MNI US MARKETS ANALYSIS - Front-End Yields Slide as Fed Repricing Pervades

US TSYS: FI Surges and Fed Rate Expectations Slump On Regional Bank Contagion Fears

• Cash Tsys have pared most recent gains but nevertheless see huge rallies on the day, with the 2YY 11bps off session lows but still down more than -30bps on Friday’s close. The Asia open saw a solid bid despite the Fed unveiling a funding facility to relieve strain from SVB’s failure but the initial rally was small compared to the subsequent acceleration through European hours as significant spillover was seen in EU FI.
• Latest STIR: Pricing just a 20bp hike for the March 22^nd FOMC (vs 43bps Wed close) and a terminal of 4.88% with the Jun meeting for -40bps on the day (vs a Wed close high of 5.69% for the Sep meeting). It’s seen followed by almost 40bps of cuts to 4.49% by year-end.
• President Biden is seen speaking on maintaining a resilient banking system and protecting the economic recovery after 0800ET.
• 2YY -31.7bps at 4.270%, 5YY -21.4bps at 3.747%, 10YY -13.9bps at 3.560% and 30YY -5.1bps at 3.655%..
• TYM3 trades +1-08 higher on huge volumes with 1.3M vs 350k average for the time of day. A number of Fibo retracement points have been cleared with an earlier high of 114-29+ forming initial resistance, after which lies 115-03+ (76.4% retrace of Feb 2 – Mar 2 bear leg). Initial firm support lies 112-31+, the 50-day EMA.
• No data on the docket with data focus instead on tomorrow’s CPI report.
• Bill issuance: US Tsy $57B 13W and $48B 26W bill auctions (1130ET)
• Fed in media blackout for macro/mon pol issues.

FED: March Pause Is "Live", Will FOMC Comms Push Back?

• But implied probability of a pause vs 25bp hike at the March FOMC hit a 50%/50% chance (12.5bp priced) this morning. Meanwhile the current leadership "guidance" going into the blackout period was from Powell implying 50bp was firmly on the table, and that may well have been their base case as recently as the middle of last week.
• Tomorrow's CPI will play a part in the decision, and market pricing could yet consolidate around a 25bp hike (50bp looks less and less likely barring an inflation shocker).
• With such uncertainty about the US bank situation and how the Fed sees it impacting the economic outlook (let alone how it sees the latest jobs and CPI data), the 2-day FOMC looms large, particularly since the communications task was already going to be increasingly complicated by the new Dot Plot.
• Given the way this Fed has handled hike uncertainty in the past it wouldn't be a major surprise to get some indication of which way the Fed is leaning by the start of next week (think June's 75bp hike communication via the WSJ).
• That could especially be the case if - once the dust has settled a little in the next few days - the market starts pricing a pause but the FOMC still sees the risks of undertightening as being greater than those of overtightening given the run of strong data.

MNI Employment Insight, Mar'23: SVB-Related Fallout Trumps Goldilocks Report

EXECUTIVE SUMMARY

• We’re left with a labour market that was still drumming up very fast seasonally adjusted payrolls creation in February (311k vs cons 225k) albeit with downward revisions taking the gloss off, especially for the private sector.
• However, judging by the household survey, it is starting to see increased labour supply help offset it and the prime-age participation rate has recovered to a peak shortly before the pandemic, prior to which last seen 2008, whilst the unemployment rate ticked higher.
• Increased labour supply plus a small miss for overall AHE growth helps mitigate inflationary pressures but it’s only one month of data, with more reliable wage measures and clearly upcoming CPI in firm focus.
• Powell’s prior openess to a 50bp hike at the upcoming meeting helped limit market reaction but continued fallout from SVB’s failure has seen huge FI rallies with Goldman leading analysts in calling for a temporary pause with the March FOMC decision.

