Highlights:
- Outside of the elevated oil prices, market fallout contained as Israel ponder response
- ADP Employment Change expected to notch up marginal gain in jobs added
- USD/JPY rallies as Ishiba talks down BoJ rate hike requirement
US TSYS: Bear Steeper Within Ranges, Israel Response and ADP In Focus
- Treasuries sit lower on the day to more than reverse risk-on flows seen after US warnings about Iran preparing to strike Israel which subsequently materialized. Treasuries outperform European FI with markets still waiting to see Israel’s response and supply also weighing for the latter.
- Cash yields are 1.4bp (2s) to 3.6bps (20s) higher on the day.
- 2s10s at 14.5bp has lifted 1.6bps but remains within recent ranges and below latest ytd highs of 24.1bp.
- TYZ4 hovers close to session lows of 114-17+ (-04+) on close to average cumulative volumes of 313k having remained within Tuesday’s range throughout.
- Yesterday’s broader gains helped it move further away from support at 114-07+ (Sep 26 low) whilst the high of 115-00+ came close to testing 115-02+ (Sep 19 high) after which lies the bull trigger at 115-23+ (Sep 11 high).
- Data: MBA mortgage applications Sep 27 (0700ET), ADP employment Sep (0815ET)
- Fedspeak: Hammack (0900ET), Musalem (1005ET), Bowman (1100ET), Barkin (1215ET) – see STIR bullet
- Bill issuance: US Tsy $64B 17W bill auction (1130ET)
STIR: 35bp Cut Priced For Nov With ADP Eyed
- Fed Funds implied rates continue to broadly hold increases seen earlier in the week, holding above levels seen prior to Powell’s NABE address Monday and with a surge in oil futures on Middle East geopolitical developments helping offset some softer data.
- Cumulative cuts from 4.83% effective: 35.5bp Nov, 71bp Dec, 102bp Jan and 166bp June.
- Today’s docket likely sees most attention on ADP employment with most Fedspeak appearances seeing limited scope for mon pol discussions. We watch Cleveland Fed’s Hammack (’24 voter) in the off chance of any relevant remarks having not publicly spoken since starting her role on Aug 21.
- Barkin (’24) is set to talk on mon pol but has recently spoken on the need for a two-phase approach to easing policy. “With inflation and unemployment being so close to normal levels, it's okay to dial back the level of restraint, somewhat...I'm not yet ready to declare victory on inflation. And so I wouldn't dial it back all the way" to neutral – AP interview published Sep 26.
- 0900ET – Hammack (’24) welcome remarks at Fed’s Minorities in Banking forum (no text)
- 1005ET – Musalem (’25) welcome remarks at Community Banking conf (text only)
- 1100ET – Bowman (voter) speech at Community Banking conf. (text only)
- 1215ET – Barkin (‘25) gives speech on “Why Not Declare Victory?” (text + Q&A)
US TSY FUTURES: Long Setting In Intermediates Seen On Tuesday
OI points to a mix of long setting and short cover during yesterday’s rally, with the only notable positioning swings coming via long setting in the intermediate area of the curve (TY & UXY).
- Net OI swings elsewhere roughly offset in DV01 equivalent terms.
- Spill over from a rally in EGBs and heightened geopolitical risk premium drove the bid on Tuesday.
| 01-Oct-24 | 30-Sep-24 | Daily OI Change | OI DV01 Equivalent Change ($) |
TU | 4,466,955 | 4,461,424 | +5,531 | +213,848 |
FV | 6,381,507 | 6,389,182 | -7,675 | -337,712 |
TY | 4,969,590 | 4,951,577 | +18,013 | +1,204,702 |
UXY | 2,146,354 | 2,128,810 | +17,544 | +1,633,055 |
US | 1,752,009 | 1,746,926 | +5,083 | +704,299 |
WN | 1,717,036 | 1,721,281 | -4,245 | -929,250 |
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| Total | +34,251 | +2,488,942 |
STIR: Short Cover Dominated In SOFR Futures On Tuesday
OI suggests that short cover dominated during yesterday’s rally in SOFR futures, as geopolitical risk and spill over from European markets drove the bid.
- Contracts finished shy of session highs.
