MNI US MARKETS ANALYSIS - First Fed Cut Eyed in May

US TSYS: Post-Waller Rally Extends, Supported By Softer Inflation Overseas

• Cash Tsys are off best levels but still trade 3-4bp richer today in an extension of yesterday’s accelerated rally following dovish remarks from Waller (increasingly confident Fed policy well positioned; if inflation stays at similar readings for three, four or five months could see lower rates).
• The move was helped at the margin by softer than expected Australian CPI, and whilst most of the move had come ahead of softer than expected German regional inflation, it helped support the richer levels on the day.
• After yesterday’s large steepening, the parallel shift in the curve keeps 2s10s at -41bps for back at mid-Nov levels.
• TYH4 at 110-05+ (+08+) is off an earlier high of 110-14+, with the day’s increase reinforcing the current bullish theme. The earlier high marks initial resistance after which lies 110-25 (1.00 proj of Oct 19-Nov 3-Nov 13 price swing).
• Data: The second release for Q3 GDP/PCE (0830ET) is in focus today with consensus for GDP to have firmed marginally further to a particularly strong 5% annualized. We also see weekly MBA mortgage data shortly (0700ET), plus wholesale/retail inventories and the advance trade balance all for October (0830ET).
• Fedspeak: Mester (’24) on financial stability at 1345ET ahead of the Fed’s Beige Book at 1400ET.
• Bill issuance: Tsy to sell $56B 17-week bills (1130ET)

First Fed Cut Seen With May FOMC

• Fed Funds implied rates have pushed lower still overnight after yesterday’s dovish Fedspeak from Waller (increasingly confident Fed policy well positioned; if inflation stays at similar readings for three, four or five months could see lower rates). Further moves came ahead of data but were then supported by weaker than expected German regional CPI data.
• It sees no further tightening priced again, whilst a first cut was fully priced for May earlier (currently 24.5bp cumulative), building to a cumulative 108bp of cuts to year-end. The Dec'24 implied rate has fallen 19bp since just before Waller started speaking.
• Cleveland Fed’s Mester (’24 voter, retiring June) headlines sole scheduled Fedspeak today on Financial Stability shortly before the Beige Book.

OI Indicates Long Setting As Dominant SOFR Positioning Factor On Tuesday

The combination of yesterday’s rally in SOFR futures and preliminary OI data points to net long setting as the dominant factor on the SOFR strip on Tuesday.

• The whites saw the largest such swing on a pack basis, with the well-documented dovish commentary from Fed Governor Waller (who pulled further away from his reputation as a hawk) filtering through.
• Also note that hedge fund manager Bill Ackman suggested that the first Fed rate cut could come as soon as Q124, with BBG headlines noting "Bill Ackman Bets Fed Will Cut Rates as Soon as First Quarter."
• Pockets of apparent short cover were also seen, most notably in the reds, which seemingly saw short cover in net terms on a pack basis.

EUROPE ISSUANCE UPDATE

• GBP4.25bln of the 3.50% Oct-25 Gilt. Avg yield 4.554% (bid-to-cover 2.36x, tail 2bp)
• Another weak auction for the 2-year 3.50% Oct-25 gilt. This follows yesterday's weak 30-year gilt auction (but also follows yesterday's BOE short-dated APF op which saw reasonable takeup). The price of the 3.50% Oct-25 gilt actually moved higher in the aftermath of the auction results, despite the average auction price coming in below the pre-auction mid-price and despite the wide 2.0bp tail.
• Gilt futures largely looked through the disappointing auction, falling around 8 ticks on the results publication but then rebounding back to prevailing levels within less than 2 minutes and then setting a new intraday high a few minutes later.

• E3bln of the 4.10% Feb-29 BTP. Avg yield 3.61% (bid-to-cover 1.45x).
• E3.5bln of the 4.20% Mar-34 BTP. Avg yield 4.17% (bid-to-cover 1.45x).
• E1bln of the 0.50% Apr-26 CCTeu. Avg yield 4.43% (bid-to-cover 1.99x).
• Auction largely in line with last month's results with a decent premium in the auction price to the pre-auction mid-price. Remember that this is the final 5/10-year BTP / CCTeu auction of the year.

• E3.5bln (E2.82bln allotted) of the 2.60% Aug-33 Bund. Avg yield 2.45% (bid-to-cover 1.40x).
• Not the strongest German 10-year auction with a decline in the bid-to-offer / bid-to-cover compared to last month's auction - despite today seeing a smaller auction size.
• In fact, in terms of 10-year Bund auctions, this appears to have similar metrics to the 6 September auction (worse than any since) and that auction was for E5bln (E4.1bln allotted) - so much larger than today's auction.
• However, the lowest accepted price still exceeded the pre-auction mid-price and there has been little market reaction. Overall we would say this is a mildly disappointing auction.

