MNI US MARKETS ANALYSIS - German PMIs Spell Soft Start to Q4

US TSYS: Twist Flatter With Flash PMIs and 2Y Supply Ahead

• Treasuries operate off best levels, with little to hang the intraday cheapening on.
• The curve has twist flattened on the day with softer than expected Eurozone PMIs and a further tightening in credit standards in Q3 having greater spillover on the longer end. Cash benchmarks trade from 3.5bp cheaper (2Y) to 1bp richer (30Y).
• 2s10s trades at -22.5bps (-3bp), off yesterday’s fresh YtD high of -10.6bps.
• TYZ3 at 106-10+ is back close to Asia Pac lows of 106-08+ having pulled away from a session high of 106-22 in European hours. For the most part though it consolidates yesterday’s sizeable rally, with that consolidation based on another overnight session with solid volumes (already 465k). Resistance seen at 107-05+ (20-day EMA) and support at 105-10+ (Oct 19 low).
• Data: Philly Fed non-mfg, Oct (0830ET), S&P Global US PMIs, Oct prelim (0945ET), Richmond Fed mfg, Oct (1000ET)
• Note/bond issuance: US Tsy $51B 2Y Note auction (91282CJE2) – 1300ET
• Bill issuance: US Tsy $75B 42D CMB bill auction – 1130ET

Early SOFR/Treasury Option Roundup: Put Condors

With few exceptions, SOFR/Treasury options focused on low delta puts and put structures overnight. Underlying futures currently weaker, paring Monday's rebound after 10Y yield tapped 5.0187% (highest since late Sep'07) in early trade. Projected rate hikes static into early 2024: November holding at 1.6%, w/ implied rate change of +.4bp to 5.333%, December cumulative of 5.7bp at 5.386%, January 2024 cumulative 9.9bp at 5.427%, while March 2024 slips to 5.8bp at 5.386%. Fed terminal at 5.438% in Jan'24. Fed terminal at 5.425% in Feb'24.

• SOFR Options:
  • 20,000 0QZ3 94.93/95.12/95.25/95.37 put condors ref 95.405 to -.40
  • 7,500 0QZ3 94.87/95.12/95.25/95.37 put condors ref 95.435
  • 3,000 SFRZ3/SFRJ4 94.50 put spds
  • 2,000 SFRH4 94.25/94.43 2x1 put spds ref 94.645
  • 4,000 SFRZ3 94.68/94.87 call spds ref 94.565
  • 3,000 0QZ3 95.50/95.87/96.25 call flys ref 95.435 to -.405
• Treasury Options:
  • 3,000 USX3 107/109 2x1 put spds
  • over 9,900 TYX3 106.5 puts, 25 last ref 106-12.5
  • 3,000 TYZ 108 calls, 27 last ref 106-14
  • 1,000 TYX3 105.5/106 3x2 put spds ref 106-17.5
  • 1,000 TYX3 105.25/105.75 put spds, 3 ref 106-17.5
  • 1,200 FVZ3 103.5 puts ref 104-22.5
  • 4,750 TYX3 105.5/106 put spds, 7 ref 106-11 to -10.5

STIR FUTURES: No Material Impact On Fed Rates From Weak EZ PMIs

• Fed Funds implied rates have shown little lasting spillover from softer than expected Eurozone PMIs (composite 46.5 vs cons 47.4), led by Germany services re-entering contractionary territory (48.0 vs cons 50.0).
• Rates for near-term meetings are unchanged on the day, with cumulative hikes of +0.5bp for Nov, +5.5bp for Dec and +9.5bp for January to a terminal 5.43% effective.
• Instead, meetings further out have reversed most of yesterday’s decline. It leaves cuts of 27bp from terminal to Jun’24 (from 29bp yesterday) and 82bp of cuts from terminal to Dec’24 (from 87bp yesterday).
• US preliminary PMIs for October headline today’s docket.

OI points To Mix Of Short & Long Setting On Monday

The combination of Monday’s twist flattening of the SOFR strip and preliminary open interest data point to the following positioning swings:

• Whites: Short setting seemed to dominate.
• Reds: Long setting seemed to dominate
• Greens: Apparent long setting was seen throughout the pack.
• Blues: Long setting seemed to dominate on a pack basis, although that came from one contract (SFRZ6), with apparent short cover seen elsewhere.
• The apparent net impact of the long setting in the reds through blues comfortably outweighed the net impact of the apparent short setting in the whites.

OI Points To Mix Of Fresh Longs & Short Cover On Monday

The combination of preliminary open interest data and yesterday’s firming in futures (after a sharp reversal from intraday lows as comments from various large fund managers and apparent interest in outright 10-Year yield levels above 5% helped trigger a recovery) point to a mix of long setting and short cover to start the week.

