MNI US MARKETS ANALYSIS - Dovish Inflation Read Could Prove Consequential

US TSYS:  Narrow Ranges Before US CPI; 10Y Supply and FOMC Minutes Also Eyed

• Cash Tsy yields sit between unchanged to 0.5bps lower, holding tight ranges ahead of US CPI in a consolidation of yesterday’s rally.
• TYM4 is currently at 109-21+ (+ 01) having kept to particularly narrow 109-19+ to 109-23 so far. Cumulative volumes are unsurprisingly below average at 235k, a change from some heavy overnight sessions in recent days.
• Resistance is seen at 110-06 (Apr 4 high) but gains are considered corrective with support at the round 109-00 before 108-25+ (Fibo projection).
• CPI clearly headlines today’s docket (preview here) before 10Y supply and then the FOMC minutes. 10Y supply offers a look at the longer end after yesterday’s poorly received 3Y auction.
• Data: Weekly MBA mortgage data (0700ET), CPI Mar (0830ET), Real earnings Mar (0830ET), Monthly budget statement Mar (1400ET)
• Fedspeak: Bowman on Basel capital requirements (0845ET), Goolsbee & Barkin in full employment discussion (1245ET), FOMC minutes (1400ET)
• Note/bond issuance: US Tsy $39B 10Y Note auction re-open (91282CJZ5) – 1300ET
• Bill issuance: US Tsy $60B 17W Bill auction – 1130ET

STIR: Fed Rate Path Consolidates Yesterday’s Decline Ahead of CPI

• Fed Funds implied rates consolidate yesterday’s decline with US CPI firmly eyed at 0830ET.
• Cumulative cuts from 5.33% effective: 1.5bp May, 15bp Jun, 25bp Jul, 41bp Sep and 67bp Dec.
• The latter touched recent lows of 61bp earlier in the week but remains more than 5bps below pre-payrolls levels and the FOMC median dot for 2024.
• Beyond CPI, focus will turn to FOMC commentary and the minutes from the March meeting in particular.
• 0845ET – A hawkish Gov Bowman (voter) speaks on Basel Capital requirements which should limit any mon pol discussion and it’s too close to CPI for her to offer any views on the latest data if (albeit unlikely) asked in Q&A.
• 1245ET – A dovish Goolsbee (’25) and hawkish leaning Barkin (’24) in a panel discussion on “Reimagining Full Employment”. Both have described Friday's jobs report as "quite strong"
• 1400ET – FOMC Minutes – we’ll have more to say on this nearer the time

MNI US CPI Preview: A Key Framing Of Trends With June Cut Seen As A Coin Toss

EXECUTIVE SUMMARY

• Consensus puts core CPI inflation at 0.3% M/M in March with some skew towards a ‘low’ 0.3 reading.
• Most of the usual drivers are seen exerting downward pressure after a stronger than expected 0.36% M/M in Feb, most notably used car prices after their surprise increase.
• OER inflation will again be watched as methodological-related noise remains top of mind, markets will likely be sensitive to supercore inflation after two particularly strong prints, and we watch for latest supply side effects across core goods categories.
• With the central leadership of the FOMC seemingly looking through near-term "bumps" and eyeing reasons to proceed with rate cuts, a softer-than-expected March core CPI reading (below 0.27% M/M, particularly if it translates cleanly to PCE) would likely re-center implied 2024 cut pricing back toward the March Dot Plot's base case 75bp (from around 63bp at the time of writing) and nudge up June pricing from around 50% currently to 60-65%.

PLEASE FIND THE FULL REPORT HERE:

USCPIPrevApr2024.pdf

TSYS: OI Points To Short Cover Dominating On Tuesday

The combination of yesterday’s rally across the curve and preliminary OI data points to net short cover as the dominant positioning factor on Tuesday, with only light pockets of apparent net long setting in TU & UXY futures breaking the trend.

• The existing short positioning bias in Tsy futures (although some of that will be basis-linked) and yield levels/Fed pricing will have promoted an extension of yesterday’s moves, with proximity to today’s CPI release also factoring in.

STIR: OI Suggests SOFR Long Setting Dominated On Tuesday, Led By Record Sized Block In SFRZ4

The combination of yesterday’s modest recovery in core global FI markets and preliminary OI data points to net long setting as the dominant positioning factor through the blues in SOFR futures.

• A more granular look reveals that the net long setting in the white pack was driven by one contract, SFRZ4.
• That came on the back of a record sized 75K block trade in that contract, which was buyer initiated.

EUROPE ISSUANCE UPDATE:

UK Gilt auction results

• GBP4bln of the 3.75% Mar-27 Gilt. Avg yield 4.204% (bid-to-cover 3.68x, tail 0.3bp).

