MNI US MARKETS ANALYSIS - CPI Primed for ‘Low’ 0.2% M/M Print

Highlights:

• US Presidential debate not as decisive as Trump/Biden, but moves the needle in Harris' direction.
• There is almost no reasonable outcome from the US CPI data to prevent the FOMC from cutting next week – but the result could be a market mover given lingering hopes of a 50bp cut.
• Yield differentials underpin JPY strength with the front-end US-JP spread at +319bps, levels last seen in August 2022.

US TSYS: Off Highs With US Filtering In, CPI in Focus

• Treasuries have pulled back from highs with US desks filtering in. Earlier gains faded a rally in oil and industrial metals after yesterday’s heavy declines and some saw the price action as a sign of the presidential debate favoring VP and Democratic nominee Harris over former President Trump.
• Cash yields sit 1-2.5bp lower, with declines led by the long end.
• 2Y yields have shifted higher after lows since Sep 2022 with 3.546% (currently 3.581%). 2s10s sits at 4.2bps (-1bps on the day).
• TYZ4 sits at 115-18+ (+04) off a latest high of 115-23+ on elevated volumes of 450k.
• The trend needle continues to point north. It has climbed through the bull trigger at 115-19 (Aug 5 high) to open 115-31 (Fibo projection of Aug 8-21-Sep 3 swings).
• Data: Weekly MBA mortgage data (0700ET), CPI Aug (0830ET), Real average earnings Aug (0830ET)
• Note/bond issuance: US Tsy $39B 10Y Note re-open auction - 91282CLF6 (1300ET)
• Bill issuance: US Tsy $60B 17W bill auction (1130ET)

US TSYS/STIR: Market Positioning Feels Long Into CPI

Positioning in both Tsy and SOFR futures remains long, leaving the risk to market positioning being titled towards a ‘hawkish’ round of CPI data.

• SOFR options activity further corroborates this view.
• While Friday’s NFP data drove some profit taking in both the Tsy and SOFR markets, longs have started to rebuild this week.
• Elsewhere, it is also worth noting that the latest J.P.Morgan Tsy client survey points to an uptick in cash Tsy longs
• Finally, market pricing continues to look aggressive when compared to recent Fedspeak and our DC policy team’s work, which has generally pointed to a preference for a more gradualist approach.
• 32bp of cuts are priced for next week’s FOMC, with just under 115bp of cuts priced through year end.

US STIR: More Than 110bps of Fed Cuts Priced to Year End

• Fed Funds implied rates are off overnight lows but hold the bulk of yesterday’s decline on broader growth concerns rather than any specific headlines.
• Latest changes on the day are mixed, with Sep and Dec meetings 0.5-1bp higher but otherwise up to 1.5bp lower out to June.
• Cumulative cuts: 32bp Sep, 72bp Nov, 113bp Dec, 153bp Jan and 229bp June.
• As such, ahead of today’s CPI release, the Fed is seen as more likely to start its cutting cycle with 25bp rather than 50bp but the following three meetings all see significant odds of 50bp cuts with steps of 40/41/39bps. 

MNI US CPI PREVIEW: Potential Tiebreaker for 25bp vs 50bp Cut

Consensus sees core CPI at 0.2% M/M in August after a slightly softer than expected 0.165% M/M in July. MNI’s survey of analysts, including multiple unrounded estimates, suggests it is firmly centered at 0.20%.

• Headline CPI is primed for a ‘low’ 0.2% M/M reading but note an almost even split between 2.5/2.6% Y/Y reading which could easily drive what appears a beat for the 2.5 Bloomberg consensus.
• We expect rental inflation and especially the smaller weighted primary tenants’ rent category to play a particularly big role this month, with analysts looking for an almost full reversal of last month’s surprise strength. We feel there could be some upside risk here.
• Analyst estimates look for CPI core services ex-housing between 0.20-0.35% M/M, i.e. at the very least matching or accelerating from the 0.21% M/M in July, but with CPI-specific categories again of prominence.
• There is almost no reasonable outcome from the CPI data to prevent the FOMC from cutting next week – but the result could be a market mover either way given lingering hopes of a 50bp cut. The default FOMC position is seen as a 25bp cut unless CPI leaves the door open to 50bp. An in-line figure would likely see implied September rates shift further toward 25bp from 32bp at typing.
• Landing in the FOMC’s blackout period, a weak report that seriously increases odds of a 50bp cut will see markets on tenterhooks for an unofficial blackout period steer, a la WSJ in June 2022 tipping a 75bp (as opposed to 50bp expected to pre-blackout) hike.
• Full report here.

