MNI US MARKETS ANALYSIS - BoJ Exit Favours Lower Vol, Lower JPY

US TSYS: Mild Bull Steepening - Housing Data and 20Y Supply Ahead

• Cash Tsys have pushed through ranges established in Asia-Pac hours, looking beyond the BoJ decision as European FI and in particular Gilts rally.
• The curve bull steepens, with yields between 0.5-2bps lower on the day. 2s10s at -39.5bps remains at the high end of last week's range.
• TYM4 at 110-00 (+ 06) has lifted a little further off yesterday’s low of 109-24+ which pierced the bear trigger at 109-25+ (Feb 23 low). A clear break here could initially open 109-14+ (Nov 28 low).
• Volumes are back at a more typical 310k for this time of day after Monday’s slow start, although are relatively light considering BoJ and RBA decisions overnight.
• Another light session today, centered around housing data before the 20Y re-open, all with tomorrow’s FOMC decision in back-of-mind.
• Data: Building permits/housing starts Feb (0830ET), TIC Flows Jan (1600ET)
• Note/bond issuance: US Tsy to sell $13B 20-Y reopen (1300ET)
• Bills issuance: US Tsy to sell $46B 52-W bills, $75B 42-D CMB (1130ET)

STIR: Fed Implied Rates Following Europe Lower

• Fed Funds implied rates saw little net impact from the BoJ decision with ultimately a following through of well-touted policy measures, but have more recently dipped in spillover from a rally in front-end UK and Euro rates.
• Cumulative cuts from 5.33% effective: 0.5bp Mar, 2.5bp May, 16.5bp Jun, 26.5bp Jul and 73bp Dec.
• Focusing on June, Fed swaps have pulled further back from briefly pricing less than 50% odds of a June cut, with CME’s FedWatch currently showing a 55% chance of a 25bp cut and 4% of a 50bp cut.

CENTRAL BANK PREVIEWS

MNI FED PREVIEW - MARCH 2024: Countdown to Confidence

The FOMC will hold rates at the presumed peak of 5.25-5.50% at its March 19-20 meeting, while reiterating its cut-leaning forward guidance. Incoming data provides the FOMC with both the justification and the flexibility to be patient before making the first cut. It’s unlikely the signal provided by the Dot Plot / economic projections will be much different to the last edition in December, while the Statement will be little changed after January’s overhaul. It would only take two participants getting slightly more hawkish on 2024 rate prospects to move the median dot from 3 cuts to 2.

MNI NORGES BANK PREVIEW - MARCH 2024: Cuts Still Some Way Off

The Norges Bank are unanimously expected to leave the policy rate on hold at 4.50%. Main interest will lie in the updated policy rate path projection within the March Monetary Policy Report, which will inform the guidance around how long rates will be held at current levels. The MNI Markets Team expects a small downward revision to the rate path, with key variables tracking below the December MPR forecasts. This will likely see the first full 25bp rate cut brought forward a little earlier in Q4 2024 than the current rate path indicates.

MNI SNB PREVIEW - MARCH 2024: Dovish Tilt on the Cards

Market pricing and consensus views for the SNB’s March decision are on a knife-edge between a 25bps cut or a hold at 1.75%. The decision will depend on the SNB’s longer-term assessment of inflation against deflation risks, as headline CPI has printed close to the middle of the SNB’s target range in recent months. A hold would likely be accompanied with a clearly dovish tilt in communication. Markets currently price 8-9bps of easing for the meeting, corresponding to about a 2/3 implied probability of a hold, while a 25bps cut to the deposit rate would likely be accompanied with cautious language on policy ahead.

MNI BCB PREVIEW - MARCH 2024: Focus on Potential Guidance Adjustment

All surveyed analysts believe that the Copom will continue the easing cycle with another 50bp cut, bringing the Selic rate down to 10.75%. Prior guidance in the January statement reiterated that economic conditions remain consistent with this strategy. However, several BCB officials have recently indicated the possibility of changing the forward guidance, and market participants will therefore be alert for any tweaks to the statement that provide clues on whether the easing pace could be adjusted in the coming meetings.

MNI CNB PREVIEW - MARCH 2024: Keeping Pace

Last-minute comments from Bank Board members, inspired reflection on market wagers, with remarks from Eva Zamrazilová and Jan Kubíček reducing the perceived odds that the push for a faster pace of rate cuts could muster sufficient support. Consensus looks for another 50bp reduction in the two-week repo rate, possibly coupled with cautious rhetoric from Governor Aleš Michl. We think that the sentiments of individual policymakers verbalised in their recent communications, persistent koruna weakness, and concerns about lingering risks to the inflation outlook limit the probability of faster monetary easing.

MNI BANK INDONESIA PREVIEW - MARCH 2024: IDR Needs Fed to Ease First

Bank Indonesia (BI) is unanimously expected to leave rates at 6.0% at its March 20 meeting given the persistence of a high level of “global uncertainty” and little new domestic information since the last decision. FX stability remains its focus and as USDIDR remains elevated, a pivot to a dovish tone is highly unlikely this month. BI will not want to risk further rupiah softening by cutting rates ahead of the Fed.

