MNI US MARKETS ANALYSIS - CAD Replaces JPY as Poorest G10 Performer

US TSYS: Modest Bull Steepening Ahead Of Minimal Docket

• Cash Tsys have pulled back off yesterday’s late lows with a modest bull steepening amidst a light European docket heading towards an equally light US docket. The steepening sees 2s10s climb off recent multi-decade lows, currently at -79bps.
• 2YY -2.7bps at 4.360%, 5YY -1.6bps at 3.762%, 10YY -0.9bps at 3.564% and 30YY -0.9bps at 3.575%.
• TYH3 trades 6+ ticks higher at 114-02 with below average volumes. It’s off overnight and yesterday’s low of 113-25 but initial technical levels remain defined by Friday’s post-payrolls ranges of 113-21+ and 114-28+ (the bull trigger).
• A very light docket, with international trade for Oct the only data release, the Fed in media blackout and no issuance.

STIR FUTURES: Fed Rate Path Consolidates 5% Terminal

• Fed Funds implied hikes have consolidated yesterday’s rise, spurred on by the beat for ISM services which helped continue a post-payrolls bounce.
• 51bp for Dec, a cumulative 90bp to 4.74% for Feb’23 (4.68% pre-payrolls), a terminal 5.0% for May’23 and 4.56% for Dec’23.
• The terminal has lifted off a pre-payrolls low of 4.84% but remains below the pre-Powell high of 5.06%.

FOMC-dated Fed Funds implied ratesSource: Bloomberg

EUROPE ISSUANCE UPDATE:

Gilt auction results

• GBP3.25bln of the 4.125% Jan-27 Gilt. Avg yield 3.472% (bid-to-cover 2.2x, tail 0.5bp)
• GBP2.25bln of the 1.125% Jan-39 Gilt. Avg yield 3.514% (bid-to-cover 2.35x, tail 0.2bp).

German auction result

• E5bln (E4.015bln allotted) of the 2.20% Dec-24 Schatz. Avg yield 2.11% (bid-to-cover 1.4x).

• The EU has mandated banks for its upcoming EUR Fixed Rate RegS Bearer dual tranche transaction, comprising a new 15yr €6.548bn (no grow) benchmark due 4 Dec. 2037 under its SURE Social Bond Framework and a €500mn (no grow) tap of the existing 2.5% benchmark due 4 Oct. 2052 for its MFA financing programme. No further group."
• "The transaction will be launched tomorrow, subject to market conditions"

HUNGARY: Hungary Vetoes EUR18bn Aid To Ukraine, All 26 Other Member States In Favour

Confirmation from the ECOFIN meeting of EU finance ministers that Hungary has vetoed the planned EUR18bn in financial assistance to Ukraine, despite all 26 other member states voting in favour of the package.

• The Hungarian gov't has given its official reasoning behind the veto as it would prefer bilateral support packages to be made with Kyiv.
• However, many observers have seen the veto as an attempt to force the EU's hand in not withholding EUR7.5bn in cohesion funding from Budapest for breaches of EU rule of law standards by the gov't of PM Viktor Orban.
• Czech Finance Minister Zbyněk Stanjura stated "Our ambition remains to start disbursement of aid to Ukraine in early January,” and that the EU would 'examine alternative solutions supported by 26 [member states].'
• The veto on aid, as well as on a minimum corporate tax rate, could see EU member states back down in their stance on withholding cohesion funding from Hungary, with some signs that France, Germany and Eastern EU members are seeking to allow Budapest a portion of the funds for having met some but not all EU demands on rule of law.
• Alternatively, it could see member states double down on the Commission and European Parliament's recommendation of a withholding of funds, as they do not want to be seen to be giving in to Hungarian 'blackmail' on the issue. A decision must be made by 19 December or the funds will be dispersed.

FOREX: CAD Replaces JPY as Poorest Performer in G10

• CAD has taken the place of the JPY as the session's poorest performer, slipping ahead of the Bank of Canada rate decision due on Wednesday. The Bank are expected to raise rates by a further 50bps to 4.25% at tomorrow's decision, but markets are instead focusing on the weaker oil price and more negative risk backdrop, as US futures point to no real relief rally for equities after yesterday's sharp decline.
• The corrective rally in USD/JPY extended overnight, putting the pair at 137.42 before fading slightly into NY hours. Any extension higher would open 139.68, the 20-day EMA. This average is seen as the first key short-term resistance. On the downside, the bear trigger is 133.63, the Dec 2 low.
• Little option influence at current JPY prices for today's cut, with few nearby expiries to drag spot in either direction - nonetheless, the pipeline for this week is tilted higher, with between $8 - 9bln notional due to roll off between Y140.00 and Y143.00 into Friday's 10am NY cut that may be exerting an influence.
• Risk reversals look to have bottomed out, supporting a corrective bump higher in spot for now, with the 1m contract rising well above the intervention-inspired lows this year in September and October.
• AUD outperforms following the RBA rate decision, at which the bank raised rates alongside expectations but also signaled further tightening is to come in 2023.
• There are no central bank speakers due Tuesday, with only tier 2 data on the docket, as US and Canadian trade balance data cross ahead of the Wall Street opening bell.

FX OPTIONS: Expiries for Dec06 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0415-35(E1.6bln), $1.0550(E787mln), $1.0575-00(E746mln)
• USD/JPY: Y140.00($1.7bln), Y143.00($1.5bln)
• GBP/USD: $1.1780-00(Gbp707mln)
• AUD/USD: $0.6800-20(A$1.1bln), $0.6875-00(A$1.7bln)
• NZD/USD: $0.6370(N$587mln)
• USD/CAD: C$1.3380($1.3bln)
• USD/CNY: Cny7.0000($1.3bln)

BONDS: Bunds Higher After Initial Weakness

• After reaching their lowest level of the month following German factory orders data this morning, Bund futures have reversed course and are now around 60 ticks off their intraday lows, back within yesterday's trading range. Gilts and Treasuries are little changed on the day.
• We have seen the first of two gilt auctions and a Schatz auction this morning. This afternoon's BOE Financial Stability Portfolio sales will only see linkers on offer due to the DMO's long-dated conventional gilt auction.
• TY1 futures are up 0-5+ today at 114-01 with 10y UST yields down -0.2bp at 3.574% and 2y yields down -2.1bp at 4.368%.
• Bund futures are up 0.23 today at 142.00 with 10y Bund yields down -1.4bp at 1.863% and Schatz yields unch at 2.057%.
• Gilt futures are up 0.09 today at 106.22 with 10y yields down -0.5bp at 3.094% and 2y yields down -4.8bp at 3.234%.