MNI US MARKETS ANALYSIS - Fed Pricing Inches Back Toward 50bps

MNI (LONDON) - Highlights:

• Fed pricing inches back toward a 50bps step in September
• Demand for EUR upside persists via options, despite faltering spot
• Weekly claims data next up

US TSYS: Front End Reversing Gains, Claims In Focus Before 30Y Supply

• Treasuries have pushed back to the low end of the day’s range having retraced a rally on initial Japan earthquake headlines as tsunami threats were downgraded.
• They still sit firmer on the day after a session that pre-earthquake was light on headlines.
• Cash yields are 0-1.7bp lower on the day as they modestly extend yesterday’s late rally on equity weakness and arguably some softer details within credit data.
• The long end leads the rally for some minor flattening payback after yesterday’s sizeable steepening as the 10Y auction tailed by 3bps along with a solid increase in dealer take-up.
• 2s10s at -3.7bps is off overnight highs of -0.5bps, which also remained a little shy of Monday’s +2bp (highest since mid-2022). Today’s 30Y supply keeps long-end supply in focus with 5s30s still elevated at 48.6bps.
• TYU4 at 113-06+ (+ 10) is off a high of 113-14 but having remained within yesterday’s range throughout, on strong volumes of 465k. Support is seen at 112-21 (Aug 2 low) but declines are deemed corrective with resistance at 114-03 (Aug 6 high).
• Data: Jobless claims (0830ET), Wholesale inventories/sales Jun F/Jun (1000ET)
• Fedspeak: Barkin NABE webinar (1500ET)
• Note/bond issuance: US Tsy $25B 30Y Bond auction - 912810UC0 (1300ET)
• Bill issuance: US Tsy $95B 4W, $90B 8W Bill auctions (1130ET)

STIR: Back Closer To Fully Pricing 50bp Fed Cut For September

• Fed Funds implied rates have cooled a little further to extend yesterday’s decline that came as falling equities increasingly weighed late on. An additional 10bp of cuts to year-end have been added since yesterday’s overnight post-payrolls high.
• Cumulative cuts from 5.33% effective: 47.5bp Sep, 81bp Nov, 114bp Dec and 136bp Jan.
• Weekly jobless claims highlight the docket considering particular sensitivity to labor market data. Later, Barkin (’24 voter) speaks in a NABE webinar at 1500ET (text tbd) - the sole remaining scheduled Fedspeak for the week – but he’s already spoken since payrolls.
• He said late Friday that 114k jobs growth is pretty normal historically but there is debate about how much of the weakness was due to weather. He’s a little more confident on inflation in the near-term and said it will take some time for rate cuts to permeate the economy but there is an inflation risk from lower rates driving up home prices.

US TSY FUTURES: OI Points To Mix Of Net Short Setting & Long Cover During Wednesday’s Sell Off

OI data points to net short setting dominating from a positioning perspective during Wednesday’s sell off.

• Net short setting across FV, TY & UXY comfortably outweighed net long cover in TU, US & WN.
• A reminder that the recent rally saw heavy rounds of net long setting across the curve. Those positions could come under pressure if broader risk sentiment recovers further in the coming sessions.

STIR: OI Data Suggests Variety Of Positioning Swings In SOFR Futures On Wednesday

OI points to a variety of net positioning swings in SOFR futures during yesterday’s twist steepening

 

• Net short cover seemed to dominate in the whites, while a mix of net short setting and long cover was seen further out.
• Early hawkish moves moderated during the NY afternoon as equities came under fresh pressure.

MACRO ANALYSIS: German Manufacturing Remains In The Doldrums [1/2]

• German factory orders and industrial production for June have come in stronger than expected over the past two days, although as noted yesterday the latter was entirely offset by negative revisions.
• The data don’t wildly change a theme of German industry having acted as a significant drag on growth and with orders data suggesting little reason for optimism ahead.
• Specifically, industrial production ex construction stood at -4.4% Y/Y in June whilst orders were -11.7% Y/Y (both calculated from swda data), or -5.1% Y/Y and -7.5% Y/Y in Q2.
• This leaves German industrial production seeing the largest contraction of the big four Eurozone economies, doubly of note considering its economy is far more reliant on industry – see charts.
• This manufacturing pessimism has been reflected for some time in the S&P Global Germany PMIs, with sub-50 mfg readings ever since Jul’22 following significant spillover from Russia’s invasion of Ukraine. At 43.2 in the final July release, this index is off mid-2023 lows but still implies heavy contraction.
• It has put a burden on the service sector, which whilst healthier at 52.5 in July hasn’t been enough to stop the composite PMI returning to sub-50 readings with 49.1 in July after a brief return above 50 to a high of 52.4 in May. Indeed, the composite averaged 47 through 2H23-1Q24, a period in which GDP growth averaged just -0.2% Y/Y.