TSYS: OI Points To Limited Net Positioning Movement During Monday's Sell Off

The combination of yesterday's move lower in Tsy futures and preliminary OI data points to limited net position movement on the day, as rounds of short setting and long cover generally offset.

• It felt like a low conviction day at the time, with momentum and continued speculation surrounding higher for longer rates (news flow saw an FT survey pointing the need for higher for longer rates and potential hawkish Fed appointments by Trump if he becomes President) front and centre.
• 2- & 5-Year yields hit fresh '24 highs on the day.

SOFR: OI Points To Mix Of Long Cover & Short Setting In SOFR Futures On Monday

Yesterday's move lower and preliminary OI data points to a mix of net short setting (dominant in the greens and blues) and net long cover (dominant in the whites and reds).

• Momentum and continued speculation surrounding higher for longer rates (news flow saw an FT survey pointing the need for higher for longer rates and potential hawkish Fed appointments by Trump if he becomes President) was front and centre.
• Fed rate cut premium has been reduced in recent weeks, with plenty of focus on Wednesday's post-meeting rhetoric from Fed Chair Powell and the updated dot plot. See our full preview of the FOMC decision here.

MNI UK Inflation Preview: February 2024

• Inflation is expected to continue to normalise across the major categories in February (albeit with some offsetting positive base effects from energy prices relative to those seen in January).
• Analysts are generally split between both headline and services inflation printing in line with the BOE’s February MPR forecast or seeing a repeat of the 0.1ppt downside surprise to the Bank’s forecast seen last month.
• We look in more detail at analyst expectations and outline the biggest expected drivers of the change in February as well as some potential sources of risk to consensus forecasts.
• We don’t think that the majority of the MPC will need to see inflation undershoot the February MPR forecasts in order to begin cutting rates. The MNI Markets team continues to put more weight on the wage data, and do not think a quorum can be achieved to vote for the first cut until it has become more evident that Q1 and April wage data are showing more meaningful signs of slowing.
• We think that a higher-than-expected inflation print (particularly for services CPI) would likely have a greater impact on delaying any possible BOE cuts than a lower-than-expected print could accelerate cuts. We therefore see asymmetry in potential market reactions – with a higher-than-expected print likely to have a larger market impact than a lower-than-expected print in our view.

Update of Expectations for FQ1 Issuance post DMO consultation

The DMO held its quarterly consultation meetings with investors and GEMMs yesterday (Minutes available here). We update our expectations for FQ1 issuance (Apr-Jun) below:

Short auctions (5 auctions)

• 3.75% Mar-27 gilt: We pencil in 2-3 reopenings (in line with both GEMM and investor preferences)
• New 5-year gilt: 2-3 auctions. In terms of maturity GEMMs favoured a June/July 2029 maturity while investors mentioned March or June 2029 maturities (it now looks extremely unlikely we will see any reopenings of the 4.50% Jun-28 gilt).

• 4.00% Oct-31 gilt: We look for 1-2 reopenings (1 reopening strongly preferred by GEMMs, with "a few calls" for 2 reopenings).
• 0.875% Jul-33 green gilt: 1 auction during FQ1 (very strong support from GEMMs)
• 4.625% Jan-34 gilt: 2 reopenings (very strong support from GEMMs)
• 3.75% Jan-38 gilt: 1 reopening (unanimous support from GEMMs).

• DMO notes this is scheduled for June, we pencil in the W/C 10 June.
• We had previously expected a new Jan-37 gilt. However, the majority of the support from GEMMs and investors was for a new gilt around the 10-year maturity area rather than pushing out to anything longer. We therefore change our expectation to a new 2035 gilt to be launched.
• We still look for a GBP8.5-10.0bln transaction.

• 4.75% Oct-43: We look for 1-2 auctions (1-2 supported by GEMMs and investors).
• 1.50% Jul-53 green gilt: We look for 1 auction (supported by all GEMMs).
• 4.375% Jul-54 gilt: We pencil in 1 auction, most likely in June
• 4.00% Oct-63 gilt: 1 auction (strongly supported by GEMMs).
• 1.125% Oct-73 gilt: There were isolated calls from GEMMs and mentioned as a possibility by investors. We think there is potential for a tender of this gilt in the upcoming quarters but don't think it will be a full auction.

• DMO notes to be held in second half of April, we pencil in W/C 22 April.
• The 30-year 4.375% Jul-54 has "very strong support" from GEMMs and "a clear preference" from investors.

• 0.75% Nov-33 linker: We expect 2 auctions in the quarter (supported by GEMMs, investors supported 1-2)
• In terms of other maturities: Mentioned by both GEMMs and investors: 0.125% Mar-39 linker, 0.625% Mar-45 linker, 1.25% May-54 linker, 0.125% Mar-73 linker. Investors also metioned 0.125% Aug-31 linker.

