MNI US MARKETS ANALYSIS - European PMIs Point to Stagflationary Conditions

US TSYS: Belly-Led Rally From European PMIs, Payrolls Prelim Benchmark Revisions Ahead

• Cash Tsys has seen a belly-led rally overnight as the US session gets underway, driven by softer than expected European service PMIs. It sees the front-end reverse most of yesterday’s sell-off whilst further out the curve we are increasingly back to Monday’s levels.
• Data are in focus today with August flash US PMIs, preliminary benchmark revisions for the establishment survey including payrolls plus new home sales, before attention on 20Y supply.
• 2YY -4.9bp at 4.997%, 5YY -7.2bp at 4.416%, 10YY -6.5bp at 4.259%, 30YY -5.0bp at 4.350%.
• TYU3 trades 12 ticks higher at 109-14 on strong cumulative volumes of 445k. Resistance is seen at 109-28+ (Aug 18 high) but trend conditions are seen remaining bearish, with support at 108-28 (Aug 22 low).
• Data: Weekly MBA mortgage data (0700ET), S&P Global US prelim PMIs Aug (0945ET), Preliminary Payrolls Benchmark Revision (1000ET), New home sales Jul (1000ET)
• Note/bond issuance: US Tsy $16B 20Y Bond sale (912810TU2) – 1300ET
• Bill issuance: US Tsy $24B 2Y FRN R/O (91282CHS3), $50B 17W Bill auctions – 1130ET

STIR FUTURES: Fed Implied Rates Softer After Weak European Service PMIs

• Fed Funds implied rates have pushed lower overnight in spillover from softer than expected European service PMIs. It comes ahead of today’s preliminary PMIs for the US along with preliminary benchmark revisions for the establishment survey.
• Cumulative hikes from 5.33%: +3bp Sep (-1bp on the day), +11bp Nov (-1bp) and with Dec still close with +9.5bp (-1bp).
• Cuts from Nov terminal: 1.5bp to Dec’23, 43bp to Jun’24 (from 41bp) and 107bp to Dec’24 (from 104bp).
• No scheduled Fedspeak today before Jackson Hole proceedings kick into gear. In case missed yesterday, the director-level discount rate discussions, separate to Fed Funds target discussions, hinted that the “couple” of FOMC participants noted in the minutes of the July 26 FOMC decision who favored holding rates steady, or could have supported such a proposal, were potentially Williams and Bostic judging by NY and Atlanta Fed directors (not presidents) favoring no change.

Source: Bloomberg

EUROPE ISSUANCE UPDATE:

German auction result

• A decent 7-year Bund auction with the bid-to-offer/cover both coming in notably better than a last month's launch auction. Part of this was due to the auction size being smaller but that only accounted for part of the improvement. The lowest accepted price of 99.14 was higher than the mid-price in the 3 minutes leading up to the cut-off time and following the auction we were trading comfortably above that level (and indeed about the average auction price).
• E3bln (E2.431bln allotted) of the 2.40% Nov-30 Bund. Avg yield 2.53% (bid-to-cover 1.92x).

EFSF dual-tranche syndication update:

• E1bln tap of the 3-year 2.75% Aug-26. Spread set at MS-20bp, books closed in excess of E2.2bln
• E2bln of the new 15-year Aug-38. Spread set at MS+28bp, books closed in excess of E8.4bln.

Finland syndication update:

• E3bln of the new 5-year Apr-29 RFGB. Spreads set at MS-20bp, books close in excess of E11.75bln.

EUR/USD Vols Supported, Spot Testing Key Support

• EUR/USD implied vols are edging higher on the back of the poor PMI data, with the 1m contract (capturing the next ECB rate decision on September 14th) narrowing in on 7.427 vol points - the highest level since mid-May.
• The moves coincide with the pull lower in Sept ECB pricing - which shed ~4bps to dip implied pricing for a 25bps hike at the next meeting back below 50% - but most importantly signal the risk and uncertainty around the ECB's next policy move.
• For EUR/USD spot, price remains anchored by the most sizeable expiry for today's NY cut: E2.1bln set to roll off at 1.0800 - brought into range by the poor services PMIs. That strike also coincides with sizeable support ahead: the 200-dma crosses at 1.0799 - a level markets haven't broken below since mid-2021, which helped presage the ~12 month downtrend in the pair.

