MNI US MARKETS ANALYSIS - JPY Rally Persists, Equities Heavy

MNI (LONDON) - Highlights:

• Eurozone PMIs falter, undermining EUR currency
• JPY rally persists, TWI close to 5% above lows
• Treasury curve steepens as equities trade heavy on earnings

US TSYS: Bull Steeper With Equities Under Pressure, PMIs In Focus Before 5Y

• Treasuries are off highs but remain firmer on balance with equity futures weakness (following yesterday’s after-market earnings) and net softer than expected Eurozone flash PMIs (German miss offset a French beat).
• Curves have steepened further, with the front-end underpinned by yesterday’s particularly strong 2Y auction and seeing further support from former NY Fed President Dudley writing that he's changed his mind and that the Fed needs to cut now rather than wait until September unnecessarily increases the risk of a recession (here).
• The longer end has seen a larger paring of intraday gains, and follows yesterday’s late sell-off linked to corporate debt issuance. It's helped at the margin by Reuters sources saying the BoJ could next week unveil a plan to roughly halve bond purchases in coming years (along with a debate about hiking which had less impact at the front-end) .
• A Reuters/Ipsos poll sees Harris lead Trump 44% to 42% in the US presidential race.
• Cash yields are 0.5-2.5bp lower on the day whilst 2s10s at -18.8bps touches new highs since January, partly a mechanical shunt higher on the new 2Y benchmark but also having steepened both before and after this impact.
• TYU4 at 110-27+ (- 00+) is off an earlier high of 110-31 but has remained within yesterday’s range overnight, amidst solid cumulative volumes of 330k.
• There’s some reluctance to push much higher, after Monday’s low of 110-18+ probed support at the 20-day EMA (110-21+) to open the 50-day EMA (110-08+).
• Data: Weekly MBA mortgages (0700ET), Adv. goods balance Jun (0830ET), Wholesale/retail inventories Jun p/Jun (0830ET), S&P Global US PMIs Jul prelim (0945ET), New home sales Jun (1000ET)
• Note/bond issuance: US Tsy $30B 2Y FRN Note (1130ET), US Tsy $70B 5Y Note auction - 91282CLC3 (1300ET)
• Bill issuance: US Tsy $60B 17W bill auctions (1130ET)

STIR: Fed Rates Drift Lower Into Recent Range, Awaiting Data

• Fed Funds implied rates are between unchanged and 0.5bp lower overnight as they continue to slowly roll back from Monday’s post CPI/PPI highs.
• For instance, the Dec’24 of 4.70% is down 3bps from Monday’s high and back to where it ended last week at a level that more firmly implies a coin toss for a third cut of the year with the December meeting (it was ~4.83% pre-CPI).
• Cumulative cuts: 1bp Jul, 25bp Sep, 40bp Nov, 63bp Dec and 80bp Jan.
• Data should be in more focus today with US flash PMIs at 0945ET although the week’s main releases are GDP/PCE starting tomorrow.
• The BoC decision at the same time could see some spillover with a second consecutive cut expected but the broader tone watched.
• Gov. Bowman and Dallas Fed's Logan give opening remarks but they should steer firmly away from anything monetary policy-related being in the FOMC media blackout.

GLOBAL MACRO: Recent Copper Correction May Be Signalling Softer Growth Outlook

LME copper prices are down 2.5% m/m in July to date after falling 4.6% in June and even though they are off their May peak they are still up 11% y/y. Copper is often a good indicator of global industrial production growth, as it is a common input across sectors, and this year’s rally is signalling that there could be a pick up in the data before IP slows again with trade flows following, which is important for Asia. Other indicators aren’t as positive though.

