MNI US MARKETS ANALYSIS - GBP/USD Inches to New Highs

Highlights:

• GBP/USD reaches new high as pair remains tied to risk
• Tuesday calendar quiet, with focus shifting to EZ inflation this week
• Fed funds implied rates further reverse Powell rally

US TSYS: Long End Reverses Powell Rally, Conf Board And 2Y Supply Ahead

• Treasuries have trended lower through Asia and European hours, with 10s pushing back to pre-Powell lows and 30s through them. Crude oil futures may have given back a small part of yesterday's strong supply-driven gains but industrial metals are up strongly on the day.
• Cash yields are 1.5-3bps higher, with only really the front end lagging the move, whilst 2s10s has increased 1.4bps to -10.4bp but remains within recent ranges.
• TYU4 has touched a session low of 113-11+ (- 07+) in a further pullback from yesterday's high of 113-30. There are heavy roll-related volumes ahead of first notice Aug 30.
• It's a move closer to support at 113-00+ (20-day EMA) but a bullish trend structure is seen in place with resistance at 114-03 (Aug 6 high).
• Today see the Conference Board consumer survey in focus for data before 2Y supply after the July auction stopped through by 2.1bps along with strong details.
• Data: FHFA house prices Jun (0900ET), S&P CoreLogic house prices Jun (0900ET), Conf Board consumer survey Aug (1000ET), Richmond Fed mfg Aug (1000ET), Dallas Fed services Aug (1030ET)
• Note/bond issuance: US Tsy to sell $69bn 2Y - 91282CLH2 (1300ET)
• Bill issuance: US Tsy to sell $75bn 42-day CMB (1130ET)

STIR: Further Paring Of Powell Rally

• Fed Funds implied rates have extended yesterday’s climb as they continue to retrace the dovish reaction to Powell’s "we will do everything we can to support a strong labor market as we make further progress toward price stability”.
• Cumulative cuts from 5.33% effective: 32bp Sep, 65bp Nov, 99bp Dec, 128bp Jan and 189bp Jun.
• The 99bp for three meetings to year-end is within last week’s range but has pulled off Monday’s lows of 106bps and is closer to the 96/97bps seen ahead of Powell.
• There’s no Fedspeak scheduled today whilst we expect the Conf. Board’s consumer survey to receive most focus from the various lower tier data releases, including its labor differential after sizeable declines in recent months.

EUROPE ISSUANCE UPDATE:

• Austria has released a mandate for a new 5-year 20-Oct-29 RAGB and possible tap of the long 60-year 1.50% Nov-86 RAGB (AT0000A1PEF7). MNI expect the Austrian transaction to take place tomorrow and pencil in E4-5bln for the new 5-year (and E1.0-1.5bln for the 60-year).

EFSF dual tranche syndication:

• E3bln of the new 3y Dec-27. Books closed in excess of E6.6bln, spread set at MS+4bps (guidance was MS+5bps).
• E2bln of the 5y 2.875% May-31 tap. Books closed in excess of E7.5bln, spread set at MS+19bps (guidance was MS+20bps).

Italy auction results

• E2.5bln of the 3.10% Aug-26 BTP Short Term. Avg yield 2.89% (bid-to-cover 1.54x).

Germany auction results

• E4bln (E3.352bln allotted) of the 2.50% Oct-29 Bobl. Avg yield 2.17% (bid-to-offer 1.80x; bid-to-cover 2.15x).

Slovenia JPY Samurai dual-tranche 3/5-year: Final guidance

• 3Y Sep-27. Guidance: TONAR MS+24bp (guidance was +24 to +26bp area)
• 5Y Sep-29. Guidance: TONAR MS+29bp (guidance was +29 to +31bp area)

FOREX: GBP Inches to a New Cycle High

• GBP modestly outperforms, gaining against all others in G10 as UK market participants return from the bank holiday on Monday. While activity is picking up, overall volumes remain below recent averages as the Tuesday calendar leaves little to inspire markets in either direction.
• Nonetheless, GBP outperformance has resulted in a new cycle high for GBP/USD at 1.3247, keeping bullish conditions intact and reinforcing the current trend set-up. The pair has traded through two important resistance points; 1.3142/43, the Jul 14 ’23 high and the top of a bull channel drawn from the Oct 4 ‘23 low. This strengthens bullish conditions and paves the way for a climb towards 1.3261, a Fibonacci projection.
• JPY is at the other end of the table, slipping against most others as US yields inch higher in the belly of the curve. We note overnight demand for AUD/JPY upside protection via options, with markets seemingly targeting the horizontally-trending 200-dma of 99.98. Most legs are shorter-dated, targeting an expiry of mid-September, therefore rolling off well ahead of the next BoJ, RBA meetings.
• Tuesday trade is headlined by August US consumer confidence stats and the Richmond Fed Manufacturing Index - although broader focus remains on the European inflation picture later in the week, with prelim German, French and Eurozone-wide CPI estimates. ECB speakers today include Knot and Nagel.

