MNI US MARKETS ANALYSIS - BoE's Bailey Set to Talk Inflation After Sticky CPI

US TSYS: UK CPI Weighs With Waller, FOMC Mins and 5Y Supply Ahead

• Cash Tsys trade twist steeper on the day with a pivot beyond the 5s, but increasingly less steep as the front end holds a decent sell-off post UK CPI beating and BoE pricing surging (2Y yields based off yesterday’s new issue), whilst the long-end has more than reversed the initial cheapening.
• Reuters reports that debt talk negotiators are expected to reconvene on Wed morning with Biden "willing to meet the Speaker halfway" and offering a compromise, which includes a spending freeze, rescinding significant unspent COVID relief funds and a two-year cap on spending in line with previous bipartisan budget agreements.
• 2YY +2.1bp at 4.285%, 5YY +0.0bp at 3.743%, 10YY -1.0bp at 3.682%, 30YY -1.5bp at 3.933%.
• TYM3 trades 1+ tick higher at 113-21 off an overnight high of 113-23+, with higher than recent average volumes of 335k cumulative after elevated activity around UK CPI. Resistance is seen at the recent breakout level of 113-30+ (Apr 19 low).
• Fedspeak: Gov Waller (1210ET, text + Q&A), FOMC minutes (1400ET)
• Data: MBA weekly mortgage data (0700ET)
• Note/bond issuance: US Tsy $22B 2Y Note FRN (91282CGY1) – 1130ET before US Tsy $43B 5Y Note auction (91282CHE4) – 1300ET
• Bill issuance: US Tsy $42B 17W bills – 1130ET

STIR FUTURES: Fed Pricing Holding Sizeable Spillover From UK CPI Beat

• Fed-dated OIS holds sizeable spillover from BoE pricing surging after stronger than expected UK CPI earlier, countering McCarthy and Graves signalling a renewed impasse in debt talks.
• Cumulative changes from 5.08% effective: +10bp Jun (+2.5bp on the day), +15.5bp Jul (+3.5bp), +7bp Sep (+4.5bp), -12bp Nov (+5bp), -33bp Dec (+4bp) and -52bp Jan (+7bp).
• Relative to levels prior to Friday’s initial impasse headlines, largest increases have been concentrated for Jul/Sep meetings with a 6bp increase for both as the July meeting sees a terminal 5.23%.
• Ahead, Gov Waller (voter) gives long-awaited remarks at 1210ET with text + Q&A, having last spoken on mon pol Apr 14 (need to tighten further with extent to hinge on incoming data, need to remain tight for substantial period). He’s followed by FOMC minutes at 1400ET.

NZGBS: Yields Sharply Lower, RBNZ Signals OCR At Peak

NZGB yields have closed 11-33bp lower after the RBNZ Decision proved to be a dovish hike.

• The RBNZ hiked 25bp to 5.5%, which aligned with its previous projection for the OCR peak. 5 members opted for the hike while 2 advocated for a pause.
• The statement released by the RBNZ primarily focused on the impact of restrictive policies and acknowledged the presence of transmission lags. Notably, the Committee appeared unconcerned about the near-term fiscal expansion and the rise in immigration.
• Based on the current scenario, it appears increasingly likely that the RBNZ will keep rates unchanged at its upcoming meeting on July 12.
• Ahead of the RBNZ Decision, the market had been pricing 37bp of tightening for today's meeting and a terminal rate of 5.93%. Post-Decision, the terminal rate has softened to 5.60%.
• Swap rates are 11-34bp lower with the 2s10s curve 23bp steeper.
• The NZ Treasury announced that they plan to sell NZ$200mn of the May-28 bond, NZ$150mn of the Apr-33 bond and NZ$50mn of the May-51 bond tomorrow.

EUROPE ISSUANCE UPDATE

German auction results

• E1.5bln (E1.178bln allotted) of the 1.00% May-38 Bund. Avg yield 2.64% (bid-to-cover 1.85x).
• E1bln (E801mln allotted) of the 4.75% Jul-40 Bund. Avg yield 2.66% (bid-to-cover 1.26x).

• GBP3bln of the 0.875% Jul-33 Green Gilt. Avg yield 4.239% (bid-to-cover 3.02x, tail 0.2bp).

FOREX: GBP U-Turn as Inflation Inspired Rally Fades Fast

• UK markets have drawn focus across the European morning following the higher than expected CPI print for April. While headline CPI dipped to 8.7% from 10.1% prior - it was a far slower step-down for inflation pressure, and core also accelerated to 6.8% from 6.2%. As a result, markets have rushed to price in a higher-for-longer approach at the Bank of England, tipping the assumed peak policy rate close to 5.50% for the first time since the fallout of the Truss budget last year.
• GBP's initial inflation-inspired rally faltered following the Gilt open, with markets returning to the previously observed pattern of selling the currency alongside notable increases in short-end rates. GBP/USD corrected off the high of 1.2470 down to the 1.2400 handle on heavy volumes, with activity across futures markets over double what you'd expect to see at this time of day.
• Despite GBP's reversal lower, NZD remains the poorest performer in G10 following the RBNZ rate decision. The bank raised rates by 25bps - as expected - but unexpectedly signaled that their tightening cycle has now concluded, resulting in NZD/USD dropping below 0.6150 for the first time since April.
• Focus turns to central bank appearances later today, as BoE's Bailey speaks at a WSJ event, ECB's Lagarde marks the 25th anniversary of the ECB and Fed's Waller talks on the economic outlook. The FOMC minutes also cross.

FX OPTIONS: Expiries for May24 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0750(E953mln), $1.0830-40(E732mln)
• USD/JPY: Y138.25($500mln)
• GBP/USD: $1.2320-25(Gbp501mln)
• AUD/USD: $0.6610(A$555mln), $0.6695-00(A$835mln)

EQUITIES: Eurostoxx Futures Dip Lower Again, Piercing Support at 20-Day EMA

• Eurostoxx 50 futures traded lower Tuesday. For now, the pullback appears to be a correction and trend signals continue to point north - moving average studies remain in a bull mode position. The contract has tested support at the 20-day EMA, which intersects at 4323.50. A clear break would expose the 50-day EMA at 4266.30. On the upside, the bull trigger has been defined at 4409.00, the May 19 high. A break would resume the uptrend.
• The S&P E-minis outlook remains bullish and yesterday’s pullback is considered corrective - for now. Trend signals highlight an uptrend and the focus is on a climb towards 4244.00, the Feb 2 high and the next important resistance. On the downside, the 20-day EMA has been tested. A clear break of it would expose the 50-day EMA which intersects at 4124.34 and marks a key support.

COMMODITIES: Recent Gains in WTI Futures Considered Technically Corrective

• A short-term bearish theme in WTI futures remains present and the latest gains are still considered corrective. Trend signals point south - moving average studies continue to highlight a downtrend. A resumption of weakness and a break of $69.39, the May 15 low, would strengthen near-term bearish conditions. On the upside, resistance is seen at $74.41, the 50-day EMA. A clear break of this level would alter the picture.
• Gold remains in a bearish cycle and is trading closer to its recent lows. The yellow metal last week cleared support at $1976.1, the 50-day EMA and $1969.3, the Apr 19 low. The clear break of this support zone highlights a stronger bearish threat and opens $1934.3, the Mar 22 low and $1929.1, trendline support drawn from Nov 3 2022. Key resistance and the bull trigger is at $2063.0, May 4 high. Initial firm resistance is $2022.6, the May 12 high.