Highlights:
- USD/JPY drifts further off highs as equity weakness pervades
- Hawkish Powell appearance remains key markets driver
- Retail sales, import/export price indices and Fedspeak make for a busy Friday
US TSYS: Off Post-Powell Lows, Focus Turns to Retail Sales, More Fed Speakers
- Treasuries continue to drift off moderately weaker overnight levels at the moment. Futures contracts are near the middle of yesterday's range as the impact from Chairman Powell's economic outlook discussion continues to moderate.
- Chairman Powell's speech contained several quotes that sound similar to what he said at last week's press conference, nothing really "new", but by the same token there is nothing dovish either. "The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully."
- Currently, the Dec'24 10Y contract trades -3.5 at 109-14 vs. 109-06 low, just above yesterday's intraday low of 109-04 and technical support at 109-05 (76.4% of Apr - Sep bull cycle (cont)). Curves recovering slightly after yesterday's late flattening, 2s10s +2.696 at 11.333, 5s30s +2.435 at 28.402.
- Focus turns to this morning's Retail Sales, Import/Export prices and Empire Mfg data at 0830ET. Industrial Production & Capacity Utilization follow at 0915ET, Business Inventories wraps up the week's data at 1000ET.
- Several Fed speakers scheduled for today: Chicago Fed Goolsbee on CNBC at 0830ET, Boston Fed Collins open remarks eco-conf (text, livestreamed) at 0900ET and again on Bbg TV at 1030ET, NY Fed Williams open remarks alumni event (text, no Q&A) at 1315ET, Chicago Fed Goolsbee on Bbg TV at 1405ET while Richmond Fed Barkin will be interviewed on Yahoo Finance at 1500ET.
MACRO ANALYSIS: Lack Of Foreign Investment Has Weighed On EZ GFCF
The downward trend in foreign capital inflows will have contributed to the weak development of aggregate Eurozone investment growth i.e. gross fixed capital formation (GFCF). In Germany, the level of GFCF was lower in Q2 2024 than Q1 2019.
- Trends for France and Spain are not much better, while Italy is the notable outperformer. However, this is due to the “Superbonus” home renovation tax credit, which saw much higher take-up than expected after its 2020 introduction. The scheme is currently being phased out (due to its sizeable fiscal impact), and the 2024 Italian GDP data suggests that the “Superbonus” tailwind has already started to fade.
- The ECB projects investment to fall 0.5% Y/Y in 2024, before recovering to 1.2% in 2025 and 2.1% in 2026. From the September macroeconomic projection write-up: “Business investment is projected to grow at a moderate but increasing pace over the projection horizon amid improving demand, a fading negative impact from financing conditions and rising green and digital investment”.
- The need for increased public and private sector investment was highlighted forcefully in Mario Draghi’s recent report on Eurozone competitiveness. The three areas Draghi highlighted to “reignite sustainable growth” in the region were (1) Closing the innovation gap with the US and China, (2) a joint plan for decarbonisation and competitiveness” and (3) increasing security and reducing dependencies.
MACRO ANALYSIS: Downward Trend In Direct Investment Inflows Across EZ Since 2022
Direct investment inflows have fallen across the four major Eurozone economies since the start of 2023, with Germany and France seeing the largest decreases relative to the start of 2019.
- We have previously highlighted Bundesbank commentary on subdued German FDI inflows, which will likely be contributing to the unfavourable labour productivity developments in Europe’s largest economy (see here). The latest bout of political uncertainty provides another headwind for attracting foreign capital.
- Since the pandemic, Spanish GDP growth has clearly outperformed the likes of Germany, France and Italy. Although direct investment inflows (4Q rolling sum) as a percentage of nominal GDP are higher in Spain than the other three economies (1.8% in Q2 2024, versus 1.0% in Germany, 0.4% in France and 1.2% in Italy), the downward trend suggests it has not been a key driver of this outperformance.
- Instead, we point to widely cited tailwinds from strong tourism activity, high levels of inward migration and improving productivity growth as more important factors.
US TSY FUTURES: Cover In The Wings Seen On Thursday
OI data points to a mix of net long cover (TU), long setting (FV, TY & UXY) and short cover (US & WN) during Thursday’s twist flattening of the curve, with the cover in the wings providing the biggest impulse to curve-wide positioning in DV01 equivalent terms.
| 14-Nov-24 | 13-Nov-24 | Daily OI Change | OI DV01 Equivalent Change ($) |
TU | 4,539,523 | 4,544,867 | -5,344 | -190,531 |
FV | 6,364,472 | 6,360,533 | +3,939 | +162,689 |
TY | 4,540,869 | 4,532,022 | +8,847 | +572,005 |
UXY | 2,205,013 | 2,192,225 | +12,788 | +1,105,647 |
US | 1,857,876 | 1,865,095 | -7,219 | -915,055 |
WN | 1,753,031 | 1,763,421 | -10,390 | -2,024,597 |
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| Total | +2,621 | -1,289,842 |
STIR: Short Setting Dominated In SOFR Whites Thursday
OI data suggests that a mix of net short setting and long cover dominated through SFRH6 on Thursday.
