Highlights:
- French, Spanish CPIs soft, raising questions over ECB's October decision
- Japan's LDP opt for Ishiba, securing fiscal discipline
- US PCE to come, providing latest insight into inflationary pressures
- Treasuries have comfortably moved away from highs seen after surprisingly soft individual Eurozone country inflation data.
- Benchmarks are back little changed on the day to consolidate yesterday’s flattening, with little impact from the increased odds of the ECB opting for a back-to-back cut in October.
- Cash yields are 0.4bp (2s) to 1.1bp lower (30s) today.
- 2s10s at 16.4bps (-0.6bp) holds yesterday’s further pullback from mid-week fresh ytd highs of 24.1bps.
- TYZ4 trades at 114-12+ (-00+) off a post-EZ data high of 114-19, having remained within yesterday’s range throughout on strong cumulative volumes of 415k.
- Yesterday’s low of 114-07 moved closer still to support at 114-00+ (Sep 4 low) after which lies 113-26+ (50-day EMA) but a bullish theme is seen remaining in place with resistance at 115-02+ (Sep 19 high).
- Data: PCE Aug (0830ET), Adv trade balance Aug (0830ET), U.Mich Sep F (1000ET), Wholesale/retail inventories Aug P/Aug (1000ET), KC Fed services Sep (1100ET)
- Fedspeak: Collins & Kugler travel for small business meetings (0930ET), Bowman Q&A at Alabama Bankers’ Association (1315ET)
STIR: Fed Rate Path Holds Yesterday’s Climb Ahead Of PCE
- Fed Funds implied rates have modestly extended yesterday’s lift that had been instigated by a surprise decline in jobless claims and possibly helped by minimal GDP revisions confirming a strong prior trend and GDI being revised strongly higher.
- November rates are 3bp higher than prior to yesterday’s data whilst Dec rates are 5bps higher.
- Cumulative cuts from 4.83% effective: 38bp Nov, 74bp Dec, 105bp Jan and 169bp June.
- Today see the monthly PCE report firmly in focus (see our 0627ET bullet on core PCE estimates) before the final U.Mich consumer survey which will be watched to see if the 5-10Y’s preliminary increase to 3.1% was maintained.
- Today’s Fedspeak is limited to Gov. Bowman (voter) at 1315ET, speaking in a moderated discussion with the Alabama Bankers Association (no text). We don’t expect any mon pol surprises having already heard from her after last week’s dissent of the Fed’s 50bp cut (she preferred 25bp as part of a methodical approach to easing).
US TSY FUTURES: OI Points to Mix Of Short & Long Setting On Thursday
OI points to a mix of net short and long setting across the curve during Thursday's twist flattening.
- Contracts moved away from session highs as Fed rate cut premium faded in the wake of lower-than-expected weekly initial jobless claims data and firmer-than-expected durable goods readings.
- The only meaningful net DV01 equivalent swings came in TY (short setting) & US (long setting) futures, with the net curve DV01 equivalent swing <$5mn.
- The net long setting seen across US & WN futures was slightly more prominent than the net short setting through UXY futures.
| 26-Sep-24 | 25-Sep-24 | Daily OI Change | OI DV01 Equivalent Change ($) |
TU | 4,475,057 | 4,471,603 | +3,454 | +134,084 |
FV | 6,434,419 | 6,431,263 | +3,156 | +138,967 |
TY | 4,959,643 | 4,933,085 | +26,558 | +1,774,928 |
UXY | 2,117,232 | 2,115,956 | +1,276 | +118,564 |
US | 1,754,222 | 1,741,623 | +12,599 | +1,741,614 |
WN | 1,708,266 | 1,703,975 | +4,291 | +937,216 |
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| Total | +51,334 | +4,845,374 |
STIR: OI Points To Short Setting & Long Cover During Thursday's SOFR Sell Off
OI data points to a mix of short setting and long cover during yesterday's data-driven weakness in SOFR futures.
- Fed rate cut premium was removed from the market following lower-than-expected weekly initial jobless claims data and firmer-than-expected durable goods readings.
- As noted elsewhere, November rates are 3bp higher than prior to yesterday’s data whilst Dec rates are 5bps higher.
- Cumulative cuts from 4.83% effective: 38bp Nov, 74bp Dec, 105bp Jan and 169bp June.
