MNI US MARKETS ANALYSIS - EUR/GBP Through to New Lows

Highlights:

• German regional CPIs tracking for a softer national print
• Fed's Beige Book eyed for comments on pricing power
• EURGBP breaks to new multi-year lows, clearing mid'23 lows 

US TSYS: Further Steepening With More Issuance On Tap, 10YY At Pre-NFP Levels

• Treasuries have seen a further steepening today as the long end extends a sizeable sell-off seen yesterday from a surprising rise in consumer confidence and double 2Y and 5Y auction tails.
• Continued issuance with today’s 7Y note auction should remain a driving force, whilst data is more secondary ahead of tomorrow’s second Q1 GDP release.
• Cash yields sit between 0.4bps lower (2s) and 1.6bps higher (30s). Having cleared 4.50% yesterday, 10Y yields are now at 4.56% off an earlier high of 4.574% and are back to pre NFP levels from May 3.
• 2s10s sits at -39bps, with the day’s level adjustment amplified by the new 2Y benchmark. It has lifted off Friday’s low of -48.3bps for its highest since May 20/21.
• TYM4 dipped further early in Asia hours but has since held a narrow range, at 108-04+ vs an earlier low of 108-02.
• The contract is in retracement mode after yesterday’s clearance of a key support at 108-15 (May 14 low), opening the round 108-00 and 107-25+ (Fibo retracement of Apr 25 – May 16 rally).
• Some notable overnight flow looking for an extension of the recent steepening: FVM4 6.0K lots blocked at 105-06.75 (suggest buyer) and TYM4 3.9K lots blocked at 108-04 (suggest seller), which we would point to a ~$240K DV01 steepener.
• Data: MBA mortgage data May 24 (0700ET), Richmond Fed mfg May (1000ET), Dallas Fed services May (1030ET)
• Fedspeak: Williams on community services (1345ET, no text), Beige Book (1400ET), Bostic on economy (1900ET, no text)
• Note/bond issuance: US Tsy to sell $28bn 2Y FRN re-open, 91282CKM2 (1130ET), US Tsy to sell $44bn 7Y notes, 91282CKU4 (1300ET)
• Bill issuance: US Tsy to sell $60bn 17-wk bills (1130ET)

STIR: Fed Rates Hold Bulk Of Prior Climb, Beige Book Leads Today's Commentary

• Fed Funds implied rates have dipped a little from overnight highs but hold the bulk of yesterday’s strong climb seen on the consumer confidence beat before following yields higher with low demand for auctions.
• Cumulative cuts from 5.33% effective: 0.5bp Jun, 3bp Jul, 13bp Sep, 19bp Nov and 32bp Dec.
• CPI releases overnight have seen a beat for Australian CPI in April whilst German regional prints point to a small miss or an in line reading for the national headline CPI released later today but with service inflation accelerating strongly.
• The Fed’s Beige Book likely headlines today’s Fed commentary, with one area of focus on the latest tone around firms’ pricing power after noting a considerable weakening in recent months back in April.
• NY Fed’s Williams speaking at a community services roundtable should limit mon pol content whilst Bostic (’24 voter) spoke multiple times last week noting he still doesn’t expect to cut rates before Q4 and that rates are restrictive but their efficacy could be weaker.
• Williams’ speech at the Economic Club of NY tomorrow is likely more impactful.

STIR: OI Points To Mix Of Short Setting & Long Cover In SOFR Futures On Tuesday

The combination of yesterday’s sell off in SOFR futures and preliminary OI data points to a notable round of net long cover in most of the whites, with apparent net short setting in SFRM4 providing the only exception to the wider theme. Net long cover dominated in net pack OI terms.

• Further out the strip, net short setting was the dominant factor in the reds, albeit with pockets of net long cover also seen.
• The greens seemed to see net short setting across all contracts, while net long cover was seemingly seen in all of the blues.
• Hawkish Fedspeak and firmer-than-expected consumer confidence data weighed on SOFR futures, before feedthrough from tepid demand at the latest round of Tsy auctions filtered through to wider core global FI markets.
• Early May lows in most SOFR futures either held or went untested.
• FOMC-dated OIS shows ~31.5bp of cuts through year end.