PLEASE FIND THE FULL REPORT HERE:

USEmploymentReportMar2023.pdf

FOREX: Greenback Slides as Banking Fallout Seen Crimping Fed Hiking Plans

• The US dollar is comfortably the poorest performer across G10, sliding against all others as markets pull back on implied rate hike pricing. For the Fed's March meeting, markets are now pricing in a solid chance of no change and a possible pause in the rate hike cycle. The USD Index is narrowing in on first key support at the 50-dma at 103.469 - a break below here opens levels not seen since mid-February.
• The moves follow the formal failure of both Silicon Valley Bank and Siganture Bank, with concerns that the Federal package announced by authorities over the weekend pushes to protect depositers, but falls short of any protection for equity or bond holders. Market focus turns to any further evidence of possible contagion across the global banking sector, as European banks slide sharply in one-way price action through the opening bell.
• Haven currencies are the notable outperformers, with JPY and CHF among the strongest in G10. USD/JPY has slipped to 133.56 while USD/CHF shows below 0.9150 for the first time since February 14th.
• The data and speaker slate is particularly light, with just an appearance from BoE's Dhingra on the docket. Both the ECB and Fed remain within their pre-meeting media blackout periods.

EGBS: Schatz Yields on Course for Record Drop

As ECB implied rates pull back on a US banking crisis-led flight to safety, 2Y German yields are currently on course for easily their biggest daily fall (going back to 1990), down 44bp on the day, more than 10bp greater than the previous record closes. 2-year OATs briefly touched 50bp lower on the day. Last seen at 2.71% and 46bp down from the last close.

ECB / BOE / FED pricing update:

• ECB: There is now around 42bp priced for this week's meeting (down from around 46bp on Friday's close and around 49bp on Thursday) as downside risks to the telegraphed 50bp hike this week continue. There are still 105bp of cumulative hikes priced by the October meeting, around 60bp below last week's peak.
• BOE: Markets now price around 15bp for next week's meeting (from around 26bp on Thursday) with a cumulative peak of 47bp of hikes priced by September (almost half the c. 90bp on Thursday).
• FED: Implied % Probability of a Fed pause next week rose above 30% in the past 15 minutes (70% prob of a 25bp hike). Prior to the SVB headlines hitting last Thursday, there was nearly 70% probability implied of a 50bp hike.

EQUITIES: European Banks Fade, But US GSIBs See Early Strength

• Early action in US equities (pre-market trade in single stocks starts an hour earlier for Europe due to the roll forward for US clocks) is putting more pressure on regional banks with a similar model to SIVB: First Republic shares among the hardest hit, down 60% at typing and some notable European banks are also lower: Credit Suisse, Commerzbank, Banco BPM and Virgin Money UK all lower by 4% or more.
• US GSIBs are faring far better in pre-market trade, however, with JPM, Wells Fargo, Bank of America and others up 1.5% or more.
• For the headline e-mini S&P, prices have faded since the European open, putting prices within range of the late Friday lows at 3881.00, first key support.

EQUITIES: E-Mini S&P Gains Considered Technically Corrective, Trend Remains Bearish

• Eurostoxx 50 futures traded lower Friday. Price has moved below a key support at 4258.60 - the base of a bull channel drawn from the Oct 13 low. A continuation lower would threaten the uptrend that has been in place since late September last year. An initial downside objective would be 4169.30, the 50-day EMA. Key resistance has been defined at the 4328.00, the Mar 6 high and is the bull trigger.
• The short-term condition in S&P E-Minis remains bearish following last week’s sell-off. Today’s gains are considered corrective. Price last week cleared key short-term support at 3960.75, the Mar 2 low and this confirmed a resumption of the bear cycle that has been in place since the Feb 2 reversal. The move lower signals potential for an extension towards 3822.00, the Dec 22 low. Initial firm resistance is seen at 4045.27, the 50-day EMA.

COMMODITIES: Gold Targets $1900.6 Retracement and Key Near-Term Resistance Level

• A sharp sell-off in WTI futures last week has defined a key resistance at $80.94, Feb 7 high. A break of this hurdle is required to reinstate the recent bullish theme that would open $82.89, the Jan 23 high and a key resistance. The contract remains vulnerable and sights are on $73.80, the Feb 22 low. A breach of this level would strengthen a bearish threat. Initial resistance is seen at $78.06, the Mar 9 high.
• Gold reversed sharply higher last week and the yellow metal has traded higher today. Resistance at $1858.3, the Mar 6 high has been cleared. This signals scope for an extension towards $1900.6, a Fibonacci retracement point and a key near-term resistance. On the downside, initial firm support is seen at $1844.3, the 50-day EMA. A break of this level is required to instead signal a top - this would expose the bear trigger at $1804.9. Feb 28 low.