MNI US MARKETS ANALYSIS - Heavy Monday Trade Tips Yields Toward 4.10%

US TSYS: Post-Payrolls Sell-Off Extends With Heavy Volumes

• Cash Tsys trades 3.5-6.5bp cheaper, with the sell-off led by 3s as shorter-term rates continue to come under pressure after Friday’s payrolls with additional impetus from Chair Powell’s weekend remarks (see STIR bullet) plus a hawkish BoJ FT sources piece.
• Further out the curve, 10Y yields are off earlier highs just shy of 4.10% but at 4.075% consolidate Friday’s return to a 4 handle after Thursday's low of 3.815%.
• TYH4 have dealt lower overnight, at 111-10 (- 11) close to earlier lows of 111-04, on very heavy volumes of 570k. The sell-off has exposed a key support at 110-26 (Jan 19 low).
• ISM services headlines data after last month’s surprise slump in the employment component, before the Fed’s SLOOS report even if it might be seen as somewhat stale having missed latest NYCB concerns.
• Data: S&P Global US Serv/Comp PMI Jan final (0945ET), ISM Services Jan (1000ET)
• Fed: Goolsbee (’25) on BBG TV (1000ET), Bostic (’24) welcoming remarks (1400ET), SLOOS (1400ET)
• Bill issuance: US Tsy $79B 13W, $70B 26W bill auctions (1130ET)

Fed Rate Path Continues Post-Payrolls Shift Higher

• Fed Funds implied rates have extended Friday’s post-payrolls shunt higher, aided by Chair Powell’s weekend remarks plus a hawkish BoJ FT sources piece.
• Cumulative cuts: 5.5bp Mar (10bp pre-NFPs), 20bp May (vs 33bp), 41bp Jun (vs 60bp) and 117bp Dec (vs 143bp). The Dec’24 implied effective rate of 4.16% is closing in on pre-Dec FOMC levels of ~4.2%.
• Powell’s aired remarks were similar in tone to Wednesday’s presser. There are questions as to creative license from the host Scott Pelley re headlines around the timing of a first cut (midyear and with reference to the election, which Powell explicitly doesn’t factor in in the transcript) plus potential for 50bp clips.
• “The prudent thing to do is to, is to just give it some time and see that the data continue to confirm that inflation is moving down to 2% in a sustainable way […] We've said that we want to be more confident that inflation is moving down to 2%. And I would say, and I did say yesterday, that I think it's not likely that this committee will reach that level of confidence in time for the March meeting, which is in seven weeks.”
• Powell transcript: https://roar-assets-auto.rbl.ms/files/59825/60.Minutes.Chair.Powell.2.4.24.pdf

OI Points To Mix Of Long Cover & Short Setting Post-NFPs

The mix of Friday's post-payrolls sell off in Tsy futures and preliminary OI data points to a mix of net long cover (FV, TY & US futures) and net short setting (TU, UXY & WN futures) ahead of the weekend.

• The former dominated in net curve terms, with the most pronounced net DV01 equivalent OI swing coming via apparent long cover in TY futures.
• A reminder that the long cover comes in the wake of the notable long setting seen earlier last week (a little over ~$12.5mn DV01 equivalent of net longs were set across the Tsy futures curve on Wednesday).

OI Points To Mix Of Short Setting & Long Cover In SOFR Futures Post-Payrolls

The combination of Friday's move lower across most of the SOFR futures strip and preliminary OI data point to the following positioning swings in the wake of the NFP release:

• Whites: Apparent long cover in SFRH4 through SFRU4. It is hard to be sure when it comes to SFRZ3 given its unchanged price status on the day.
• Reds: Apparent short setting in all contracts.
• Greens: Apparent short setting across all contracts outside of seeming net long cover in SFRH6. The former dominated in net pack OI terms.
• Blues: A mix of short setting (SFRH7 & M7) and long cover (SFRZ6 & U7), with the former providing the dominant impulse in terms of net pack OI.
• The reds came under the most pressure in price terms, with each contract shedding over 20bp come settlement.
• FOMC-dated OIS removed ~18bp of '24 rate cut pricing come the close (vs. pre-NFP levels). That move has extended further today in the wake of Fed Chair Powell's weekend remarks.