EUROPE ISSUANCE UPDATE:

UK auction results:
* GBP1bln of the 0.125% Mar-39 linker. Avg yield 1.051% (bid-to-cover 3.16x).

German auction results:
* E500mln (E400mln allotted) of the 1.00% May-38 Bund. Avg yield 2.75% (bid-to-offer 6.70x; bid-to-cover 8.37x).
* E1.5bln (E1.22bln allotted) of the 2.60% May-41 Bund. Avg yield 2.80% (bid-to-offer 1.57x; bid-to-cover 1.94x).

Spain syndication: Launched
* E10bln (MNI expected E10-15bln) of the 10-year Oct-34 Obli. Order books in excess of E125bln, Spread set at 3.25% Apr-34 Obli (mid) + 6bps area (guidance was +8bps area).

BOC: May Inflation Watch: BoC To Assess If Deceleration Is "Sustained"

• Markets are split on whether the BoC will cut on the June 5th rate decision or wait until July.
• BoC said June rate decision would focus on: evolution of excess demand, inflation expectations, wage growth, and corporate pricing power.
• Headline inflation, along with the BoC's preferred core measures, were the slowest in three years in April. Headline CPI YOY has been within the BoC target range so far this year; the Bank projected inflation to be close to +3% in H1'24.
• Governor Macklem says economy has moved into excess supply. The Q1 GDP report will be released on the 31st of May where growth is tracking at +2.5% annualized, slightly below the BoC forecast for +2.8%. (The Bank in April upgraded Q1 estimate from +0.5%)
• The Bank says consumer and business near-term inflation expectations moderated over Q1 2024, but remain elevated.
• Unemployment remained at +6.1% in April from the month before despite large employment gains as the labour force +108K. Macklem has said that a broad range of indicators suggest the labour market is easing. Wage gains are still high with +4.7% from the April jobs report and +4.5% from the Feb payrolls.
• Corporate pricing behavior is normalizing according to the MPR and a BoC Staff Analytical Note.
• Global oil prices that were contributing to headline inflation and caused the BoC increase oil pricing assumptions in projections have started fading. Expectations on the US monetary policy trajectory will impact pricing; CPI will be released on May 31st. OPEC+ countries are expected to cut output on June 2nd.

GERMAN DATA: MNI Projects 2.3-2.4% National CPI Y/Y, Core CPI Flat Around 3.0%

From state-level data that equates to 86.7% weighting of the national May flash German CPI print (due at 13:00 BST / 14:00 CET), MNI estimates that national CPI (non-HICP print) rose by 0.0-0.1% M/M (April: 0.5%) and 2.3-2.4% Y/Y (April: 2.2%).

• Analyst consensus currently stands at 0.2% M/M and 2.4% Y/Y so this would represent a lower reading than had been expected on the monthly comparison (but broadly in line Y/Y).
• Current tracking of core CPI (ex-energy and food, based on 50% of the national index) implies 3.0% Y/Y (3.0% in April) and 0.2-0.3% M/M, per our calcualtions.
• The transport category, which is in focus this month as per a base effect on a subsidized rail ticket which was introduced a year ago falling out of the yearly comparison, printed broadly around 2.6% Y/Y (vs +0.9% April), our calculations imply.
• This suggests an acceleration in the services component to around 3.9% Y/Y (vs 3.4% prior), based on 50% of the national index.
• We will provide a follow-up bullet looking at underlying drivers in due course.
• Note: These estimates are in relation to the national CPI print, not the HICP print which feeds into the Eurozone HICP print that the ECB targets. The magnitude of surprises to consensus can sometimes be different due to the different methodologies and weights used in national CPI vs HICP - but the direction of the surprise is normally the same.

