latest consumer confidence survey allowed SOFR futures to move off NY morning lows.
- That left ~104bp of ’24 cuts priced into Fed Funds futures vs. ~100bp late Monday.
| 27-Aug-24 | 26-Aug-24 | Daily OI Change | Daily OI Change In Packs | ||
| SFRM4 | 1,125,587 | 1,123,957 | +1,630 | Whites | +86,819 |
| SFRU4 | 1,349,885 | 1,319,705 | +30,180 | Reds | +21,018 |
| SFRZ4 | 1,236,913 | 1,194,458 | +42,455 | Greens | +22,795 |
| SFRH5 | 920,283 | 907,729 | +12,554 | Blues | +6,084 |
| SFRM5 | 896,690 | 877,308 | +19,382 | ||
| SFRU5 | 684,400 | 693,191 | -8,791 | ||
| SFRZ5 | 903,524 | 901,874 | +1,650 | ||
| SFRH6 | 692,406 | 683,629 | +8,777 | ||
| SFRM6 | 725,985 | 705,211 | +20,774 | ||
| SFRU6 | 573,792 | 577,390 | -3,598 | ||
| SFRZ6 | 486,285 | 485,388 | +897 | ||
| SFRH7 | 284,490 | 279,768 | +4,722 | ||
| SFRM7 | 284,053 | 282,018 | +2,035 | ||
| SFRU7 | 218,869 | 211,369 | +7,500 | ||
| SFRZ7 | 232,666 | 236,666 | -4,000 | ||
| SFRH8 | 174,555 | 174,006 | +549 |
UK: GERMANY-Starmer, Scholz Seek 'Action Plan' On Migration; No Reversing Brexit
Speaking at a presser in Berlin alongside German Chancellor Olaf Scholz, UK PM Sir Keir Starmer says that, regarding his gov'ts talk of 'resetting' relations with Europe, "That does not mean reversing Brexit or re-entering the single market or customs union". Adds that "We do not have a plan for a youth mobility scheme". Livestream can be found here.
- Scholz says that he "welcomes" the UK PM's bid for close relations with Europe. Scholz wants “to base our relations on an entirely new footing” with “a treaty that reflects the entire spectrum of our relations”.
- The two leaders have agreed to an 'action plan' intended to curb illegal immigration, although so far have offered little indication of details of how this would work. Scholz says that cooperation will improve on repatriation of failed asylum seekers, countering radical Islamism, and tightening weapons laws.
BOE: Mann to appear on panel at 13:15BST - but don't expect large market moves
- The headline UK event of the day will be a panel appearance by external MPC member Catherine Mann at 13:15BST / 14:15CET in Frankfurt at the CEBRA2024 meeting (Central Bank Research Association). The panel will be on "The Value of Economic Research for Policy" and she will appear alongside Luc Laeven (Director General of Research at the ECB) and BCB Deputy Governor Diogo Abry Guillen.
- However, it is questionable whether we will have headlines from the panel - there is no livestream (although the video will be available online after the event with a delay) - so we are reliant upon a journalist from one of the wires attending in person.
- Mann recently conducted an interview with the FTre (published just over two weeks ago on 12 August) where she described her level of hawkishness as falling from 10 to 7 this year.
- Mann is still dissenting against rate cuts, and remains concerned about structural changes to wage behaviour.
- We don't think that there be large market moves on the back of her comments today for a couple of reasons:
- First, given that she has made comments relatively recently we would be very surprised if she notably changed her stance.
- Second, she is still considered one of the most hawkish members of the MPC - and her vote is not needed for the MPC to cut Bank Rate further.
- At the time of writing market price around an 18% probability of a September cut, cumulatively price 26bp of cuts by November, 40bp by December and 99bp by June 2025.
MNI EZ Inflation Preview – Aug 2024: Olympic Effect Eyed
- The Eurozone August flash inflation round is not likely to deter the ECB from delivering a 25bp rate cut at its September 12 meeting, but will help inform the guidance around the likely path for policy into year-end.
