MNI US MARKETS ANALYSIS - Bonds Regain Ground As Stocks Sink

US TSYS: Bull Flatter On Decent Volumes Ahead Of Barren Docket

• Cash Tsys trade bull flatter with potential drivers from China growth concerns and softer than expected UK retail sales. 10Y yields have now dipped 10bps from yesterday’s high of 4.3256% that came with 1bp of the highest since 2008, and the flattening on the day sees 2s10s pull back 3.5bps to -68bps off yesterday’s lowest level of inversion since May.
• Flow/headlines is likely to shape proceedings today with an exceptionally light docket ahead, with no data (Bloomberg analyst survey aside), no scheduled Fedspeak and no Treasury issuance.
• 2YY -2.5bp at 4.904%, 5YY -5.5bp at 4.353%, 10YY -5.3bp at 4.221% and 30YY -4.2bp at 4.345%.
• TYU3 trades 18+ ticks higher at 109-27+ close to an earlier high of 109-28+, again on above average volumes nearing 310k. The bounce is considered corrective as it lifts towards 110-07 (Aug 15 high) off support at 109-03 (Aug 17 low).

STIR: Fed Implied Rates Continue Drift Lower

• Fed Funds implied rates have on balance continued a decline that started late in yesterday’s session on at the time limited new drivers, more recently potentially linked to concerns over the Chinese economy as authorities have stepped up efforts to stabilize markets per Bloomberg reports.
• Cumulative hikes from 5.33% effective: +2.5bp Sep (unch), +9bp Nov to 5.42% terminal (-0.5bp)
• Cuts from Nov terminal: 3bp to Dec’23, 52bp to Jun’24 and 118bp to Dec’24. The latter slowly builds from 116bp at yesterday’s close and 112bp on Wed at what was the lowest close post the July FOMC.
• Still no scheduled Fedspeak for today, next up Goolsbee on Tue (Aug 22) before Jackson Hole with Powell now set for 1005ET on Fri (Aug 25)

UK DATA: Retail Sales disappointing but unlikely to alter MPC's reaction

• UK JUL RETAIL SALES -1.2% M/M, -3.2% Y/Y / EX-FUEL -1.4% M/M, -3.4% Y/Y
• The ONS notes that wet weather impacted sales - the wettest July since 2009 and the sixth wettest on record. And this also led to the highest proportion of online sales since February 2022.
• It is a disappointing print and there were also some minor downward revisions to prior months - but the UK retail sales data is very volatile so this is unlikely to have much impact on the MPC's reaction in September. Labour / inflation data remain much more important.
• GBPUSD initially dipped just under 20 pips on the release (but had moved around 10 pips higher just ahead of the release.

EUROZONE DATA: HICP data largely unrevised; M/M services print a tenth lower than flash

• The final print of Eurozone HICP was unrevised from the flash print at 5.3%Y/Y while core CPI was also unrevised at 5.5%Y/Y.
• The main components of the Y/Y data were all unrevised from the flash but there were some small revisions to the M/M prints: services inflation rose +1.3%M/M (flash +1.4%M/M), energy -0.2%M/M (flash -0.3%M/M) and food, alcohol and tobacco increase +0.1%M/M (flash 0.2%M/M).
• The continued rise in services inflation remains a concern for the ECB - it has risen from +4.8%Y/Y in February 2023 to +5.6%Y/Y in July.
• The other broad categories of inflation continue to show improvement. The Y/Y changes for food and non-energy industrial goods continue to come off their highs while energy is a drag on headline inflation at -6.1%Y/Y in July.

FOREX: GBP Softens Following Weak UK Retail Sales, USDCNH Recovers

• GBP has traded on a softer note since the weaker set of July retail sales data. Cable remains around 0.2% lower on the session but has yet to test Thursday’s low print of 1.2703. The trend direction for GBPUSD remains down with the Aug 14 low of 1.2621 marking the short-term bear trigger.
• GBPJPY was the early notable mover, registering losses of 0.60% at its lowest point, having snapped an eight-day winning streak on Thursday. However, the pair has since bounced back above the 185 handle and remains just moderately lower on the session.
• Early JPY strength was a key feature of the session, amid weakness across European equity markets. USDJPY fell just shy of testing the initial support which lies between 145.07-11, a key pivotal area that after breaking earlier this week, provoked an impressive rally to yesterday’s 146.56 high print.
• Since then, a general bid for the greenback has seen USDJPY bounce around 45 pips to 145.60 as of typing, reinforcing the technical uptrend that remains intact, with short-term pullbacks considered corrective at this juncture. Topside focus is on 147.49, a Fibonacci projection.
• Coinciding with the stronger dollar, USDCNH has extended its recovery from the overnight lows of 7.2825, now trading in positive territory above 7.31. This follows China delivering its strongest ever pushback against a weaker yuan via its daily reference rate for the managed currency, as it seeks to restore confidence to a market spooked by disappointing data and heightened credit risks.
• There was no reaction to the final Eurozone data which were in line with expectations for unchanged main aggregate measures. September ECB hike pricing steady at 13bp and the general greenback bid in recent trade sees EURUSD hover at session lows of 1.0864. There are no further major data releases this week.

FX OPTIONS

• EUR/USD: $1.0850(E1.3bln), $1.0900(E1.4bln), $1.0925(E701mln), $1.1000(E1.0bln), $1.1100(E1.1bln)
• USD/JPY: Y145.00($832mln)
• GBP/USD: $1.2700(Gbp637mln), $1.2785-00(Gbp557mln)
• USD/CAD: C$1.3550($590mln)

EQUITIES: Bear Cycle In S&P E-Minis Remains In Play

• A bearish theme in the E-mini S&P contract remains intact and yesterday’s move lower reinforces this theme. This week’s bearish price action has resulted in a break of the 50-day EMA and the contract has breached channel support drawn from the Mar 13 low. The clear breakout signals scope for a continuation lower and opens 4368.50 next, the Jun 26 low. Initial firm resistance to watch is at the 50-day EMA - at 4459.03.
• A bearish theme in EUROSTOXX 50 futures remains present and this week’s sell-off reinforces current conditions. The contract has breached support at 4276.00, the Aug 8 and 15 low. Today’s extension lower has resulted in a break of 4220.00, the Jul 7 low. This opens 4177.40, 61.8% of the Mar 20 - Jul 31 bull leg. Key short-term resistance is unchanged at 4420.00, the Aug 10 high. Initial firm resistance is 4353.20, the 50-day EMA.

COMMODITIES: Gold Remains Close to Thursday's Multi-Month Lows

The uptrend in WTI futures remains intact and the latest pullback appears to be a correction. Firm support to watch lies at $78.69, the Aug 3 low. A clear break of this level would signal scope for a deeper short-term retracement. For bulls, a resumption of gains would refocus attention on the next objective at $87.43, a Fibonacci projection. Moving average studies are in bull-mode condition, highlighting an uptrend. Gold remains bearish and this week’s move lower has reinforced current conditions. Price has breached key support at $1893.1, the Jun 29 low. The clear break strengthens bearish conditions and signals scope for $1865.8, a Fibonacci retracement. Moving average studies remain in bear mode condition, highlighting current bearish sentiment. On the upside, initial firm resistance to watch is $1937.6, the 50-day EMA.