POLITICAL RISK: Debate Not Decisive as Trump/Biden, But Moves Needle in Harris' Direction

MNI ECB PREVIEW: September Cut, October Pause

UK DATA: No Growth for UK in July as Economy Flatlines

• The UK economy saw no growth in July for a second straight month, the Office for National Statistics said Wednesday, although GDP is standing 1.2% higher than in the same month a year ago.
• It was the second straight month of flat growth, but the rolling three-month quarter to July saw the economy expand by 0.5% on the three months to April. The ONS could make no inference as to whether the data was impacted by the early July election, with returns from stakeholders coming in across the month.
• Services rose 0.1% in the month, while industrial production fell by 0.8% m/m and construction declined 0.4%. The data is at the softer-end of Bank of England expectations, but is unlikely to sway the September policy decision next week.
• “Longer-term strength in the services sector meant there was growth over the last three months as a whole," ONS Director of Economic Statistics Liz McKeown said.

MNI UK LABOUR MARKET INSIGHT: September 2024 Release

• This week’s labour market was broadly in line with expectations while the activity data was disappointing across the board. Overall we think that these data will have little impact on any MPC member at the September meeting but we think the data will help to cement a November cut and increase the probability of a December cut (with that reaction broadly reflected in market pricing).
• We continue to think that the most important part of the labour market report is the private regular wage growth. We look at this in more detail - on both yearly, momentum and the single month metrics.
• We also look at other aspects of the labour market report such as the unemployment rate, economic activity rates and the claimant count.
• Furthermore, we look at this morning's July monthly activity release.
• Our analysis is complemented by a roundup of sellside views.
• For the full document please see here.

EUROPEAN ISSUANCE UPDATE

UK Auction Review:

• A wide tail on the 10-year gilt auction with the lowest bid-to-cover at a 10-year auction of 2024.
• The 1.3bp tail is also the widest at a conventional (non-green) gilt 10-year gilt auction since December 2021.
• The 4.25% Jul-34 gilt is now trading below the pre-auction mid-price with the yield around 1bp higher than the intraday low.
• Gilt futures fell around 5 ticks on the result (but that is a small move relative to the rest of the day.
• GBP3.75bln of the 4.25% Jul-34 Gilt. Avg yield 3.757% (bid-to-cover 2.84x, tail 1.3bp).

German Auction Review:

• E4.5bln (E3.688bln allotted) of the 2.60% Aug-34 Bund. Avg yield 2.11% (bid-to-offer 1.74x; bid-to-cover 2.12x).

FOREX: EURJPY Bear Cycle Extends Ahead of US Data and ECB

• While USDJPY has broken a notable support point overnight and printed fresh lows for 2024, EURJPY is yet to breach the lows seen in early August, a level that could take focus over the upcoming US data and ECB meeting on Thursday.
• As noted earlier, yield differentials with Japan continue to narrow and this is helping to underpin the bearish theme in EURJPY, which has been exacerbated by not only the weakness for major equity indices in early September, but also the fact that a pick-up in Eurozone growth is yet to materialize, being held back by restrained fixed investment and declining fiscal stimulus.
• EURJPY trades 0.35% lower today as the bear cycle that started mid-August extends. All key retracement points of the rally between Aug 5 - 15, have been cleared and this exposes the key support and bear trigger at 154.42, the Aug 5 low.
• Furthermore, there remains a cluster of support between 153.49-154.42 (shown below) and a close below the former would significantly strengthen bearish conditions. Pivot support at 151.69 remains a notable target for a deeper correction lower.
• On the upside, initial firm resistance is not seen until 160.14, the 20-day EMA and short-term gains at this juncture would continue to be considered technically corrective.

FOREX: JPY Volatility in Firm Focus as US Inflation Data Approaches

• Despite USDJPY extending its recovery off the lows to roughly 100 pips, the pair remains 0.6% lower on the session amid the extended decline for core yields on Wednesday. Heightened volatility following last night’s US presidential debate is evident by JPY futures volumes roughly 40% above average for midway through the European morning.
• Adding to the most recent theme of yen strength, BoJ board member Junko Nakagawa reiterated overnight that the BoJ will adjust the degree of easy policy if the economy realises the bank’s forecast for the economy and prices as real interest rates remain at considerably low levels. Yield differentials are underpinning the moves with US-JP lower at the front, the spread at +319bps, levels last seen in August 2022.
• Ahead of the significant US CPI release, downside focus will remain on intra-day lows of 140.71 and then 140.25, the Dec 28 low from last year and key support. Resistance is not seen until 143.71, the Sep 9 high.
• Worth noting that MXNJPY briefly extended the year’s range to or 26% as the cross slipped below 7.00, and the lowest level since March 2023 as the Morena party’s judicial reform plan makes further progress through congress.
• The greenback is underperforming the broader G10 basket, although adjustments across other major pairs remain contained ahead of the data. EUR, AUD and CAD are between 0.15-0.20% higher, whereas NZD underperforms at the margin.
• US CPI up next where consensus sees core CPI at 0.2% M/M in August after a slightly softer than expected 0.165% M/M in July.