GBP: GBP/USD Extends Gains as Pair Remains Coupled to Risk

GBP's mild outperformance early Tuesday keeps the pair tilted toward new cycle highs, with GBP/USD's 1.3247 print today the highest since March 2022. GBP/USD's bull run sees higher highs printed in 12 of the past 14 sessions, opening 1.3261 as next resistance.

• Moves come despite the relatively contained moves in the spread between year-end Fed and BoE implied rates (96bps for Fed, 41bps for BoE - as has been the case for much of August), with GBP/USD far more closely tied to broader risk and, in particular, US equities.
• The sharp recovery for the e-mini S&P off the 200-dma in August coincided with the >500 pip rally in GBP/USD, and the index pressing toward cycle highs is supporting GBP vols, with 1m holding above 7 points as the contract captures the September BoE decision (Sept 19th).
• Despite the fade off mid-July highs in the GBP net position (still long ~30% of open interest), options markets remain cognizant of the upside risk - GBP/USD 3m risk reversals are further reversing the premium for put vol over calls, which has persisted since March 2020 and the onset of the COVID pandemic in March 2020.

OPTIONS: Hedgers Target Recovery in AUD/JPY 

• No surprise to see exceptionally low FX options volumes on Monday due to the UK Bank Holiday (in fact, activity was the lowest since July 4th holidays) - and that impact is carrying over into Tuesday trade with overall volumes well below normal for this time of day.
• That said, there are hotspots of activity today, with demand for AUD/JPY upside a clear standout. Call strikes layered between 98.50 - 100.80 make up the bulk of vanilla options trade, as markets look to target the horizontally-trending 200-dma of 99.98. Most legs are shorter-dated, targeting an expiry of mid-September, therefore rolling off well ahead of the next BoJ, RBA meetings.
• Shorter-dated vols across G10 are seeing some relief following the passage of Jackson Hole, but maturities beyond 1m remain supported as markets roll toward September. EUR/USD 1m vols hold north of 6 points with spot remaining supported above consensus for the coming month (1.1170 at typing vs. ~1.0930 median for Sept).

SWEDEN: Further Riksbank Cuts Should Help Business Lending Growth Bottom Out 

The prospect of further Riksbank rate cuts through this year should help set a floor in business lending growth, which fell 2.5% Y/Y in July (vs -2.3% prior). Household lending meanwhile was 0.7% Y/Y, steady for the past 3 months.

• Mortgage lending, which constitutes 83% of total household lending, was 0.8% Y/Y, while consumption loans (6% of total lending) fell to 2.0% Y/Y from 3.5% in June.
• The average interest rate on new floating rate mortgages was 4.54% (vs 4.51% in June and 4.57% in July 2023). For 1-5-year fixed rate mortgages, the average interest rate was 3.40% (vs 3.64% in June and 4.14% in July 2023.
• Further Riksbank easing should help these rates continue to fall in the coming months, providing an impulse to domestic demand as disposable income recovers.

GERMAN DATA: Weak Capital Investment Drags GDP Lower

German Q2'24 final GDP growth was -0.1% Q/Q as expected (+0.1% prior). Underlying drivers were released, and some revisions altered the picture from last quarter also:

• Private Consumption -0.2% Q/Q vs 0.0% cons; +0.3% prior, a strong upward revision from -0.4%. Strong Q1 real wage gains suggest some upside potential here looking forward. The weak figure indicates consumer caution, though - which appears to consist considering today's drop in GfK consumer confidence (-22.0 vs -18.2 cons; -18.6 prior).
• Government Spending +1.0% Q/Q vs +0.2% cons; -0.1% prior, revised from -0.4%. Note that further gov't spending upside contributions will be limited as per the 2024/2025 budgets / limited fiscal headroom.
• Capital Investment -2.2% Q/Q vs -1.5% cons; +0.1% prior, downwardly revised from +1.2%. The fact that capital investment was weak hardly comes as a surprise as it was mentioned by Destatis as the main downward contributor in the flash release. However, the narrative in Q1 was that especially construction inv drove growth upwards amid good weather - the downward revision draws that into question. Equipment investment was especially weak in Q2 (-4.1% Q/Q vs -1.6% prior).
• Exports -0.2% Q/Q vs +1.3% prior (no cons). This shows the absence of the external sector push from last quarter (given imports 0.0% vs +0.8% prior). Excl. the external sector, GDP growth would have been flat in Q2. IFO export expectations have moved further into contractionary territory this month, so little upside to be expected for Q3.