FOREX: EUR Fades Off Highs as Regional CPIs Slow Faster Than Forecast

• EUR/USD trades in decent volumes to pull lower off another higher high overnight. Today's reversal off the best levels is - at present - no risk to the broader uptrend after yesterday's break and show above 1.10. The Waller-inspired rally helped trigger a fifth session of higher highs overnight, and today's move lower is likely corrective in nature. This has kept the RSI from erring into overbought territory.
• EUR futures volumes sit around 50% ahead of average for this time of day - thanks to a sharp spike in activity that coincided with the soft Spanish CPI print.
• Largely due to the waning EUR, the USD Index is in positive territory, and a close at current or higher levels would prompt the first daily close in the green since Thursday last week. Despite the recovery off the November low, the USD Index remains in a short-term corrective cycle lower, with the 200-dma still a way above at 103.601.
• NZD is the firmest currency across G10, after the RBNZ rate decision kept headline policy unchanged, but signaled strongly that further hikes will follow in 2024 should CPI remain stubbornly high in the interim. NZD/USD is off the overnight high of 0.6208, but the uptrend remains intact. Further strength would open 0.6274 ahead.
• Prelim German CPI data takes focus later today, with regional CPI prints so far this morning supportive of consensus that looks for headline to slow to -0.1% from 0.0% and 3.5% from 3.8% Y/Y. US trade balance and secondary US GDP data is set to follow, as well as appearances from Fed's Mester, BoE's Bailey & Hauser.

FX OPTIONS: Expiries for Nov29 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0895-00(E1.5bln), $1.0970-75(E1.2bln)
• USD/JPY: Y148.00-15($2.1bln), Y148.50($926mln), Y149.00-05($1.1bln)
• AUD/USD: $0.6500(A$2.5bln), $0.6525(A$1.2bln)
• USD/CNY: Cny7.1700($667mln)

EGBS: Firmer on Positive Inflation Data; Peripheries Tighter

Core/semi-core EGBs are off the day's best levels, but remain firmer on the day on the back of soft EZ inflation indications and dovish Fed-Speak yesterday.

• November flash inflation estimates from German states and Spain have pointed to a downside risk to the current Eurozone HICP consensus (at 2.7% Y/Y, released tomorrow @ 1000GMT). Yesterday's impetus came as Fed Governor Waller - an influential member of the FOMC - brought up the idea of US rate cuts in the coming months to maintain the level of real rates.
• Bund and OAT futures are both up around 40-50 ticks at typing, while the German 2s10s curve lightly bull steepens as 10-Year Bund supply would have limited the downside in yields. The OAT curve is seen bull flattening, with the 2s10s curve down -2.4bp today at -24.9bp.
• Peripheries outperform in line with the positive risk sentiment across markets, with the 10-Year BTP/Bund spread tightening 3.1bps to 172.4bps. The final 5/10-Year BTP auction of the year will have weighed in the lead up, but demand metrics came out reasonably strong with a decent auction price vs the pre-auction mid. News that the EC has approved Italy’s E16.5bln NGEU payout will have also been supportive.
• The remainder of today's docket sees the German national CPI print at 1300GMT, with no ECB speakers currently scheduled.

EQUITIES: Pullback in Eurostoxx 50 Futures Considered Corrective

• A bullish theme in Eurostoxx 50 futures remains intact and the latest pullback appears to be a correction. The short-term trend condition is overbought and a move lower would allow this overbought reading to unwind. Moving average studies are in a bull-mode position signalling a rising cycle and the potential for a continuation higher. A resumption of gains would open 4388.00, the Aug 30 high. Initial firm support to watch is at 4290.00, the 20-day EMA.
• A bullish theme in S&P e-minis remains intact and the contract is holding on to its recent gains. A strong rally on Nov 14 resulted in the break of a trendline drawn from the Jul 27 high. This breach reinforces bullish conditions and signals scope for a climb towards 4597.50, the Sep 1 high. Moving average studies are in a bull-mode position highlighting an uptrend. On the downside, initial firm support is seen at 4473.54, the 20-day EMA.

COMMODITIES: Strong Rally in Gold This Week Reinforces Bullish Set-Up

• The trend outlook in WTI futures is unchanged and remains bearish. Attention is on support at $72.37, the Nov 16 low. A break of this level would confirm a resumption of the downtrend that started late September and maintain a price sequence of lower lows and lower highs. Moving average studies are in a bear-mode position, highlighting a downtrend. Key resistance is unchanged at $79.65, the Nov 14 high.
• The trend condition in Gold remains bullish and this week’s strong rally reinforces this set-up. The yellow metal has traded through resistance at $2009.4, the Nov 7 high. The clear break of this hurdle has confirmed a resumption of the uptrend and signals scope for an extension towards 2063.0, the May 4 high and a key resistance. Note the all-time high at $2070.4 (Mar 8 ‘22). Initial firm support is at $1983.8, the 20-day EMA.