EUROPE ISSUANCE UPDATE:

• E837mln of the 3.00% Feb-26 SlovGB. Avg yield 3.2623% (bid-to-cover 1.55x)
• E568mln of the 3.00% Feb-28 SlovGB. Avg yield 3.0971% (bid-to-cover 1.55x)

• Another weak EU-bond auction following the weak January auction and the very strong January syndication. Note that the upper target amount was not reached for either the 3-year or 20-year EU-bond on offer today. Little market reaction to the release of the results for either bond sold.
• E2.724bln of the 2.75% Oct-26 EU-bond. Avg yield 2.753% (bid-to-cover 1.05x)
• E1.71bln of the 4.00% Apr-44 EU-bond. Avg yield 3.33% (bid-to-cover 1.09x)

• E4bln of the new 10-year Feb-34 EFSF-bond. Spread set at MS+22bp, books in excess of E11.5bln

• New 10-year EUR Reg S transaction in the "near future". MNI expects a E1.0-1.5bln transaction tomorrow.

FOREX: Greenback Favoured for Second Session

• The USD is favoured in early Monday trade, with the greenback firmer for a second session after Friday's solid payrolls release. An appearance from Fed chair Powell on 60 Minutes has added to the hawkish market reaction, within which the host suggested markets may have to wait until a few months before the Presidential election in November for the first Fed rate cut.
• Currency markets are generally busy, with volumes sitting ahead of average for this time of day. Desks suggest that Asia-Pac interbank FX volume was 40-50% above the recent norms, with adjustments in Fed pricing front and centre when it came to discussions, although Tsy yields are back from their Asia highs (which went beyond Friday’s post-NFP extremes across the curve).
• EUR/GBP is slightly firmer for a third consecutive session, with the cross seemingly finding a base at 0.8513. JPY trades well, firmer against most others in G10 on the back of a surge in front-end repo rates in local markets, which prompted a BoJ bond-buying response to contain the move.
• Focus for the Monday session turns to the January ISM services release and the latest SLOOS release from the US. Central bank speak includes Fed's Bostic and Goolsbee, although the latter has spoken relatively recently. BoE's Huw Pill is also set to speak, however he already made an appearance on Friday, after last week's unchanged BoE rate decision.

FX OPTIONS: Bumper NFP Helps Push FX Options Volumes to Multi-Week High

• The breakout payrolls report helped underpin a surge in FX hedging volumes on Friday, with close to $120bln notional crossing via the DTCC to make for the busiest single session since Jan 17 and the flurry of HKD and JPY hedges that dominated the beginning of the year.
• EUR/USD and USD/JPY options trade were well ahead of average on Friday, with upside interest in the USD expressed via EUR/USD puts and USD/JPY calls.
• Sizeable trade in EUR/USD puts tilted the put/call ratio to close to 1.5 in vanilla options space, with outsized demand for 1.0800, 1.0750 and 1.0650 puts tipping the scale considerably – over $6bln notional was wagered against these strikes alone.
• As a result, the front-end of the risk reversals curve remains under pressure, with the 3m risk reversal touching new ’24 pullback lows this morning, retreating to 0.46 points in favour of puts – although still some way to go before meeting the pre-December Fed levels of ~0.65 points.
• Topside interest in USD/JPY was evident between Y147.50-149.00 call strikes, but was also noted as high as Y155.00 post-payrolls. JPY vols continue to see support off the late Jan lows, with preference for upside hedges helping arrest the pullback in riskies.

BONDS: EGBs & Gilts Hold Much of Early Weakness

EGBs and gilts sit a little above softest levels of the day after a combination of wider macro impulses (Fed chair Powell’s weekend interview & hawkish BoJ sources) and UK matters (corporate expectations re: price rises, ONS adjustments to labour market data and slightly firmer-than-flash final PMIs) providing the obvious sources of early pressure this week.