FOREX: EUR/GBP Cements Bearish Break on Poor PMIs

• The EUR slipped alongside poor PMI data from France and Germany, with the services sector falling short of forecast and showing more broad-based economic weakness. The subsequent break lower in EUR/GBP put the cross to the lowest levels since last August, with prices piercing the key support at 0.8504 (the YTD low). A close at or below these levels would mark a bearish break and cement the downtrend posted off the mid-August high (with the 100-dma proving the key resistance in the cross). 0.8479 marks the next downside level, the 1.0% 10-dma envelope ahead of 0.8471, the Aug 29 '22 low.
• EUR/JPY extending corrective pullback on the PMIs, putting the cross through last week's lows of 157.66 as well as the 23.6% retracement for the Jul - Aug upleg. Next key level on the way lower: the 156.66 50-dma that's helped define the uptrend off the March lows. JPY the main beneficiary of the soft data this morning, but the USD also gaining and helping keep GBP/USD under pressure and at the lowest levels of the week so far.
• Meanwhile, UK PMI numbers showed weak demand via sluggish new orders as well as a further moderation in inflationary pressures, evident in the slowest pace of rise in input costs for two-and-a-half years.
• Prelim US PMI data takes focus ahead, with markets expecting manufacturing to hold below 50.0, while services holds just in expansion territory. New home sales data is set to follow alongside Eurozone consumer confidence. The speaker slate remains light, keeping focus on the beginning of the Jackson Hole policy symposium later in the week. Markets received confirmation earlier today that BoJ's Ueda would be in attendance.

Expiries for Aug23 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0800(E2.0bln), $1.0825-35(E1.7bln), $1.0845-55(E518mln)
• USD/JPY: Y145.00($1.7bln)
• AUD/USD: $0.6529(A$570mln)
• NZD/USD: $0.6100(N$670mln)
• USD/CNY: Cny7.5690($2.7bln)

EQUITIES: Latest Recovery in E-Mini S&P Deemed Technically Corrective

• A bearish theme in Eurostoxx 50 futures remains present and the latest recovery appears to be a correction. The contract has recently breached support at 4276.00, the Aug 8 and 15 low and cleared 4220.00, the Jul 7 low. This opens 4177.40, a Fibonacci retracement. Key short-term resistance is unchanged at 4420.00, the Aug 10 high. Initial firm resistance is 4341.10, the 50-day EMA.
• A bearish theme in the E-mini S&P contract remains intact and this week’s recovery appears to be a correction. Last week’s price action reinforces this theme. The move lower resulted in a break of the 50-day EMA and a breach of channel support drawn from the Mar 13 low. The Jun 26 low of 4368.50, was breached last Friday and attention is on 4344.28, a Fibonacci retracement. Initial firm resistance is at 4452.08, the 50-day EMA.

COMMODITIES: Outlook for Gold Remains Bearish Despite Recent Gains

• The uptrend in WTI futures remains intact and recent weakness appears to be a correction. Firm support to watch is unchanged at $78.33, the Aug 3 low. A clear breach of this level would signal scope for a deeper short-term retracement. For bulls, a resumption of gains would refocus attention on the next objective at $85.24, a Fibonacci projection. Moving average studies are in bull-mode condition that continues to highlight an uptrend.
• The outlook in Gold remains bearish and short-term gains are considered corrective. The yellow metal has breached key support at $1893.1, the Jun 29 low. The clear break strengthens bearish conditions and signals scope for $1865.8, a Fibonacci retracement. Moving average studies are in bear mode condition, highlighting current bearish sentiment. On the upside, initial firm resistance to watch is $1932.7, the 50-day EMA.