- The above implied rate path is derived from Fed funds futures.
| 26-Sep-24 | 25-Sep-24 | Daily OI Change |
| Daily OI Change In Packs |
SFRU4 | 1,324,354 | 1,350,697 | -26,343 | Whites | -19,418 |
SFRZ4 | 1,372,999 | 1,356,425 | +16,574 | Reds | -20,548 |
SFRH5 | 1,079,398 | 1,081,957 | -2,559 | Greens | +11,367 |
SFRM5 | 909,423 | 916,513 | -7,090 | Blues | +3,705 |
SFRU5 | 691,931 | 689,423 | +2,508 |
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SFRZ5 | 987,466 | 996,578 | -9,112 |
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SFRH6 | 704,307 | 710,774 | -6,467 |
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SFRM6 | 637,303 | 644,780 | -7,477 |
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SFRU6 | 556,570 | 553,849 | +2,721 |
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SFRZ6 | 623,519 | 624,450 | -931 |
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SFRH7 | 362,528 | 359,712 | +2,816 |
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SFRM7 | 319,267 | 312,506 | +6,761 |
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SFRU7 | 250,807 | 250,084 | +723 |
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SFRZ7 | 227,170 | 230,052 | -2,882 |
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SFRH8 | 180,856 | 180,033 | +823 |
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SFRM8 | 156,055 | 151,014 | +5,041 |
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US DATA: Core PCE Recent Trend Rates Seen Below Target
- Today’s monthly PCE report for August at 0830ET headlines the US docket.
- Yesterday’s comprehensive revisions back to 2019 saw very little change in the recent quarterly pace of core PCE inflation (Q2 seen at 2.79 vs 2.77 prior, Q1 at 3.75% vs 3.74).
- Barring some large changes in the monthly distribution of these quarters, it should have minimal impact on estimates for August. That means that consensus looks for a rounded 0.2% for core PCE inflation but it’s likely to be a ‘low’ 0.2 and with odds of it rounding lower.
- We saw analyst estimates (post CPI, PPI and in case some explicitly import prices) for core PCE inflation average 0.16% M/M in August after 0.16% in July, whilst the Fed’s Waller estimates somewhere around 0.14% M/M. (Note that Nomura revised up their estimate from 0.135 to 0.16% after yesterday's revisions).
- The above revisions saw Y/Y core PCE inflation revised up slightly back in Q2 from 2.65% to 2.73% Y/Y, which should help the August Y/Y round more firmly to 2.7%. Base effects are expected to keep this Y/Y rate relatively elevated into year-end (the median FOMC participant pencils in 2.6% for 4Q24, although that was down from 2.8% in the June SEP) but run rates are coming in meaningfully lower.
- Prior to latest revisions, a 0.16% M/M increase for core PCE would see three-month inflation at just 1.8% annualized and a six-month rate of 2.4%. Note that Gov. Waller on CIBC last week somewhat cherry-picked a four-month average which he saw as on track for 1.8% annualized.
- Should this be realized, it will likely dial up the odds that the Fed continues with a front-loaded cutting cycle in November (Fed Funds pricing 38bps), with even a mild further deterioration in labor data enough to cement it. There are however two NFP reports, one CPI/PPI round and not least the presidential election all to come before the Nov 7 FOMC decision.
EUROPE ISSUANCE UPDATE:
Italy auction results
- E1bln of the 3.00% Aug-29 BTP. Avg yield 2.68% (bid-to-cover 2.38x).
- E2.5bln of the 3.00% Oct-29 BTP. Avg yield 2.76% (bid-to-cover 1.88x).
- E3.5bln of the 3.85% Feb-35 BTP. Avg yield 3.43% (bid-to-cover 1.62x).
- E1.75bln of the 0.75% Oct-30 CCTeu. Avg yield 4.68% (bid-to-cover 1.94x).
ECB VIEW: 3 Sell-Side Names Now Look For Oct Cut
This week’s softer-than-expected flash PMIs and national CPI data has resulted in a sharp dovish repricing in the front end of the EUR strip, with ~19bp of cuts now priced for the ECB’s October meeting vs. ~5bp late last Friday.
- 3 sell-side names have changed their official ECB call on the back of the data:
- BNP: We now look for a 25bp cut in October on risk management grounds. Recent data point to an increased risk of a more pronounced deterioration in economic activity, while the near-term inflation outlook appears benign. Expect another cut in December, followed by a quarterly pace of cuts in 2025 as the economy re-gains some momentum.
- HSBC: A further weakening in the demand outlook could raise the risk of a more material inflation undershoot of target. We now think that the ECB will cut rates by 25bps at every meeting from October until April 2025, when the key deposit rate reaches 2.25%. At this point, policy should be close to neutral or even mildly stimulative.