- Beyond there, a mix of net long setting and short cover was seen, as the strip twist flattened.
- A reminder that these inferences are based on settlement prices.
- SOFR futures sold off in post-settlement trade as markets reacted to the latest comments from Fed Chair Powell.
| 14-Nov-24 | 13-Nov-24 | Daily OI Change |
| Daily OI Change In Packs |
SFRU4 | 1,277,621 | 1,274,923 | +2,698 | Whites | +122,099 |
SFRZ4 | 1,334,822 | 1,251,185 | +83,637 | Reds | -43,906 |
SFRH5 | 1,068,343 | 1,072,504 | -4,161 | Greens | +3,737 |
SFRM5 | 979,639 | 939,714 | +39,925 | Blues | +1,846 |
SFRU5 | 734,681 | 735,111 | -430 |
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SFRZ5 | 961,269 | 984,043 | -22,774 |
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SFRH6 | 647,921 | 652,751 | -4,830 |
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SFRM6 | 607,623 | 623,495 | -15,872 |
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SFRU6 | 591,142 | 593,644 | -2,502 |
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SFRZ6 | 647,237 | 646,818 | +419 |
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SFRH7 | 422,698 | 418,380 | +4,318 |
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SFRM7 | 336,605 | 335,103 | +1,502 |
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SFRU7 | 270,920 | 269,307 | +1,613 |
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SFRZ7 | 263,148 | 263,349 | -201 |
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SFRH8 | 208,751 | 208,099 | +652 |
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SFRM8 | 155,230 | 155,448 | -218 |
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EUROPE ISSUANCE UPDATE:
DMO FQ4 (Jan-Mar) Issuance Operations Announcement
Syndications:
- W/C 20 January: Long conventional 15-20 year maturity. We had initially pencilled this in for 21 January (and the DMO has this morning confirmed the W/C 20 January). There is a chance that this is a tap of the 4.375% Jan-40 gilt before it moves into the medium-dated bucket. We think that the likelihood of that has increased since the DMO has announced it would auction the 4.75% Oct-43 gilt in March (the existing 20-year benchmark). The DMO has stated that it will be in the 15-20 year maturity area and that it could be a new or existing gilt (rather than the 15-25 year area as previously suggested). Plenty of scope for this remaining syndication to be upsized from the GBP4.5bln pencilled in by the DMO.
- February: New 10-year gilt. Confirmed as a 10-year as widely expected. We look for 11 February. The DMO has pencilled in a GBP8.5bln size. This is the same amount as was pencilled into the March remit, but the June transaction saw a size of GBP11.0bln nominal (GBP10.9bln cash). So there is a good chance that this syndication is also upsized. Regarding the maturity, we expected either Jan-35 or Oct-35. Jan-35 would be a little shorter maturity than usual but a January maturity would leave Oct-35 open to launch another 10-year gilt later in 2035 - and that may well also be launched via syndication given next year's remit is still on the large size. ISIN confirmed as GB00BT7J0027.
- March: 20-25 year linker: This had originally been noted as taking place in February but has since moved to March. The DMO has also confirmed that this will be a new issue in the 20-25 year area (rather than 15-25 year). We pencil in a new 2049 linker (around 24.5 years to maturity). ISIN confirmed as GB00BT7J0134.
Tender consultation
- The DMO has confirmed that it will hold a consultation next week with views on "demand for, and timing of, a short conventional gilt tender (for a maturity of under five years) in the coming period."
Auctions highlights:
- New 5-year Mar-30 gilt: A launch and at least 2 reopenings (in line with our expectations and strongly supported by both investors and GEMMs). Maturity a bit longer than the Jan-30 that we had pencilled in, maturing on 7 March 2030 with an ISIN GB00BSQNRD01. Auctions on 8 January, 4 February, 5 March.
- New 10-year linker: Maturity date set at 22 September 2035. To be launched on 28 January and reopened on 25 February. ISIN will be GB00BT7HZZ68.
- 4.75% Oct-43 gilt: One auction on 25 March (this wasn't fully expected - and makes it look much more likely we will see a 15-year tap rather than new 20-year via syndication).
BUNDS: SWAPS: Widening Episodes Remain Limited, Swap Spreads Hold Around Lows
Modest ASW tightening today, keeping spreads around cycle/all-time lows.
- Long end leads the move, with Buxl vs. 3-month Euribor ASW ~1bp tighter.
- The medium-term spread tightening drivers that we have flagged on many occasions seemingly remain intact.
- Long end spreads are seemingly the most susceptible to further tightening given sensitivity to issuance/fiscal policy, alongside increased risks of fiscal loosening/political paralysis.