• E2.5bln (E2.009bln allotted) of the 2.60% May-41 Bund. Avg yield 2.54% (bid-to-offer 1.28x; bid-to-cover 1.60x)

• E641mln of the 2.25% Apr-34 OT. Avg yield 2.937% (bid-to-cover 1.25x)
• E353mln of the 3.50% Jun-38 OT. Avg yield 3.227% (bid-to-cover 1.41x)
• E529mln of the 4.10% Feb-45 OT. Avg yield 3.433% (bid-to-cover 1.26x).

FOREX: NZD Firms on RBNZ, Tilting AUD/NZD Off Highs

• NZD trades firmer ahead of the NY crossover, with NZD/USD cresting at a recovery high of 0.6078 on the back of the unchanged RBNZ rate decision overnight. While the OCR was kept unchanged at 5.50% (alongside expectations), the stressing of the importance of anchored inflation expectations added a hawkish tilt to the statement, helping NZD outperform vs. broader G10.
• The USD Index has reverted back above the 50-dma support - a level tested during Tuesday trade, but not firmly broken. A soft CPI release today could put the level under pressure once more, crossing today at 103.965.
• Elsewhere, GBP trades better, with GBP/USD testing the 1.2700 handle at typing to keep pressure on the weekly recovery high of 1.2709 - first major resistance in the pair.
• JPY is among the weakest despite yesterday's report that the BoJ could upgrade their inflation view in light of recent pay settlements, keeping USD/JPY within striking distance of major resistance at the psychological Y152.00 level.
• US inflation data takes focus going forward, with markets expecting Y/Y CPI to tick higher to 3.4%, while ex-food and energy moderates to 3.7%. The Bank of Canada rate decision also crosses, at which markets expect no change to headline policy rates of 5.00%. The speaker schedule includes Fed's Bowman, Goolsbee and Barkin.

EUR: ECB, CPI Risk Underpins Surge in Vols to Multi-Month Highs

• Front-end EUR vols are bid early Wednesday, with overnight implied vols now capturing both the US CPI release today as well as the ECB rate decision and press conference on Thursday. Overnight vols above 13 points compare with average background vol of just over 5 points so far in 2024, suggesting a decent risk premium for the pair into Thursday's NY cut.
• We identify the hawkish risks as the press conference explicitly downplaying any commitment to a June rate cut, potentially via Lagarde stressing that a move is highly conditional and not guaranteed. Conversely, a downgrade in communications from “sufficiently long duration” and/or “sufficiently restrictive” with respect to policy rates could prove dovish for market prices.
• An ATM straddle struck for tomorrow's NY cut implies a break-even of ~60 pips for EUR/USD, meaning a hawkish meeting could bring resistance at 1.0943 into play, while a reversion low would open the Apr 05 low at 1.0791.
• Hedging flow for EURUSD since the beginning of the week has generally favoured upside protection, mirroring the ~80 pip recovery off NFP-inspired lows, with notable demand for 1.0900 and 1.0905 call strikes over the past three days.

FX OPTIONS: Expiries for Apr10 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0875(E869mln), $1.0895-00(E2.3bln)
• USD/JPY: Y149.00($700mln), Y149.50($607mln), Y151.00-20($638mln), Y151.50($816mln), Y151.90-10($609mln)
• GBP/USD: $1.2675(Gbp801mln)
• AUD/USD: $0.6645-55(A$2.1bln)
• USD/CAD: C$1.3720($864mln)
• USD/CNY: Cny7.2400($514mln), Cny7.2500($1.6bln)

EQUITIES: Primary Uptrend in Eurostoxx 50 Intact

• The trend condition in S&P E-Minis is unchanged and remains bullish. The recent move down highlights a short-term corrective cycle and last week's sell-off reinforces this condition. The contract has breached bull channel support drawn from the Jan 17 low.
• The primary uptrend in Eurostoxx 50 futures remains intact and recent weakness is considered corrective. The move down is allowing an overbought condition to unwind. The break of support around the 20-day EMA suggests potential for a deeper retracement.

COMMODITIES: Gold Bullish Price Sequence Persists to New Highs

• The trend condition in Gold remains bullish and the yellow metal is trading at this week’s highs. The move higher maintains the bullish price sequence of higher highs and higher lows and note that moving average studies are in a bull-mode condition, reflecting positive market sentiment.
• A bull theme in WTI futures remains intact and the latest pullback is considered corrective. Last week’s rally reinforced current conditions and confirmed a resumption of the uptrend. The contract has traded through $84.87, the Sep 15 ‘23 high.