• TU & UXY futures seemingly saw fresh longs set on net, while FV, TY, US and WN futures seemingly saw shorts cover on net.
• The net OI DV01 equivalent change across the curve was limited, although slightly tilted more towards short cover.

EUROPE ISSUANCE UPDATE:

UK Auction Results - 0.75% Nov-33 linker

• GBP1.5bln of the 0.75% Nov-33 linker. Avg yield 0.831% (bid-to-cover 2.94x).

German Auction Results - 2.40% Oct-28 Bobl

• E4bln (E3.262bln allotted) of the 2.40% Oct-28 Bobl. Avg yield 2.71% (bid-to-cover 1.61x)

Dutch Auction Results - 2.50% Jul-33 DSL

• E1.995bln of the 2.50% Jul-33 DSL. Avg yield 3.125%.

FOREX: EUR Dented by PMIs, JPY Eyes Further BoJ Reports

• The Greenback is mixed, with EUR the underperformer on the back of a poor set of PMI numbers for October - and Germany in particular. Services and composite PMIs came in below forecast, putting the economy on a particularly soft footing headed into Q4. EUR/USD reversed off recovery highs of 1.0694, but support is seen scant into 1.0616 and 1.0571.
• AUD/USD looked through a speech from RBA's Bullock, despite a step-up in rhetoric on inflation. Nonetheless, this messaging resulted in only a marginal 5 pip move in AUD/USD as the base message on policy ("Our focus remains on bringing inflation back to target within a reasonable timeframe, while keeping employment growing") was broadly unchanged.
• Similarly, inflation is expected to soften further in the coming quarter, leaving markets to only partially price one further 25bps hike this cycle (peak rates priced for the May'24 meeting). Next RBA decision due on November 7th.
• USD/JPY trades lower, but recovered around 15-20 pips off the lows, on the back of a Bloomberg report citing sources in reporting that the BoJ are said to be waiting until the last minute, watching global yield curves in any decision to tweak yield curve control due to concerns over US yields. The report adds that the BoJ see little need to change forward guidance at this stage. Speculation of a potential tweak at the upcoming meeting on Oct31 has ramped up in recent days/weeks, given expectations for inflation projection alterations and broader market moves in wider core global FI markets.
• Preliminary October S&P PMI data comes just ahead of the Richmond Fed manufacturing index, marking the only tier one releases left during the Tuesday session. Central bank speak is unsurprisingly light with both the ECB and the FOMC inside their pre-decision media blackout periods. This keeps focus on the machinations across the US yield curve, with the un-steepening of the curve since the open on Monday helped partially stabilise markets across equities and bonds this week.

FX OPTIONS: Expiries for Oct24 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0485(E892mln), $1.0550-65(E2.3bln), $1.0600-10(E1.5bln), $1.0650-60(E1.0bln)
• USD/JPY: Y149.50($1.0bln), Y149.95-00($1.8bln), Y151.00($882mln)
• GBP/USD: $1.2245-55(Gbp846mln)
• NZD/USD: $0.5840-50(N$531mln)
• USD/CAD: C$1.3630-45($503mln)

EQUITIES: Bearish Start to Week Confirms Resumption of Downtrend in E-Mini S&P

• A bearish theme in Eurostoxx 50 futures remains in play and last week’s move lower reinforces current conditions. The contract has cleared support at 4082.00, the Oct 4 low and a bear trigger. This break confirms a resumption of the downtrend and maintains the bearish price sequence of lower lows and lower highs. The focus is on the 4000.00 handle. Initial firm resistance is at 4155.50, the 20-day EMA.
• S&P e-minis maintain a softer tone and the contract started the week on a bearish note. Support at 4235.50, the Oct 4 low and bear trigger, has been breached. The break of this support confirms a resumption of the downtrend and opens 4197.75, the May 24 low. Price remains below resistance at the 50-day EMA, at 4404.28. A clear breach of this average is required to strengthen bullish conditions. Initial resistance is at 4348.88, the 20-day EMA.

COMMODITIES: Recent Move Lower in WTI Futures Likely Corrective

• WTI futures traded higher last week and the contract remains in bull-mode condition. The move lower from recent highs appears to be a correction. Key support is at $80.20, the Oct 6 low. The medium-term trend condition is bullish and an extension higher would expose the bull trigger at $92.48, the Sep 28 high. Clearance of this hurdle would confirm a resumption of the uptrend. For bears, a move through $80.20, would highlight a short-term top.
• Gold traded higher last week, extending the reversal from $1810.5, the Oct 6 low. The yellow metal has breached key resistance at $1953.0, the Sep 1 high, and $1987.5, the Jul 20 high. The break strengthens a bullish theme and opens $2003.4, a Fibonacci retracement point. Initial firm pivot support lies at $1907.7, the 50-day EMA. Clearance of this level is required to signal a short-term top and a potential reversal.