FOREX: USD/JPY Fades Off Highs as Global Equity Pullback Persists
- Currency markets are trading on a more stable footing early Friday, with the pullback in US equity markets into the Thursday close and the extension this morning underpinning a recovery for the JPY. The moves stem from Powell's relatively hawkish appearance in Dallas yesterday, at which he noted the US economy's persistent strength - lessening the expectations of further rate hikes through 2025.
- As a result, USD/JPY has faded back below the Y156.00 handle, reversing the USD-led rally into the close. While the pair is weaker, the overriding uptrend triggered by the Presidential election remains intact, and a buy-on-dips strategy would target the cycle highs at 156.75 as well as the 76.4% retracement for the downleg posted off the July high.
- Monthly UK GDP data came in softer against expectations, and while GBP is again weaker, pullbacks are limited at these levels and the prospect of a December BoE rate cut remains unlikely - OIS markets priced ~4bps of cuts into year-end, leaving the February or March meetings as the next likely easing move. EUR/GBP touched a new weekly high this morning at 0.8350, with the 50-dma sitting just above as next resistance at 0.8362.
- Focus for the session ahead rests on US retail sales and import/export price indices data, as well as the October industrial production release. Central bank speakers include Fed's Goolsbee, Collins, Williams and Barkin, while ECB's Panetta, Lane and Cipollone are set to speak.
OPTIONS: Expiries for Nov15 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.0500(E2.4bln), $1.0540-50($655mln), $1.0600(E1.9bln), $1.0650(E1.0bln), $1.0700(E3.7bln), $1.0800(E1.9bln)
- USD/JPY: Y151.00($1.5bln), Y154.00($591mln)
- AUD/USD: $0.6510-30(A$1.3bln)
- NZD/USD: $0.5980-00(N$880mln)
- USD/CAD: C$1.4000($635mln), C$1.4035-50($632mln)
- USD/CNY: Cny7.1880($593mln), Cny7.2000($1.1bln)
EQUITIES: Bearish Theme in Eurostoxx 50 Futures Intact Despite Thursday’s Gains
- Despite Thursday’s gains, a bearish condition in Eurostoxx 50 futures remains intact. The move lower this week marks a resumption of the downtrend that started Sep 30. Price has breached 4746.94, 61.8% of the Aug 5 - Sep 30 bull cycle. This exposes 4662.12, the 76.4% retracement point. Initial firm resistance has been defined at 4961.00, Nov 6 high, where a break would highlight a reversal. For now, gains are considered corrective.
- The trend condition in S&P E-Minis remains bullish and the latest pullback is - for now - considered corrective. A key short-term support has been defined at 5724.25, the Nov 4 low. Initial supports to watch are 5911.09 and 5823.84, the 20- and 50-day EMA points respectively. Recent gains resulted in a breach of the bull trigger at 5927.25, Oct 17 high, confirming a resumption of the primary uptrend. Sights are on 6070.16, a Fibonacci projection.
COMMODITIES: Latest Pullback in Gold Appears to Be a Correction
- A bearish theme in WTI futures remains intact and the move lower from the Nov 7 high has reinforced current conditions. The move down exposes $65.99, the Oct 1 low, and $64.16, the Sep 10 low and key support. For bulls, a clear reversal to the upside would instead refocus attention on the key short-term resistance at $77.70, the Oct 8 high. Clearance of this level would resume the recent uptrend. Initial firm resistance is $72.88, the Nov 7 high.
- The long-term trend condition in Gold is unchanged, it remains bullish and the latest pullback appears to be a correction. However, the latest move down has resulted in a breach of the 20- and 50-day EMAs, and the metal is trading at its recent lows. The breach of the EMAs signals scope for a deeper retracement and sights are on $2511.1 next, the Sep 18 low. Firm resistance is seen at $2667.6, the 20-day EMA.
| Date | GMT/Local | Impact | Country | Event |
| 15/11/2024 | 1330/0830 | ** |  US | Import/Export Price Index |
| 15/11/2024 | 1330/0830 | ** |  CA | Monthly Survey of Manufacturing |
| 15/11/2024 | 1330/0830 | ** | CA | Wholesale Trade |
| 15/11/2024 | 1330/0830 | ** | US | WASDE Weekly Import/Export |
| 15/11/2024 | 1330/0830 | *** | US | Retail Sales |
| 15/11/2024 | 1330/0830 | ** | US | Empire State Manufacturing Survey |
| 15/11/2024 | 1400/0900 | * | CA | CREA Existing Home Sales |
| 15/11/2024 | 1400/0900 | US | Boston Fed's Susan Collins | |
| 15/11/2024 | 1415/0915 | *** | US | Industrial Production |
| 15/11/2024 | 1500/1000 | * | US | Business Inventories |
| 15/11/2024 | 1500/1600 |  EU | ECB's Lane at seminar on Fragmenting Trading System | |
| 15/11/2024 | 1515/1615 | EU | ECB's Cipollone in discussion on productivity |
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