MNI US MARKETS ANALYSIS - EURGBP Unable to Crack 0.85 Support

Highlights:

• PCE in focus ahead of Fed media blackout
• Downgrade risk for French sovereign rating
• MoF confirm biggest FX intervention on record in JPY terms  

US TSYS: PCE Focus Ahead Next Fed Policy Blackout

• Treasuries are looking mildly weaker for the most part - holding to a narrow overnight range in the lead-up to this morning's PCE Deflator release at 0830ET, as well as Personal Income and Spending. MNI's Chicago PMI follows later this morning at 0945ET.
• Scheduled Fed speakers is limited to Atlanta Fed Bostic giving a commencement speech later this evening at 1815ET. However, expect some additional speakers to pop up ahead of the Fed entering the Blackout period at midnight. The self imposed policy blackout runs through June 13, the day after the next FOMC policy announcement.
• Cash yields are currently running a little higher: 2s +.0187 at 4.9435%, 10s +.008 at 4.5540%, 30s +.0019 at 4.6814%, while curves continue to recede from midweek steeps: 2s10s -1.070 at -39.362, 5s30s -1.144 at 9.918.
• Meanwhile, Sep'24 Treasury futures officially take lead quarterly position, Jun'24 won't expire until next month: 10s, 30s and Ultras on June 18, and June 28 for 2s and 5s.
• Treasury futures remain vulnerable to a bearish theme after Wednesday's reversal extension from the May 16 high. The Sep'24 10Y contract has pierced 108-02+, the 76.4% retracement of the Apr 25 - May 16 climb.

STIR: OI Points To Mix Of Long Setting & Short Cover  in SOFR Futures On Thursday's Data

The combination of yesterday’s uptick in most SOFR futures and OI data points to the following net positioning swings on Thursday:

• Whites: An apparent mix of net long setting and short cover, with the latter slightly more pronounced in net pack OI terms.
• Reds: Long setting seemed to dominate, with modest rounds of net short cover seen in some contracts in the pack.
• Greens: Net short cover was seemingly seen in 3 of the 4 contracts, with OI in the remaining contract essentially unchanged.
• Blues: An apparent mix of short cover and long setting, with the latter more meaningful when it came to net pack OI.
• Thursday's U.S. data facilitated a modest dovish move in Fed pricing, particularly with the strip trading close to recent hawkish extremes.
• ~32.5bp of ’24 cuts are currently priced into FOMC-dated OIS, with this morning’s European CPI data having a modest hawkish impact.
• That leaves the measure little changed vs. prevailing levels seen ahead of yesterday’s U.S. data.
• The monthly PCE data provides the major event risk ahead of the weekend.

FRANCE: /OATS/RATINGS: Downgrade Risk Evident, With S&P Set To Update On France After Hours

S&P is set to provide an update on France after hours, with downgrade risk apparent.

• S&P currently has France at AA; Outlook Negative.
• That is one notch above the equivalent rating at Fitch (AA-; Outlook Stable).
• Moody’s has France at the S&P equivalent rating (Aa2), but with a ‘Stable’ outlook.
• A wider-than-expected ’23 deficit and flatter debt/GDP path in the government’s projections generated French fiscal worry in late March/early April.
• That drove spread widening for OATs, although the lack of negative ratings action from both Fitch & Moody’s in the interim, along with greater hope surrounding GDP growth, placated some of the worry, allowing spreads to retrace from wides.
• Subsequent action and rhetoric from French policymakers highlights a need to cut spending, but poses risks to the ruling political party.
• A one-notch downgrade from S&P would likely promote fresh OAT spread widening, although a sizeable move beyond year-to-date wides vs. Bunds seems unlikely as many expected such action back in early April (assuming a Stable outlook alongside such a downgrade).
• Select sell-side comments on this evening's update can be found below:
• Commerzbank: As the outlook is already negative and the deficit trajectory has clearly worsened since December, a downgrade to AA-/stable should not be a big surprise.
• Danske: Given that the fiscal outlook has worsened, we expect a one-notch downgrade tonight. This should have a modest widening impact on OAT spreads.
• Mizuho: We see a risk of a downgrade for France, which would likely drive OAT-Bund spreads back to the April wides.
• UniCredit: There is only a small difference between the government’s latest debt/GDP forecasts and those of the agency’s. We think that the room for a spread significant widening is limited given that the majority of OAT holders are not very sensitive to changes in ratings. The elevated liquidity of OATs and an improving picture for fixed-income markets, in light of expected ECB rate cuts will also be supporting factors.