EUR/GBP Breaks to New Lows on Soft Regional German CPIs

• The single currency is softer against all others, slipping on the back of the lower-than-forecast monthly regional CPI prints from Germany. EUR/USD opened a gap of over 50 pips with yesterday's high upon release, but perhaps more notably the data helped open a further downside leg in EUR/GBP, which broke below key support at 0.8493 to print the lowest level since mid-2022.
• These moves open losses toward 0.8454, the 76.4% retracement for the Mar 7 - Sep 26 2022 bull phase. 
• Weaker US equity futures have done little to underpin the JPY, which sits slightly firmer on the day, but well within recent ranges. However, SEK trades more poorly as EUR/SEK gravitates back toward the 200-dma of 11.4966 - a level pierced into the close yesterday. 
• Focus for the remainder of Wednesday trade is on the preliminary German CPI print for May, at which markets are on watch for downside risks given the seemingly soft turnouts from the regional monthly prints. MNI projects the national CPI broadly inline with expectations, but a lower-than-expected M/M print at 0.0-0.1%. 
• Outside of German CPI, Richmond Fed manufacturing data and an appearance from Fed's Williams are also due, ahead of the latest Beige Book from the Fed.

CNY, INR, HKD Among Hotspots of Quieter Options Trade

• Currency hedging volumes are recovering after an expectedly quiet start to the week (UK and US market holidays Monday), but still remain broadly subdued. There are hotspots of activity early Wednesday, namely CNY, HKD and INR, which see volumes ahead of average for this time of day.
• USD/CNY trade has been dominated by topside exposure, mirroring the recovery in spot and USD/CNH's break to the monthly highs. The lower PBOC CNY fix again helped open the door to further USD/CNY demand, evident in particular demand for 7.3000 call strikes, although 7.25, 7.28 and even 7.69 calls also saw decent interest. Close to $3 in calls have traded for every $2 in puts so far today.
• Underlying USD/INR flow has also favoured upside exposure. Accompanying the strength in spot USD/INR, 82.70 and 83.50 calls make up the most notable options trade, although a series of 85.00 call strikes rolling off late June and late August add to the theme.

Expiries for May29 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0800(E1.3bln), $1.0835-40(E782mln), $1.0850-55(E640mln), $1.0875(E1.3bln), $1.0880-00(E2.3bln)
• USD/JPY: Y154.70-75($1.3bln), Y156.20-30($743mln), Y156.50($629mln), Y157.90-10($1.6bln)
• GBP/USD: $1.2650(Gbp814mln)
• USD/CAD: C$1.3550($510mln), C$1.3800($722mln), C$1.4050($1.0bln)
• USD/CNY: Cny7.2200($975mln)

Uptrend in E-Mini S&P Intact Despite Latest Pullback

• Eurostoxx 50 futures are in consolidation mode. The recent trend condition remains bullish and the recent pullback appears to be a correction. The contract has recently cleared a key hurdle at 5079.00, the Apr 2 high, to confirm a resumption of the uptrend. This opens 5127.70 next, a Fibonacci projection. Support at the 20-day EMA has been pierced. The next level to watch is 4962.80, the 50-day EMA.
• The uptrend in S&P E-Minis remains intact and the pullback last Thursday appears to have been a correction. The contract also traded to a fresh cycle high that day, reinforcing a bullish theme. Recent gains have also resulted in a break of 5333.50, Apr 1 high. This confirms a resumption of the primary uptrend and opens 5372.73, a Fibonacci projection. Moving average studies are in a bull-mode set-up. Initial support is 5265.28, the 20-day EMA.

WTI Futures Hold on to This Week's Gains

• WTI futures traded higher yesterday and the contract is holding on to its most recent gains. The trend direction remains down and the latest recovery appears to be a correction - for now. A resumption of weakness would signal scope for a move towards $75.64, the Mar 11 low. Key resistance and the bull trigger is at $86.16, the Apr 12 high. Initial firm resistance to watch is at $83.63, the Apr 26 high.
• Gold is trading just ahead of its recent low. The medium-term trend structure remains bullish and the recent move down appears to be a correction that is allowing  an overbought condition to unwind. Moving average studies are in a bull-mode position, highlighting an uptrend. A resumption of gains would open $2452.5 next, a Fibonacci projection. The 50-day EMA, at $2304.2, represents a key support. A clear break of it would be bearish. 