MACRO ANALYSIS: German Business Sentiment Remains Depressed [2/2]

• As for broader forward-looking indicators, the difference in the Ifo business survey’s future and present situation indices has at least started to look healthier compared to its lows from 2H22.
• This has historically been a useful metric around turning points in the economic cycle, although we note that the continued trend improvement has more been the assessment of the present situation better reflecting what has been historically soft sentiment for future conditions – see charts.
• The underperformance reflected in part one has started to be increasingly reflected in relative changes in unemployment rates (https://marketnews.com/germany-sees-greatest-relative-easing-in-european-labor-market-2-2) and could also be a by-product of Germany still seeing sizeable drags from a credit impulse perspective (https://marketnews.com/italy-and-spain-lead-positive-credit-impulse-swing-after-large-drags-2-2)
• The latter, if it starts to dissipate in the months ahead, could help to revitalize the economy but there is little sign of it in manufacturing (a recent lift in 3m/3m core factory orders aside that is yet to materially lift longer trend measures).

STIR: Fresh ’24 Highs For TTF Futures Further Complicates Inflation Moderation Narrative

Plenty of focus on the uptick in TTF natural gas prices, with the contract hitting a fresh ’24 high on increased supply risks.

 

• While the moves and outright price level in the contract pale in comparison when compared to the major swings and price peaks seen in the last 3 years, there is still some risk that the move higher could extend further.
• Any such move would further complicate the inflation moderation narrative, albeit with the ECB more concerned with sticky services inflation at this juncture.
• EUR STIRs have looked through the move at this stage, focusing on swings in broader risk sentiment.
• ECB-dated OIS continues to price a relatively aggressive easing cycle through the remainder of the year, with just under 75bp of cumulative cuts priced across the three remaining meetings of ’24.
• While EUR STIRs have pulled away from this week’s dovish extremes (~90bp of ’24 ECB cuts), current market pricing still looks aggressive when compared to the steer provided by several Governing Council members, which has tended to guide towards quarterly moves in benchmark rates.

SPAIN: Police Hunt Puigdemont, Arrest Could Pose Risks To Madrid Gov't Stability

A major police blockadehas been set up in Barcelona, intended to catch former Catalan regional president Carles Puigdemont. The leader of the pro-independence Junts, Puidgemont is in Spain for the first time since 2017 when he entered self-imposed exile after an arrest warrant was issued against him and others following the illegal Catalan independence referendum of that year.

• Earlier this morning Puidgemont spoke to supporters close to the Catalan parliament ahead of the investiture vote of pro-union PSC leader Salvador Illa as regional president. He was not seen after the speech and did not try to enter the parliament, with the prospect that he was attempting to flee justice.
• Should Puigdemont be arrested it could have implications not only for Catalan politics but Spain's broader fiscal outlook. The gov't has already rolled overthe 2023 budget to 2024 amid lengthy efforts to form a gov't and the Catalan regional election in the spring. This could have to happen again, with Junts already voting against the gov't in the early stages of the process to enact a 2025 budget in July. Rolling over the budget could avoid confidence votes or Sanchez calling an early election.
• Nevertheless, given that Spanish PM Pedro Sanchez's minority leftist gov't relies on Junts for a majority, the arrest of Puidgemont would likely prove inflammatory to Catalan separatists, risking them withdrawing support entirely. This could significantly hamper the gov't's ability to enact legislation.

AUD Benefits From Bullock's Vigilance

• Following the acute spell of weakness posted off the July high, AUD trades on a more stable footing early Thursday, ahead of all others in G10 on the back of an appearance from the RBA governor Bullock. Bullock did not shy away from talking up the prospect of a rate hike in the near future, with the central bank retaining their vigilant approach to inflation.
• Elsewhere, JPY trades marginally firmer, but USD/JPY holds comfortably north of the Y145 handle as the fraught equity backdrop persists. Index futures trades lower across Europe, and US markets are mixed ahead of the cash equity open.
• The NOK is the poorest performer in G10 as the currency reverses a small part of the two-day rally posted off the Monday low. USD/NOK has shrugged off the slowing wages data evident in this morning's Q2 release, which should keep the wage picture off the Norges Bank's lists of concerns ahead of next week's rate decision. CPI data should prove more eventful for the currency, set for release early Friday. 
• Weekly jobless claims data tops the docket Thursday, with wholesale inventories and trade sales unlikely to move the market needle. The speakers slate is similarly muted, with just Fed's Barkin appearing for a fireside chat just ahead of the US cash close.