- RBC: Details of GDP are not encouraging, while leading indicators have weakened substantially. The risk (to growth) remains to the downside. Even the more hawkish ECB members seem to have softened their rhetoric. We now expect that the ECB will reduce rates again in October. We Also expect the ECB to signal that the faster (cutting) pace is here to stay. We reduce our terminal rate expectation to 2.25% come April ‘25.
- Note that several other sell-side names warned of risks of an October cut/larger December cut following the PMIs, without formally changing their call. We await their CPI reactions in the coming hours/days.
FOREX: JPY Shoots Higher on Ishiba Victory, EUR Slips on Inflation
- JPY gained sharply on the back of Ishiba's victory in the race for the leadership of the LDP, and de-facto Prime Minister of Japan. USD/JPY's 300 pip slippage reflects the concern priced into markets that the rival, Takaichi, could take the top spot, and usher in stronger critiques of BoJ rate hikes and a preference for a weaker currency.
- The reversal lower for USD/JPY confirms the rejection of resistance that coincided with the Y146.20 50-dma as well as the uptrendline drawn off the August 5th low (146.27 today). This could heighten the importance of the Friday high at 146.49 on any rallies ahead.
- EUR is the poorest performer ahead of the NY crossover, with soft French and Spanish inflation prints setting markets up for a lower-than-forecast outcome at Tuesday's Eurozone CPI Estimate. The implications for the ECB are real - markets had solidly assumed a pace of quarterly rate cuts from the ECB, but these inflation prints have bolstered calls for further action as soon as the October meeting. This speculation has driven EUR/GBP back toward recent pullback lows and major support at 0.8317 - the late Sept low.
- Canada's GDP print for July and US personal income/spending, PCE price index data for August are the calendar highlights Friday, as well as the final UMich sentiment print. The central bank speaker schedule is topped by ECB's Nagel, Cipollone and Fed's Collins, Kugler and Bowman.
EQUITIES: Bull Cycle in E-Mini S&P Firms Following Thursday's Rally
- Eurostoxx 50 futures trade firmly Friday morning, having tripped the bull trigger ahead of the Thursday close. Short-term momentum is tilted higher, with 5065.38 resistance (the 0.618 proj of the Aug 5 - Sep 3 - Sep 6 price swing) cleared to open 5100 and 5114 above. On an intraday basis, 5090.47 could cap rallies, but the picture remains firm the longer prices hold above the mid-week lows.
- A bull cycle in S&P E-Minis firmed again Thursday with the confirmed break above both round number resistance at 5800 and the 0.50 projection for the Sep 6 - 17 - 8 minor price swing at 5818.12. This confirms a resumption of the long-term uptrend. First key support is 5635.41, the 50-day EMA. Initial support lies at 5700.77, the 20-day EMA.
COMMODITIES: WTI Futures Remain Soft After Reversing Large Part of Recent Gains
- WTI futures remain softer, reversing a large part of recent gains. This affirms the strength of resistance at the 50-day EMA of 72.25, which remains the key upside level. This price action confirms the recovery since Sep 9 as a correction. Note that MA studies are in a bear-mode set-up, highlighting a dominant downtrend. A reversal lower would refocus attention on $64.61, the Sep 10 low and bear trigger.
- Gold bulls remain in the driver’s seat and the yellow metal has again traded to a fresh all-time high. The move higher confirms a resumption of the primary uptrend and maintains the bullish price sequence of higher highs and higher lows. Moving average studies are in a bull-mode set-up, highlighting a clear uptrend and positive market sentiment. The focus is on $2675.5 next, a Fibonacci projection. Firm support lies at $2577.4, the 20-day EMA.
| Date | GMT/Local | Impact | Country | Event |
| 27/09/2024 | 1230/0830 | *** |  US | Personal Income and Consumption |
| 27/09/2024 | 1230/0830 | *** |  CA | Gross Domestic Product by Industry |
| 27/09/2024 | 1230/0830 | ** | US | Advance Trade, Advance Business Inventories |
| 27/09/2024 | 1230/0830 | *** | CA | Gross Domestic Product by Industry |
| 27/09/2024 | 1330/0930 | US | Fed's Susan Collins, Adriana Kugler | |
| 27/09/2024 | 1400/1000 | ** | US | U. Mich. Survey of Consumers |
| 27/09/2024 | 1500/1100 | CA | Finance Dept monthly Fiscal Monitor (expected) | |
| 27/09/2024 | 1715/1315 | US | Fed Governor Michelle Bowman |
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