- Headline inflation is expected to ease to 2.2% Y/Y (vs 2.6% prior) in August, with downward energy base effects making a (brief) return.
- Core inflation meanwhile is seen easing slightly to 2.8% Y/Y (vs 2.9% prior), driven by another slight moderation in core goods inflation, with services set to remain steady or even accelerate on an annual basis.
- The Olympic Games in Paris did not appear to have a meaningful impact on French (and therefore Eurozone) services inflation in July, but several analysts are wary that such effects will show up in August’s data.
- Our preview includes analysis of price categories to watch, assessments of underlying inflation trends, outlooks for the French, German, Spanish, and Italian national inflation prints, and sell-side analyst previews.
PDF analysis here: https://roar-assets-auto.rbl.ms/files/66994/August2024EZCPIPreview.pdf
FOREX: USD Index Firmer, But Uncomfortably Close to Cycle Lows
- The greenback is firmer, but well off the session's best levels headed into the NY crossover. Market focus remains on the cycle lows in the USD Index posted yesterday at 100.514, with Fed pricing and the closing proximity to the September FOMC decision still largely responsible. OIS markets price ~33bps of easing at present, but it's year-end and early '25 rates pricing that's proving more influential, with markets now pricing 100bps of cuts across the full year and 175bps by the end of H1 next year - leading the greenback lower.
- An early phase of crude oil weakness has worked against oil- and commodity-tied FX, forcing NOK underperformance against all others in G10 on an intraday basis. As a result, EUR/NOK has recovered off the 50-dma support of 11.6973 - a level that's been tested, and held, on several occasions across August.
- GBP/USD hit a new cycle high yesterday at 1.3266, and we flag the close co-movement of the pair and US equity markets, noting that despite the fade off mid-July highs in the GBP net position (still long ~30% of open interest), options markets remain cognizant of the upside risk - GBP/USD 3m risk reversals are further reversing the premium for put vol over calls, which has persisted since March 2020 and the onset of the COVID pandemic in March 2020.
- Datapoints are few and far between Wednesday, keeping focus on central bank comms, with BoE's Mann and Fed's Bostic both scheduled to speak. NVidia's after-market earnings should also draw focus given the stock's lead across US equity markets and the proximity to all-time highs in the e-mini S&P.
EQUITIES: Eurostoxx 50 Futures Holding Onto Recent Gains
- Eurostoxx 50 futures traded higher last week and price is holding on to its latest gains. The contract has recently pierced the 50-day EMA, at 4875.55. An extension higher would undermine the recent bearish theme and highlight a stronger reversal. Sights are on 4951.00 next, the Jul 31 high. For bears, a reversal lower would refocus attention on the bear trigger at 4494.00, the Aug 5 low. Initial support lies at 4839.22, the 20-day EMA.
- S&P E-Minis are in consolidation mode. A bullish theme is intact and the contract traded to a fresh cycle high Monday. Price has recently cleared 5600.75, Aug 1 high, signalling scope for an extension towards key resistance and the bull trigger at 5721.25, Jul 16 high. A break would resume the primary uptrend. Support to watch lies at 5504.86, the 50-day EMA. A clear breach of it is required to instead highlight a potential bearish threat.
COMMODITIES: WTI Futures Extend Pullback From Monday's Highs
- WTI futures have recovered from their recent lows and the contract traded sharply higher Monday. The climb is considered corrective, however, price has traded through the 50-day EMA. A clear break of this average would undermine the recent bearish theme. Attention is on key resistance at $78.54, the Aug 12 high. For bears, a stronger reversal lower would refocus attention on $70.88 key support.
- Bullish trend conditions in Gold remain intact. The recent breach of resistance at $2483.7, the Jul 17 high, confirmed a resumption of the primary uptrend. Note that moving average studies are in a bull-mode set-up and this highlights a dominant uptrend. The focus is on a climb towards $2536.4 next, a Fibonacci projection. Initial support to watch lies at $2472.2, the 20-day EMA. Short-term weakness would be considered corrective.
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