Better Demand for Upside Via Options, Despite Softer Spot

• The fade off highs for EUR/USD spot belies a better market for upside among options - with over $3 in calls trading for every $2 in puts so far Thursday. Demand for call strikes layered between $1.10 and $1.11 stands out, making up close to half of all call notional crossing the DTCC today - but interest is seen as high as 1.17 in trades consistent with vol hedging targeting an early October expiry - thereby capturing both the September Fed/ECB rate decisions and any subsequent fallout from the expected rate cuts.
• While EUR/USD has faded off highs, the currency fares better against GBP (as noted above) but has been unable to make headway above 160.00 in EUR/JPY despite a sharp bounce off the 154.42 low printed earlier this week. This could keep a sell-on-rallies theme dominant in the near-term, particularly once the 14d RSI reverses the acute oversold condition. 

WTI Futures Hold Onto the Bulk of Wednesday's Gains

A bear threat in WTI futures remains present and the contract traded lower Monday, extending the current downtrend, before recovering. Sights are on the next key support at $72.23, the Jun 4 low. It has been pierced, a clear break would reinforce bearish conditions and pave the way for an extension towards $70.73, the Feb 5 low. Key resistance is seen at $78.88, the Aug 1 high. Short-term gains would allow an oversold condition to unwind. Recent weakness in Gold appears to be a correction. However, note that the yellow metal has managed to pierce support at the 50-day EMA - at $2375.6. A clear break of this EMA would signal scope for a deeper retracement towards $2277.4, the May 3 low and a key support. For bulls, a resumption of gains would open $2483.7, the Jul 17 high and a bull trigger. Clearance of this hurdle would resume the uptrend.

• WTI Crude down $0.14 or -0.19% at $75.01
• Natural Gas down $0.03  or -1.42% at $2.081
• Gold spot up $10.52 or +0.44% at $2393.73
• Copper up $0.8 or +0.2% at $395.85
• Silver up $0.23 or +0.86% at $26.8468
• Platinum up $6.67 or +0.73% at $924.78

Upside EURGBP Bias Remains Intact, UK CPI Data Next Week

• Last week’s close back above the July 1 high and notable pivot at 0.8500 marked an important development for EURGBP, cancelling the recent bearish theme and highlighting a potential short-term reversal. Dips have remained well supported this week and the cross is testing above initial resistance this morning at 0.8621, the May 9 high.
• We noted the severe deterioration of global risk sentiment as having likely weighed on high-beta GBP and despite the moves remaining relatively limited compared to some G10 counterparts, outperformance this year and stretched positioning could provide further short-term headwinds for sterling.
• 0.8645, the Apr 23 high, marks a key resistance and further out, attention will be on 0.8715, the Dec 28 high.
• UK employment data and CPI figures for July will be released next week and will be the key short-term focus for BOE pricing & GBP sentiment.
• For the longer-term, attention will be on political risk developments, with the October 30 budget likely to receive intense scrutiny as the new labour government attempts to shore up the UK’s finances. 

Date	GMT/Local	Impact	Country	Event
08/08/2024	1230/0830	***	US	Jobless Claims
08/08/2024	1230/0830	**	US	WASDE Weekly Import/Export
08/08/2024	1400/1000	**	US	Wholesale Trade
08/08/2024	1430/1030	**	US	Natural Gas Stocks
08/08/2024	1530/1130	*	US	US Bill 08 Week Treasury Auction Result
08/08/2024	1530/1130	**	US	US Bill 04 Week Treasury Auction Result
08/08/2024	1700/1300	***	US	US Treasury Auction Result for 30 Year Bond
08/08/2024	1900/1500	***	MX	Mexico Interest Rate
08/08/2024	1900/1500		US	Richmond Fed's Tom Barkin
09/08/2024	0130/0930	***	CN	CPI
09/08/2024	0130/0930	***	CN	Producer Price Index
09/08/2024	0600/0800	***	DE	HICP (f)
09/08/2024	0600/0800	**	SE	Private Sector Production m/m
09/08/2024	0600/0800	***	NO	CPI Norway
09/08/2024	0800/1000	**	IT	Italy Final HICP
09/08/2024	1230/0830	***	CA	Labour Force Survey
09/08/2024	1700/1300	**	US	Baker Hughes Rig Count Overview - Weekly