Fig. 1: 10-Year OAT/Bund Spread (bp)

Source: MNI - Market News/Bloomberg

EUROZONE DATA: Service Inflation, Core and Headline All Higher Than Consensus

Eurozone May flash headline printed a tenth above consensus while core inflation came in 2 tenths above, in line with MNI's tracking based on the national data released earlier today and yesterday.

• Headline HICP was 2.6% Y/Y (vs 2.5% cons; 2.4% prior) and 0.2% M/M (vs 0.2% cons; 0.6% prior). On an unrounded basis, headline was 2.57% Y/Y and 0.22% M/M.
• Core HICP came in a higher than expected at 2.9% Y/Y (vs 2.7% cons; 2.7% prior). This is a marginally larger surprise than the headline number. On an unrounded basis, core was 2.87% Y/Y and 0.44% M/M.
• Looking at the individual categories, services inflation is expected to reach highest levels of this year at +4.1% Y/Y after disinflating to +3.7% in April. This was expected due to the removal of the 49 euro German ticket base effect and other travel components mentioned in our preview. Non-energy industrial goods saw its longer-term disinflation trend continuing as highlighted in our preview, printing at +0.8% Y/Y (vs +0.9% prior), while energy prices saw their expected uptick materialize at 0.3% Y/Y (vs -0.6% prior).
• At a country level, annual HICP rose in 10 countries, fell in 7 countries, and was unchanged for the remaining 2 countries.

EZ Core CPI Underpins EUR Recovery into NY Hours

• The single currency trades slightly firmer, with EUR/USD touching new daily highs on the back of the firmer-than-expected May CPI estimate from the Eurozone. Headline CPI was 0.1ppts ahead of consensus, but it's the 0.2ppts beat for core CPI that will have troubled markets.
• JPY trades poorly, falling against all others in G10 as markets await the formal release from the Japanese finance ministry to confirm the extent of intervention across May. Expectations are for ~$60bln (Y9.4trl) to have been sold across two phases this month. Headlines cross at 1100BST/1900 local time.
• Chinese macro data overnight came in soft, with official manufacturing and non-manufacturing PMIs falling short of expectations - manufacturing was a particular source of weakness (49.5 vs. Exp. 40.5) and unexpectedly fell into contraction territory - a release that's worked against CNH, which trades softer against the greenback. 
• Focus ahead turns to the MNI Chicago PMI release for May, at which markets expect headline weakness to abate slightly, with a 41.5 reading from 37.9 previously. PCE data for April is also set to cross, at which markets expect another moderation in price pressures in the final reading before the June FOMC decision.

MoF Confirm JPY Intervention - Alongside Expectations

• Japan's Ministry of Finance confirm that Japan spent Y 9.8trl in currency intervention across April 26th - May 29th.
• Confirmation - as expected - of the Japanese intervention phases across the past month - Y9.8trl is just ahead of expectation (gauged at ~Y9.4trl) and does mark the largest month for intervention on record in JPY terms (but again no surprise here given the prevailing spot rate). No reaction in JPY markets, with JPY still toward the lower-end of the day's range.