German Q2 Issuance Update

• DFA has announced that there are no changes to the previously announced auction schedule for Q2 for Bubills, Schatz, Bobls and Bunds. This is as expected.
• There is no updated guidance on syndications (the annual guidance included a E12bln target including at least one green tap). E10.5bln has already been raised through the launch and tap of the 2.50% Aug-54 Bund (leaving just E1.5bln of the original E12bln available).
• The DFA has also confirmed one of each Bund on offer at each multi-ISIN auction in the quarter:
  • 17 April: E1bln of the 2.50% Aug-54 Bund (ISIN: DE000BU2D004) alongside E1bln of another issue.
  • 15 May: E1bln of the 1.80% Aug-53 Bund (ISIN: DE0001102614) alongside E1bln of another issue.
  • 29 May: E1.5bln of the May-41 Bund (ISIN: DE000BU2F009) alongside E500mln of another issue.
  • 19 June: E1bln of the 2.50% Aug-54 Bund (ISIN: DE000BU2D004) alongside E1bln of another issue.

EUROZONE ISSUANCE UPDATE:

• Gilt rally as today’s auction sees decent enough demand metrics (albeit not as strong as the Jan offering of the line) and any related hedging flow passes. Core global FI also trades on the front foot. Moves are relatively modest in the grand scheme of things.
• Gilt futures trade as high as 98.77, initial resistance at 99.35, the Mar 14 high. Gilt yields 3-4bp lower, 5s lead the rally. Gilts outperform global peers across all tenors.
  
• GBP2bln of the 4.75% Oct-43 Gilt. Avg yield 4.467% (bid-to-cover 3.41x, tail 0.4bp).

FOREX: JPY Offered as BoJ Withdraw from NIRP

• An exit from the Bank of Japan's negative interest rate policy has resulted in a weaker Japanese currency, with USD/JPY through Y150 to the upside and narrowing the gap with cycle highs and the bull trigger at 150.89. With the rate hike well telegraphed, markets focused on the Bank's commitment to containing any spillover in Japanese bond markets and dovish guidance suggesting today's rate hike may not be the first in a sequence of fast paced policy tightening.
• The USD is comfortably the strongest performing currency in G10, with the USD Index back above the 200-dma and nearing March's best levels at 104.292.
• The RBA decision overnight came in unchanged, as expected, and has worked against Antipodean currencies as the RBA dropped their tightening bias in the policy statement. AUD/USD has backtracked below the 200-dma and is narrowing in on the 0.6500 handle, weakness through which would put prices at the lowest level since March 6th.
• Germany's ZEW survey, US housing starts and building permits data and Canadian inflation top the agenda for Tuesday, with central bank speakers still quiet as the Fed start their two-day meeting ahead of Wednesday's policy announcement.

Pressure on JPY Vols Aids Further Selling Via Crosses

• With BoJ event risk out of the way, and the market content that today's rate hike will not be the first in a sequence of policy steps, the front-end of the USDJPY vol curve has resumed it's slide, putting 1m vols briefly through 7 points and close to the lowest levels in two years.
• USD/JPY spot's 1% rally, and the break above Y150.50, was priced at an implied probability of 17% via options markets yesterday - and the pull lower in vols is clearly aiding further JPY selling in the crosses - contributing to the post-BoJ trade today.
• This leaves JPY flirting with some key levels - and another push lower will see resistance tested: USD/JPY at 150.89, EUR/JPY at Feb's 163.72 and GBP/JPY at 191.32.

FX OPTIONS: Expiries for Mar19 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0790-00(E1.4bln), $1.0855-65(E1.0bln), $1.0875-85(E938mln)
• USD/JPY: Y150.00($733mln), Y151.50($500mln)

EQUITIES: E-Mini S&P Remains Close to Recent Highs, Price Signals Bullish

• The trend condition in Eurostoxx 50 futures remains intact and last week’s fresh cycle highs reinforce current conditions. Moving average studies are in a bull-mode position and this continues to reflect positive market sentiment. Sights are on the psychological 5000.00 handle. Clearance of this level would strengthen the bullish condition. On the downside, initial firm support lies at 4867.30, the 20-day EMA.
• The trend condition in S&P E-Minis remains bullish and the contract remains closer to its recent highs. Fresh cycle highs reinforce current conditions and note that price action continues to highlight the fact that corrections remain shallow. This is an important bullish signal, reflecting positive market sentiment. Support to watch is 5168.27 the 20-day EMA. A clear break of this average would open 5057.80, the 50-day EMA. Sights are on 5300.00 next.

COMMODITIES: WTI Futures Trading Near Monday's Cycle Highs

• WTI futures have started this week on a bullish note, trading higher once again, yesterday. Last week’s gains resulted in a break of $79.87, Mar 1 high. The move higher confirms a resumption of the uptrend that has been in place since mid-December last year. Sights are on $83.87 next, the Oct 20 ‘23 high. A break of this level would open $84.87, the Sep 15 ‘23 high and a key resistance On the downside, support to watch is $78.44, the 20-day EMA.
• The trend condition in Gold is bullish and the latest pullback is considered corrective and appears to be a bull flag - a continuation pattern. The yellow metal recently cleared $2135.4, the Dec 4 high, to deliver a fresh all-time cycle high. The break reinforces bullish conditions and opens $2206.6, a Fibonacci projection. S/T conditions are overbought, a deeper retracement would allow this set-up to unwind. Firm support is $2117.4, the 20-day EMA.