Global IP y/y% vs copper prices

Source: MNI - Market News/Refinitiv

• Copper prices may be overstating IP strength given supply disruptions contributed to prices rise. Uncertainty over China’s demand, given ongoing property woes, disappointing data and rate cuts, weighed on prices in June/July. But the overall demand outlook remains robust as the electricity sector accounts for almost 30% of global copper consumption, according to ANZ estimates. With continued rollouts of renewables, EVs and infrastructure that seems unlikely to change for now.
• The JP Morgan Global manufacturing PMI has indicated muted activity growth through 2024 with a slight pickup in Q2. The index is up almost 2 points since end 2023 though. The PMI as well as economic surprise indices are not as optimistic as copper prices about the outlook for IP growth. Preliminary US/European PMIs released today should give an indication before the global PMI is out August 1.
• Global IP growth as measured by the Dutch CPB improved to 2.3% y/y in April from 1.5% in January, close to the historical growth rate. But 3-month momentum has slowed since September last year and unlike copper prices is signalling that growth will be unlikely to improve further.
• There has been some improvement in global trade growth this year after a lacklustre 2023. In April, 3-month momentum at 4.8% annualised was its highest since August 2022 (May due July 25).

Global growth

Source: MNI - Market News/Refinitiv

WHITE HOUSE: Biden Address @ 2000ET; Seeks To Outline Final 6 Months In Office

President Joe Biden is set to deliver an address to the nation at 2000ET (0100BST, 0200CET) from the Oval Office regarding his decision not to run for a second presidential term. NBC News reportsthat accoridng to a source familiar with Biden's remarks, "In addition to providing a detailed explanation for his withdrawal from the race, Biden also wants to talk about the work ahead in the remaining months of his presidential term".

• NYT reports than in a call with the now-Harris for President campaign HQ, Biden said his focus for the remaining six months in office would include "initiatives to curb gun violence, expand child care and elder care, lower the cost of prescription drugs and stem climate change." He has also said that he wants to see an end to the war in Gaza. Notably without the massive distraction of running a presidential campaign, the president can now dedicate more time to such subjects.
• However, he faces the major hindrance of being a 'lame duck', with lawmakers on both sides of the aisle and foreign leaders already focusing on what the next administration will bring. NYT quotes Princeton historian Julian Zelizer: "Being a lame duck might free up the departing president, but also emboldens opponents at home and abroad who no longer fear that person. The result is more might-have-beens than breakthrough moments.”

EUROPE ISSUANCE UPDATE: 

UK auction results
* Strong 30-year auction with a tight tail of 0.2bp and bid-to-cover of 3.35x.
* Furthermore the pre-auction mid-price of 95.677 was exceeded with a lowest accepted price (LAP) of 95.757. The LAP was more in like with levels around 20 minutes before the auction cut-off.
* Ahead of the results publication there was a move higher from 95.677 to around 95.78 - broadly in line with the average price of the auction. We moved marginally higher on the results but are now trading around 95.775, roughly half way between the LAP and average auction price.
GBP2.25bln of the 4.375% Jul-54 Gilt. Avg yield 4.636% (bid-to-cover 3.35x, tail 0.2bp).

German auction results
E5bln (E4.142bln allotted) of the 2.60% Aug-34 Bund. Avg yield 2.43% (bid-to-offer 1.52x; bid-to-cover 1.83x).

FOREX: JPY Spot TWI Nears 5% Rally Off Lows, EUR Sinks on PMIs

• Once again, broad JPY strength was evident across the European open, with JPY the best performing currency across G10 for a third consecutive session. JPY got a boost from a further flight-to-quality, a poor showing from global equity futures markets and a continued unwind of the carry trade fuelled USD/JPY rally. Cross-selling against antipodean currencies continues to stand out.
• After the key technical breaks in AUD/JPY earlier in the week, NZD/JPY is following suit Wednesday as price breaks the 200-dma support for the first time since June last year. Slippage through 90.82 would mark a total reversal of the rally  off the early May lows, and could come into contention on an extension lower - the cross has traded lower in 10 of the past 11 sessions - helping trigger  a technically oversold signal in the 14-day RSI.
• EUR similarly trades poorly on the back of a soft set of PMIs from France, Germany and the Eurozone-wide reading. EUR/USD was pressured to a new pullback low at 1.0826 on heavy volumes - making for the busiest session of the week so far. Interestingly, the protracted spot weakness off last week's high has worked against the formation of a 'golden cross' in DMA space (50-dma > 200-dma), denying  markets a possible positive technical signal to slow the decline and build a  base for a recovery.
• Focus turns to the remaining flash PMI prints today, aswell as the Bank of Canada rate decision, at which markets are split between a hold and a back-to-back 25bps rate cut, which would put the base rate at 4.50%. OIS pricing has another easing step priced at ~90% probability. New home sales data are then set to follow for June. 