Date	GMT/Local	Impact	Country	Event
29/05/2024	1100/0700	**	US	MBA Weekly Applications Index
29/05/2024	1200/1400	***	DE	HICP (p)
29/05/2024	1255/0855	**	US	Redbook Retail Sales Index
29/05/2024	1400/1000	**	US	Richmond Fed Survey
29/05/2024	1430/1030	**	US	Dallas Fed Services Survey
29/05/2024	1530/1130	**	US	US Treasury Auction Result for 2 Year Floating Rate Note
29/05/2024	1700/1300	**	US	US Treasury Auction Result for 7 Year Note
29/05/2024	1745/1345		US	New York Fed's John Williams
29/05/2024	1800/1400		US	Fed Beige Book
29/05/2024	2300/1900		US	Atlanta Fed's Raphael Bostic
30/05/2024	0130/1130	*	AU	Building Approvals
30/05/2024	0130/1130	*	AU	Private New Capex and Expected Expenditure
30/05/2024	0600/0800	***	SE	GDP
30/05/2024	0700/0900	***	ES	HICP (p)
30/05/2024	0700/0900	**	CH	KOF Economic Barometer
30/05/2024	0700/0900	***	CH	GDP
30/05/2024	0700/0900	**	SE	Economic Tendency Indicator
30/05/2024	0900/1100	**	EU	Unemployment
30/05/2024	0900/1100	**	EU	EZ Economic Sentiment Indicator
30/05/2024	0900/1100	*	EU	Consumer Confidence, Industrial Sentiment
30/05/2024	0900/1100	**	IT	PPI
30/05/2024	1230/0830	***	US	Jobless Claims
30/05/2024	1230/0830	***	US	GDP
30/05/2024	1230/0830	*	CA	Current account
30/05/2024	1230/0830	*	CA	Payroll employment
30/05/2024	1230/0830	**	US	Advance Trade, Advance Business Inventories
30/05/2024	1400/1000	**	US	NAR Pending Home Sales
30/05/2024	1430/1030	**	US	Natural Gas Stocks
30/05/2024	1455/1055		CA	BOC payment director gives speech in Toronto.
30/05/2024	1500/1100	**	US	DOE Weekly Crude Oil Stocks
30/05/2024	1530/1130	*	US	US Bill 08 Week Treasury Auction Result
30/05/2024	1530/1130	**	US	US Bill 04 Week Treasury Auction Result
30/05/2024	1605/1205		US	New York Fed's John Williams
30/05/2024	2100/1700		US	Dallas Fed's Lorie Logan
31/05/2024	2330/0830	**	JP	Tokyo CPI
31/05/2024	2330/0830	*	JP	Labor Force Survey
31/05/2024	2350/0850	*	JP	Retail Sales (p)
31/05/2024	2350/0850	**	JP	Industrial Production
31/05/2024	0130/0930	***	CN	CFLP Manufacturing PMI
31/05/2024	0130/0930	**	CN	CFLP Non-Manufacturing PMI
31/05/2024	0600/0800	**	DE	Retail Sales
31/05/2024	0600/0800	**	DE	Import/Export Prices
31/05/2024	0600/0700	*	GB	Nationwide House Price Index
31/05/2024	0630/0730		GB	DMO to release FQ2 (Jul-Sep) gilt operations calendar
31/05/2024	0630/0830	**	CH	Retail Sales
31/05/2024	0645/0845	***	FR	HICP (p)
31/05/2024	0645/0845	**	FR	PPI
31/05/2024	0645/0845	**	FR	Consumer Spending
31/05/2024	0645/0845	***	FR	GDP (f)
31/05/2024	0800/1000	***	IT	GDP (f)
31/05/2024	0830/0930	**	GB	BOE M4
31/05/2024	0830/0930	**	GB	BOE Lending to Individuals
31/05/2024	0900/1100	***	EU	HICP (p)
31/05/2024	0900/1100	***	IT	HICP (p)
31/05/2024	1230/0830	**	US	Personal Income and Consumption
31/05/2024	1230/0830	***	CA	GDP - Canadian Economic Accounts
31/05/2024	1230/0830	***	CA	Gross Domestic Product by Industry
31/05/2024	1230/0830	***	CA	CA GDP by Industry and GDP Canadian Economic Accounts Combined
31/05/2024	1230/0830	**	US	WASDE Weekly Import/Export
31/05/2024	1345/0945	***	US	MNI Chicago PMI
31/05/2024	1500/1100		CA	Finance Dept monthly Fiscal Monitor (expected)
31/05/2024	1700/1300	**	US	Baker Hughes Rig Count Overview - Weekly
31/05/2024	2215/1815		US	Atlanta Fed's Raphael Bostic