EQUITIES: Eurostoxx 50 Futures Remain Below 20- and 50-Day EMAs

• Eurostoxx 50 futures traded lower last week and a bearish tone - a correction - remains intact for now. The latest move down has resulted in a break of both the 20- and 50-day EMAs. Last Friday’s sharp sell-off signals scope for an extension lower and sights are on 4686.53, a Fibonacci retracement point.  Initial key short-term resistance has been defined at 4998.00, the Sep 3 high. First resistance is at 4872.22, the 50-day EMA.
• Recent weakness in S&P E-Minis highlighted the start of a corrective cycle. The contract remains in a bear-mode condition, despite this week’s gains, and scope is seen for a deeper retracement near-term. An extension lower would open 5330.00, 61.8% retracement of the Aug 5 - Sep 3 bull leg. Key resistance has been defined at 5669.75, the Sep 3 high. Initial firm resistance to watch is 5535.19, the 20-day EMA.

COMMODITIES: Tuesday's Sell-Off Reinforces Bearish Theme for WTI Futures

• WTI futures remain in a bearish condition. Tuesday’s strong sell-off reinforces current conditions and confirms an extension of the bear cycle. This also maintains the price sequence of lower lows and lower highs. A continuation lower would open $63.93 next, a Fibonacci projection point, ahead of the psychological $60.00 handle. Short-term gains would be considered corrective. Firm resistance is at $72.01, the 20-day EMA. 
• Gold continues to trade inside a range but remains closer to its recent highs. The trend condition is unchanged and the primary direction remains up. Note too that moving average studies are in a bull-mode set-up, highlighting a dominant uptrend. Sights are on $2536.4 next, a Fibonacci projection. The 20-day EMA has recently been pierced. The next firm support to watch is $2451.0, the 50-day EMA. Short-term weakness is considered corrective.

MNI (LONDON)

Date	GMT/Local	Impact	Country	Event
11/09/2024	1230/0830	***	US	CPI
11/09/2024	1230/0830	*	CA	Intl Investment Position
11/09/2024	1400/1000	*	US	Services Revenues
11/09/2024	1400/1000		US	MNI Connect Video Conference on ‘Fed Balance Sheet – Comparison with Other Central Banks’
11/09/2024	1430/1030	**	US	DOE Weekly Crude Oil Stocks
11/09/2024	1700/1300	**	US	US Note 10 Year Treasury Auction Result
12/09/2024	-		EU	European Central Bank Meeting
12/09/2024	0600/0800	***	SE	Inflation Report
12/09/2024	0700/0900	***	ES	HICP (f)
12/09/2024	1000/1100	**	GB	Gilt Outright Auction Result
12/09/2024	-		GB	OBR Fiscal Risks and Sustainability Report
12/09/2024	1215/1415	***	EU	ECB Deposit Rate
12/09/2024	1215/1415	***	EU	ECB Main Refi Rate
12/09/2024	1215/1415	***	EU	ECB Marginal Lending Rate
12/09/2024	1230/0830	***	US	Jobless Claims
12/09/2024	1230/0830	**	US	WASDE Weekly Import/Export
12/09/2024	1230/0830	***	US	PPI
12/09/2024	1230/0830	*	CA	Building Permits
12/09/2024	1230/0830	*	CA	Household debt-to-income
12/09/2024	1245/1445		EU	ECB Monetary Policy Press Conference
12/09/2024	1345/1545		EU	Eurosystem staff macroeconomic projections publications
12/09/2024	1415/1615		EU	ECB Podcast: Lagarde presents the latest monetary policy decisions
12/09/2024	1430/1030	**	US	Natural Gas Stocks
12/09/2024	1530/1130	*	US	US Bill 08 Week Treasury Auction Result
12/09/2024	1530/1130	**	US	US Bill 04 Week Treasury Auction Result
12/09/2024	1600/1200	***	US	USDA Crop Estimates - WASDE
12/09/2024	1700/1300	***	US	US Treasury Auction Result for 30 Year Bond
12/09/2024	1800/1400	**	US	Treasury Budget