FOREX: EUR/GBP Still Unable to Close Below Significant 0.8500 Support

• EURUSD (+0.14%) remains bid following the Eurozone inflation data and trades at the top end of its relatively narrow two-day range. In similar vein, EURGBP (+0.20%) has had a near 30 pip bounce from session lows, assisted by the moderate repricing of ECB cuts which now leaves ~4bp fewer cuts priced through year end when compared to yesterday’s close.
• Overall conditions for EURGBP remain unchanged and a bearish theme is in play. Key supports have recently been pierced; the 0.8500 pivot level, and an important support zone between 0.8498, the Feb 14 low, and 0.8493, the Aug 23 ‘23 low. We have pointed to a clear break of these price points as strengthening the bearish technical theme.
• However, despite multiple tests below the key 0.8500 mark, both this week and across the past year, EURGBP has been unable to close below this level since August 2022. A stronger recovery would target initial firm resistance at 0.8540, the 20-day EMA. Above here, the Apr 23 high and bull trigger is at 0.8645.
• Next week’s key event risk will be the ECB decision as markets try to gauge expectations for future policy decisions, with today’s data pointing towards a cautious/hawkish hold. In the background, despite betting markets expecting a smooth Starmer victory on July 04, both the expectation of an increase in political noise and the prospects of a Labour government for the UK economy might continue to pose downside risks for sterling.

Expiries for May31 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0799-00(E603mln), $1.0845-65(E1.6bln), $1.0875-80(E1.5bln), $1.0900(E852mln)
• USD/JPY: Y155.00($584mln), Y156.00-05($613mln), Y156.75-80($750mln), Y157.00-10($850mln), Y158.00($891mln)
• AUD/USD: $0.6600(A$975mln), $0.6700(A$507mln)
• USD/CAD: C$1.3745-50($870mln), C$1.3900($832mln)

Short-Term Bear Cycle in Gold Remains in Play

WTI futures have pulled back from Wednesday high of 80.62. The trend direction remains down and the latest recovery appears to have been a correction. A continuation lower would signal scope for a move towards $75.64, the Mar 11 low. On the upside, 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. A short-term bear cycle in Gold remains in play, for now. The medium-term trend structure is 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 $2307.0, represents a key support. 

• WTI Crude down $0.07 or -0.09% at $77.81
• Natural Gas down $0.03 or -1.01% at $2.547
• Gold spot up $0.01 or +0% at $2343.13
• Copper down $1.35 or -0.29% at $464.65
• Silver up $0.08 or +0.24% at $31.249
• Platinum down $0.86 or -0.08% at $1028.78
   

E-Mini S&P Narrows Gap to Support at 50-day EMA

Eurostoxx 50 futures have traded lower this week and the contract remains soft. This week’s pullback - a correction - has resulted in a breach of the 20- and 50-day EMAs. The 50-day average lies at 4964.40 and a clear break of it would undermine the recent short-term bullish theme and signal scope for a deeper retracement. This would open 4894.90, a Fibonacci retracement. Initial resistance is seen at 5019.60, the 20-day EMA. The uptrend in S&P E-Minis remains intact, however, a corrective cycle has resulted in a pullback from the recent high of 5368.25 (May 23). The contract has traded through the 20-day EMA and this exposes a firmer support at 5209.88, the 50-day EMA. A clear break of this average would signal scope for a deeper retracement. On the upside, a resumption of gains and a break of 5368.25, would confirm a resumption of the uptrend.      

• Japan's NIKKEI closed higher by 433.77 pts or +1.14% at 38487.9 and the TOPIX ended 46.29 pts higher or +1.7% at 2772.49.
• Elsewhere, in China the SHANGHAI closed lower by 4.865 pts or -0.16% at 3086.813 and the HANG SENG ended 150.58 pts lower or -0.83% at 18079.61.
• Across Europe, Germany's DAX trades higher by 7.61 pts or +0.04% at 18502.48, FTSE 100 higher by 25.95 pts or +0.32% at 8257.02, CAC 40 up 7.94 pts or +0.1% at 7986.45 and Euro Stoxx 50 up 8.76 pts or +0.18% at 4990.94.
• Dow Jones mini up 8 pts or +0.02% at 38237, S&P 500 mini down 5.25 pts or -0.1% at 5247.75, NASDAQ mini down 45.5 pts or -0.24% at 18561.