GERMAN DATA: Deeper Q2 GDP Data Shows Higher Saving, Weak Productivity

A deeper view into the German Q2 GDP data gives some further indications on underlying drivers and momentum of the German economy:

• Gross value added (GVA) by industry broadly affirms the prevailing narrative: weak industry (industrial production excl. construction -0.5% Q/Q vs -1.3% prior), v weak construction (-3.2% Q/Q vs +1.9%), and resilient services (this was not entirely clear ahead of the release as per suspended activity data releases; "information and communication" +0.6% vs +0.9% prior, finance and insurance +0.2% vs +0.5%, business services +0.9% vs -0.3%, "public, education, health services" +0.1% vs +0.5%). "Trade, transport, hospitality" sector rather weak (-0.6% vs 0.3%).
• Productivity was weak as to be expected after Q2 employment data (GDP per hour worked -0.4% Y/Y vs -0.3% prior).
• Consumer caution appeared firm again as per a rising savings ratio (10.8% vs 10.2% prior).
• Revisions are limited on overall growth (no revisions after the Q2'23 period, before that slight downwardly revisions every couple of quarters).

EQUITIES: Bullish Theme in E-Mini S&P Remains in Play

• A bullish theme in S&P E-Minis remains intact and the contract traded to a fresh cycle high Monday. Price has cleared resistance at 5600.75, the Aug 1 high and this signals scope for an extension towards key resistance and the bull trigger at 5721.25, the Jul 16 high. A break would resume the primary uptrend. On the downside, support to watch lies at 5499.15, the 50-day EMA. A clear break of it is required to instead highlight a potential bearish threat.
• Eurostoxx 50 futures are unchanged. The contract traded higher last week and price is holding on to its latest gains. The contract has pierced the 50-day EMA, at 4873.86. An extension higher would undermine the recent bearish theme and highlight a stronger reversal. Sights are on 4951.00 next, the Jul 31 high. For bears, a reversal lower would refocus attention on the bear trigger at 4494.00, the Aug 5 low.

COMMODITIES: WTI Futures Continue to Trade Above Resistance at 50-Day EMA

• WTI futures have recovered from their recent lows and the contract traded sharply higher Monday. The move is considered corrective, however, price has breached resistance at $76.30, the 50-day EMA. The clear break of the average undermines the recent bearish theme and attention turns to key resistance at $78.54, the Aug 12 high. For bears, a reversal lower would refocus attention on $70.88 key support.
• Gold remains in a bull-mode condition and the yellow metal is trading at its recent highs. The recent breach of resistance at $2483.7, the Jul 17 high, confirmed a resumption of the primary uptrend. Note that moving average studies remain in a bull-mode set-up and this continues to highlight a dominant uptrend. The focus is on a climb towards $2536.4 next, a Fibonacci projection. Initial support to watch lies at $2466.7, the 20-day EMA.

Date	GMT/Local	Impact	Country	Event
27/08/2024	1255/0855	**	US	Redbook Retail Sales Index
27/08/2024	1300/0900	**	US	S&P Case-Shiller Home Price Index
27/08/2024	1300/0900	**	US	FHFA Home Price Index
27/08/2024	1300/0900	**	US	FHFA Home Price Index
27/08/2024	1300/0900	**	US	FHFA Quarterly Price Index
27/08/2024	1300/0900	**	US	FHFA Quarterly Price Index
27/08/2024	1400/1000	***	US	Conference Board Consumer Confidence
27/08/2024	1400/1000	**	US	Richmond Fed Survey
27/08/2024	1430/1030	**	US	Dallas Fed Services Survey
27/08/2024	1530/1130	*	US	US Treasury Auction Result for Cash Management Bill
27/08/2024	1700/1300	*	US	US Treasury Auction Result for 2 Year Note
28/08/2024	0130/1130	***	AU	Quarterly construction work done
28/08/2024	0130/1130	***	AU	CPI Inflation Monthly
28/08/2024	0515/0115		US	Fed Governor Christopher Waller
28/08/2024	0600/1400	**	CN	MNI China Liquidity Index (CLI)
28/08/2024	0645/0845	**	FR	Consumer Sentiment
28/08/2024	0800/1000	**	EU	M3
28/08/2024	0900/1000	*	GB	Index Linked Gilt Outright Auction Result
28/08/2024	1100/0700	**	US	MBA Weekly Applications Index
28/08/2024	1430/1030	**	US	DOE Weekly Crude Oil Stocks
28/08/2024	1530/1130	**	US	US Treasury Auction Result for 2 Year Floating Rate Note
28/08/2024	1700/1300	*	US	US Treasury Auction Result for 5 Year Note
28/08/2024	2200/1800		US	Atlanta Fed's Raphael Bostic