FOREX: CHF Catches Up With JPY as Carry Trade Reversal Dominates

• CHF playing catch-up with JPY in recent trade, joining the currency among the best peformers in G10. The move started in earnest at the European open, evident in CHF/JPY's rally off the base at 173.27, and like the JPY is most notable against growth-, risk- and commodity-proxy currencies. 
• The currency will be benefiting from the reversal in carry trade dynamics following BoJ intervention, with CHF's status as a funding currency mirroring that of the JPY. This countered any dovish impact from the early bid in Euribor, which lent itself to a new contract high print at 99.155 in the Dec-24 SARON future - signalling that rate expectations are not the driver of the current spot move. 
• NZD/JPY was a focus in late Asia/early Europe trade on several technical breaks - NZD/CHF is following suit with the break of the bear trigger at 0.5282, the mid-April low. Next level of note in EUR/CHF crosses at the 0.9603 200-dma. 

FOREX: JPY Firms Briefly on Report BoJ are to Consider August Rate Hike

• USD/JPY dips to new lows of 154.29 on a Reuters sources reports detailing that the BoJ are to weigh a rate hike next week, and detail plans to halve the pace of bond buying. The piece writes that the decision will depend on how long the board members prefer to wait for clarity on whether consumption will recover and keep inflation stable. 
• JPY rallies against G10, albeit briefly. USD/JPY spot back above 154.50 and recovering slowly from here - nonetheless that move does confirm a break of the early June low key support at 154.55.

FX OPTIONS: Sizeable Strikes in USD/JPY Could Limit Further Losses in Spot Today

• For USD/JPY, mixed call/put notional of $1.4bln rolling off between 154.95-00 could limit losses in spot today - particularly with the pair having bottomed out somewhat this morning. GBP/USD eyes $290mln of puts expiring at 1.2885-88 today, although £470mln at 0.84 in EUR/GBP could provide a counter.
• Meanwhile, EUR weakness off last week's highs have spot clear of the most notable expiries set to roll off at today's cut - with the $3.2bln at 1.0990 unlikely to feature. $1.7bln in AUD/USD rolls off at the $0.66 handle today, while USD/CAD's pipeline is crowded to capture post-BoC price action - with the most salient strikes at: 
  • 1.3785-00 (C$277mln)
  • 1.3730-50 (C$613mln)
  • 1.3680-00(C$431mln)

Earnings The Key Driver of Futures Weakness, But ESA Support Intact

Risk-off trade pervades across European equity markets and US futures so far this morning, with tech leading underperformance in US futures (NASDAQ 100 future lower by 0.9-1.0%), while French stocks underperform thanks to pull lower in Luxury names (LVMH -4.8% post-earnings). Despite weakness in the e-mini S&P today, 5542.00 support is intact, but a break of this mark opens the 50-dma of 5497.65 and the early July lows.

Pre-market trade in the US restarted at 0900BST - most notable movers are: 
Gaining: 

• Enphase Energy +7.1%
• Seagate Technology +5.4%
• Texas Instruments +1.9%
• Chubb +0.9%
  ---------------

Declining:

• Capital One -0.9%
• Visa -3.2%
• Alphabet/Google -3.2%
• Tesla -7.3%

E-Mini S&P Returns Lower Following Poor After-Market Earnings

• A bull cycle in Eurostoxx 50 futures remains intact, despite the pullback in prices into the Friday close. Prices recovered well across the Monday and Tuesday sessions, however the move lower last week undermines the bullish theme somewhat, with price having tested the bear trigger at 4860.00, the Jun 14 low. Clearance of this level would expose 4846.00, the Apr 19 low and a key reversal point. For bulls, a move higher and a break of 5087.00, the Jul 12 high, would again highlight a bullish theme.
• E-mini S&P prices returned lower early Wednesday on the back of poor after-market earnings, pressuring the Jul 19 lows at 5542.00. Any renewed weakness through here would challenge the 50-day EMA and key support of 5501.50. The broader trend condition in S&P E-Minis remains bullish and the slip lower into last week’s close appears to be a correction. MA studies are in a clear bull-mode set-up, highlighting positive market sentiment. Sights are on 5741.34, a Fibonacci projection. 

WTI Futures Recover from Yesterday's Multi-Week Lows

• Weakness through Tuesday and the broad commodity sell-off resulted in a new low for WTI futures at $76.40, breaking the Monday low in the process. Vol band based support undercuts from here at 76.52, ahead of key support at the Jun 4 low of 72.23. Initial key resistance to watch is $83.58, the Jul 5 high, and a break and close above this level is needed ahead of any test on the 84.36 bull trigger.
• Gold prices faded across the second half of last week, resulting in new pullback lows of $2383.99 on Monday. Nonetheless, the broader gains last week reinforce current conditions, and keep the M/T trend pointed higher. The yellow metal has breached key resistance and the bull trigger at $2450.1, the May 20 high. This confirms a resumption of the medium-term uptrend and opens the $2500.00 handle next. Moving average studies are in a clear bull-mode set-up, highlighting a rising trend. Initial support is at $2392.2, the 20-day EMA.
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Date	GMT/Local	Impact	Country	Event
24/07/2024	1100/0700	**	US	MBA Weekly Applications Index
24/07/2024	1200/1400		EU	ECB's Lane at ECB/IMF conference
24/07/2024	1345/0945		CA	BOC Monetary Policy Report
24/07/2024	1345/0945	***	US	S&P Global Manufacturing Index (Flash)
24/07/2024	1345/0945	***	US	S&P Global Services Index (flash)
24/07/2024	1345/0945	***	CA	Bank of Canada Policy Decision
24/07/2024	1400/1000	***	US	New Home Sales
24/07/2024	1430/1030	**	US	DOE Weekly Crude Oil Stocks
24/07/2024	1430/1030		CA	BOC Governor Press Conference
24/07/2024	1530/1130	**	US	US Treasury Auction Result for 2 Year Floating Rate Note
24/07/2024	1700/1300	*	US	US Treasury Auction Result for 5 Year Note
25/07/2024	0600/0800	**	SE	PPI
25/07/2024	0645/0845	**	FR	Manufacturing Sentiment
25/07/2024	0800/1000	**	EU	M3
25/07/2024	0800/1000	***	DE	IFO Business Climate Index
25/07/2024	1000/1100	**	GB	CBI Industrial Trends
25/07/2024	-		EU	ECB's Cipollone at Rio de Janeiro G20 Fin min/central bank meeting
25/07/2024	1230/0830	***	US	Jobless Claims
25/07/2024	1230/0830	**	US	WASDE Weekly Import/Export
25/07/2024	1230/0830	***	US	GDP
25/07/2024	1230/0830	*	CA	Payroll employment
25/07/2024	1230/0830	**	US	Durable Goods New Orders
25/07/2024	1230/0830	**	US	Advance Trade, Advance Business Inventories
25/07/2024	1300/1500	**	BE	BNB Business Sentiment
25/07/2024	1430/1030	**	US	Natural Gas Stocks
25/07/2024	1500/1100	**	US	Kansas City Fed Manufacturing Index
25/07/2024	1500/1700		EU	ECB's Lagarde attends Paris Summit
25/07/2024	1530/1130	*	US	US Bill 08 Week Treasury Auction Result
25/07/2024	1530/1130	**	US	US Bill 04 Week Treasury Auction Result
25/07/2024	1700/1300	**	US	US Treasury Auction Result for 7 Year Note