MNI US MARKETS ANALYSIS - Corrective Pullback in USD Persists

US TYS: Recent Rally Extends Ahead Of PCE, MNI Chicago PMI and Williams Text

• Cash Tsys have extended yesterday’s rally, with gains spilling over from Eurozone inflation progress. It sees benchmarks 2.5-4bps richer with the wings slightly underperforming.
• TYZ3 trades 11+ ticks higher at 108-07 having mostly plateaued in the 04-08 range after the rally earlier in European hours. Volumes are strong having already cleared 400k.
• The high of 108-08+ remained below resistance at 108-17 (Sep 27 low) in what’s deemed a corrective recovery, with support at 107-05+ (1.382 proj of Jul 18 – Aug 4 – Aug 10 price swing).
• It comes ahead of a solid US session including monthly core PCE (seen at 0.2% M/M in August after some upward revisions skewed more heavily back in 2022), the MNI Chicago PMI and finalized U.Mich survey. It’s followed by text-only remarks from NY Fed’s Williams at 1245ET.

STIR FUTURES: Fed Rate Path Drifts Lower On Softer Eurozone Inflation

• Fed Funds implied rates have drifted further lower overnight, extending yesterday’s larger decline from a combination of a dovish leaning Barkin after the close before more earnestly a slowing in Eurozone inflation. It sees the end-2024 implied rate now just 2.5bp above pre-FOMC levels.
• Cumulative hikes from 5.33% effective: +4.5bp Nov (-0.5bp), +9.5bp Dec (-0.5bp) and +9.5bp Jan (-0.5bp) with the terminal tied at 5.42%.
• Cuts from terminal: 24bp to Jun’24 (from 23.5bp) and 82bp to Dec’24 (from 80bp).
• Barkin (’24 voter): it’s hard to know where demand and inflation are heading but more tightening is to come from past rate hikes.
• Today’s sole scheduled Fedspeak comes from NY Fed’s Williams (voter) although it will be text-only at 1245ET owing to a personal matter. It will be his first remarks since last week’s FOMC, having said on Sep 7 that labor supply & demand is becoming more balanced and that underlying inflation measures have come down quite a bit whilst he is still focused on core services inflation progress.

FOREX: Greenback Falters Further, Death Cross Forms in EUR/USD

• Greenback comfortably the poorest performer in G10 early Friday, helping tip EUR/USD back above 1.06 and extend the short-term corrective recovery. Markets have shown back above the Tuesday high of 1.0609, opening 1.0657 as the next upside level.
• The fading USD has allowed the technically oversold condition in EUR/USD and GBP/USD to fully reverse - suggesting this USD dip could be corrective in nature at these levels. Yesterday's close secured a 'death cross' in EUR/USD (50-dma falling bellow 200-dma), the first since mid-2021, and shows near-term momentum clearly pointed lower in the pair. Worth recalling the majority of sell-side month-end FX rebalancing models all pointed to USD buying into the month-end fix, so markets may be wary heading into US hours of underlying USD demand.
• Eurozone flash inflation came in below consensus expectations in September at an unrounded 4.344% Y/Y (vs. 5.2% prior; 4.5% cons). This was the lowest headline print since October 2021, but left little impact on the EUR, which remains staunchly mid-table. AUD, NZD and NOK are outperforming, while JPY and USD remain the poorest performers.
• Data Friday includes August US trade balance numbers, personal income/spending and the latest PCE data. The MNI Chicago PMI is expected to deteriorate to 47.6 from 48.7 previously, just ahead of the final September University of Michigan sentiment release. Speakers include Fed's Williams, who rounds off the week with a speech on monetary policy.

FX OPTIONS: Expiries for Sep29 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0500(E1.7bln), $1.0570-75(E944mln), $1.0600(E3.0bln), $1.0650(E1.3bln)
• USD/JPY: Y146.95-00($1.4bln), Y149.00-15($1.1bln)
• GBP/USD: $1.2400(Gbp590mln)
• EUR/GBP: Gbp0.8640(E770mln)
• AUD/USD: $0.6380(A$503mln), $0.6500(A$659mln), $0.6600(A$550mln)
• USD/CAD: C$1.3500($729mln), C$1.3510-15($610mln)
• USD/CNY: Cny7.3000($1.3bln), Cny7.3100($1.1bln)

BONDS: Euro Inflation Progress Helps Bunds Lead Global Core Rally

Global core FI has rallied with European outperformance focused on curve bellies in morning trade Friday.

• With more preliminary data out this morning showing convincing progress on eurozone inflation in September (the slowdown in Euro core HICP to 4.5% vs 4.8% consensus particularly noteworthy), Germany is leading the rally, with 5Y-10Y yields down 8+bp, pulling back from multi-year highs set Thursday.
• Gilts have underperformed Bunds; 5Y yields are outperforming on the UK curve, down 5+bp.
• US Tsys have leaned bull flatter, with 10Y yields down around 4bp.
• Periphery EGB spreads have narrowed on a more constructive global risk atmosphere than seen earlier in the week, with the USD fading and equities higher.
• Earlier, JGBs spiked higher on an unscheduled BOJ bond purchase, but the move quickly reversed.
• Attention for the rest of the session is on month- and quarter-end dynamics, with a solid US data slate including August PCE, final UMich sentiment, inventories, trade balance, and of course, September MNI Chicago PMI.

EQUITIES: Latest Bounce in Eurostoxx 50 Futures Considered Corrective

• Eurostoxx 50 futures maintain a softer tone and the latest bounce is considered corrective. This week’s extension reinforces current conditions and key support at 4210.00, the Sep 8 low, has been breached. The clear break confirms a resumption of the downtrend that started late July and opens 4109.90, a Fibonacci projection. Key short-term resistance has been defined at 4359.00, the Sep 15 high.
• A bear cycle in S&P E-minis remains in play and the contract traded lower this week, extending the current downleg. The recent break of support at 4397.75, the Aug 18 low, reinforced bearish conditions and signals scope for a continuation lower. Sights are on 4242.15, a Fibonacci retracement point. Initial firm resistance is 4472.85, the 50-day EMA. Short-term gains are considered corrective.

COMMODITIES: Gold Sell-Off This Week Reinforces Bearish Conditions

• The uptrend in WTI futures remains intact and this week’s recovery has confirmed a resumption of the trend - resistance at $92.43, Sep 19 high, has been cleared. This maintains the bullish price sequence of higher highs and higher lows and note that moving average studies are in a bull-mode position, reflecting the market's positive sentiment. Sights are on $97.08 next, a Fibonacci projection. Key support has been defined at $88.19, the Sep 2 low.
• Gold sold off sharply this week, reinforcing bearish conditions. The move lower has resulted in a break of support at $1901.10 and this has been followed by a move through $1884.9, the Aug 21 low. A resumption of the downtrend that started off the early May high has been confirmed. Attention turns to $1839.0, a Fibonacci retracement point. On the upside, initial firm resistance is at yesterday’s high of $1903.9.