• ECB & BoE-dated OIS have unwound a little more of the rate cuts priced for ’24 across their respective strips (127bp of ’24 cuts now priced for the ECB, ~85bp for the BoE) but also sit a little off session extremes as core bonds stabilise.
• The burden of supply (via an ongoing EFSF 10-Year syndication and dual-tranche supply from the EU) will also be providing some background pressure.
• Final Eurozone services and composite PMI readings failed to alter the economic narrative, printing in line with the flash estimates.
• Eurozone PPI was near enough in line with expectations.
• Technical support in Bund futures (134.31) has held so far, with the contract registering a low of 134.33 (last 134.45). German cash yields are 4.0-4.5bp higher, with any early flattening pressure unwound.
• Peripheral spreads to 10-Year Bunds are little changed to 1bp tighter on the day.
• Gilts near enough respected early session lows post-domestic PMI data (lows of 98.20 thus far). Although the contract has broken last week’s base it has not tested initial support at the Jan 16 low (98.16), which protects the bear trigger (97.57).
• Cash gilt yields are 4-7bp higher, as the curve bear flattens.
• The U.S. ISM survey, aforementioned European supply, comments from BoE’s Pill & Fedspeak from Goolsbee and Bostic headline from here.

Volatility Continues, State Support Signs Remain Evident After CSRC Pledge

MNI (London) - Chinese & HK benchmarks bounced from worst levels of the day, finishing +0.7% and -0.2%, respectively.

• This came after the weekend saw the CSRC pledge that it will stabilise markets, although regulators and policymakers offered nothing new in the way of specifics.
• The Commission vowed to prevent “abnormal fluctuations,” with a focus on guiding more medium- and long-term funds into the market, along with clamping down on illegal activity. As mentioned above, these snippets failed to provide meaningful specifics, with those matters all touched on in previous rounds of communique.
• This provided the latest such instance of apparent under delivery vs. wider market wants when it comes to policy support.
• That facilitated a sell off in early Monday trade, before the rebound from session lows (which lacked a headline catalyst).
• Note that the CSI 300 failed to breach Friday’s intraday low (which represents the lowest level witnessed since early ’19).
• Chinese margin usage continues to tumble, which suggests that forced liquidation of leveraged longs has factored into the recent run lower in Chinese equities.
• A spike higher in benchmark ETF turnover during the afternoon triggered the latest round of speculation re: direct state-backed support.
• Long CSI 300 vs. short CSI 1000 trades have received plenty of attention in recent weeks, given the national team’s usual focus on larger cap names. However, some small cap ETFs experienced record turnover on Monday (even with the CSI 1000 finishing lower on the day), which triggered speculation re: state-backed support for smaller names.
• Slightly-softer-than-expected Caixin services PMI data failed to impact equities.
• The HK-China Stock connect links provided light net buying of mainland equities for a fifth straight session (~CNY1.2bn on the day).

EQUITIES: Friday's Gains Reinforce Broader Uptrend in E-Mini S&P

• Eurostoxx 50 futures remain firm and the contract is holding on to the bulk of its recent gains. Key resistance at the Dec 14 high of 4634.00 has recently been cleared. The break confirms a resumption of the medium-term uptrend and sights are on the 4700.00 handle next. Initial firm support lies at 4578.50, the 20-day EMA. Key trend support has been defined at 4402.00, the Jan 17 low. A short-term pullback would be considered corrective.
• A broader uptrend in S&P E-Minis remains intact and Friday’s gains reinforce this condition. The contract has traded to fresh cycle highs, confirming a resumption of the uptrend. Recent corrections have been shallow - this also highlights a strong uptrend. The focus is on the psychological 5000.00 handle. On the downside, initial key short-term support has been defined at 4866.00, the Jan 31 low.

COMMODITIES: Gold Extends Pullback from Last Week's Highs

• WTI futures remain soft following last week’s steep sell-off. The move lower undermines the recent bullish theme. A continuation would expose support at $70.62, the Jan 17 low, and $69.56, the Jan 3 low. For bulls, a reversal higher is required to refocus attention on the key short-term resistance at $79.29, Jan 29 high. A break of this level would reinstate a bullish theme. Initial resistance is at $76.95, the Feb 1 high.
• Gold has pulled back from last week’s high but remains above the Jan 17 low of $2001.9. Recent short-term gains have improved a bullish condition and a continuation higher would signal scope for a climb towards $2088.5, the Dec 28 high and a key resistance. For bears, a stronger reversal lower would refocus attention on $2001.9 where a break is required to reinstate the recent bearish theme.