- Isolated pockets of long setting were also seen.
| 01-Oct-24 | 30-Sep-24 | Daily OI Change |
| Daily OI Change In Packs |
SFRU4 | 1,312,921 | 1,336,474 | -23,553 | Whites | -57,003 |
SFRZ4 | 1,383,117 | 1,405,116 | -21,999 | Reds | -3,870 |
SFRH5 | 1,078,421 | 1,089,925 | -11,504 | Greens | -18,769 |
SFRM5 | 923,928 | 923,875 | +53 | Blues | +1,260 |
SFRU5 | 697,557 | 696,733 | +824 |
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SFRZ5 | 1,014,621 | 996,375 | +18,246 |
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SFRH6 | 685,057 | 699,027 | -13,970 |
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SFRM6 | 625,683 | 634,653 | -8,970 |
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SFRU6 | 556,857 | 563,474 | -6,617 |
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SFRZ6 | 594,944 | 606,404 | -11,460 |
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SFRH7 | 370,176 | 369,917 | +259 |
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SFRM7 | 317,428 | 318,379 | -951 |
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SFRU7 | 258,989 | 261,250 | -2,261 |
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SFRZ7 | 228,790 | 227,180 | +1,610 |
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SFRH8 | 183,196 | 181,169 | +2,027 |
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SFRM8 | 154,676 | 154,792 | -116 |
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JAPAN: New Ministers Kick 'Asian NATO' Idea Into Long Grass
New Foreign Minister Takeshi Iwaya has said that an 'Asian NATO' is "one idea for the future,". Speaking as a presser, Iwaya said "It's difficult to immediately set up a mechanism that would impose mutual defence obligations in Asia, so it's more of a vision for the future." Asked if such a framework would be targeting China, Iwaya said "The best way would be for a defence and security co-operation relationship that spans the Indo-Pacific without excluding any specific nation,"
- New Defence Minister Gen Nakatani said separately that PM Shigeru Ishiba has not asked him to pursue the 'Asian NATO' proposal. Nakatani also said that US nuclear deterrence 'should be maintained and strengthened to ensure its reliability'.
- Ahead of coming to office, Ishiba was viewed as something of a foreign policy maverick in the governing Liberal Democratic Party (LDP), having previously argued for an Asian NATO and for Japan to become 'more equal and independent' in its relations with the US. His stance vis-a-vis China is not viewed as combative, in contrast to other LDP leadership contenders, but potentially looking to engage with Beijing in an effort to avoid escalation.
- Earlier, Chinese President Xi Jinping sent a congratulatory message to Ishiba, saying he looked forward to building "strategic and mutually beneficial" bilateral ties between the "neighbours separated by a strip of water". Xi said the two should "follow the path of peaceful coexistence, friendship for all generations, mutually beneficial cooperation and common development".
ISRAEL: KAN-'Harsh' Response Expected, Poss. Targeting 'Strategic Sites' In Iran
Amichai Stein at KAN posts on X: "After Israel security cabinet meet: Israel is expected to respond 'harsh' against Iran, with the possibility of targeting strategic sites in Iran". This would appear to back up earlier reports claiming that Israel will look to deliver a 'significant retaliation' against Iran following the missile barrages launched against Israeli cities on 1 October.
- Striking 'strategic sites' is likely to refer to hitting the country's oil installations and/or its nuclear facilities. It could even extend to targeted assassinations of key figures.
- The extend of Israeli retaliation will be closely watched, not just with regards to the prospect of regional conflagration but also for potential global market flashpoints such as Iran closing off the Strait of Hormuz, a key transit point for oil supplies. The Houthi rebels in Yemen, one of Iran's regional proxies, could also look to escalate its attacks on shipping in the region.
EUROPE ISSUANCE UPDATE:
UK auction results
- Another soft 5-year gilt auction, as we expected, with a 1.2bp tail (but with the bid-to-cover still hovering around 3x).
- Both the average accepted price and the lowest accepted price were on the soft side. Indeed, the 101.010 was below the secondary market price low pre-results intraday low of 101.054.
- The weakness has seen gilt futures move to their lows of the day from around 98.48 pre-results to 99.37 at writing.
- GBP4bln of the 4.125% Jul-29 Gilt. Avg yield 3.88% (bid-to-cover 2.93x, tail 1.2bp).
German auction results
- E4.5bln (E3.704bln allotted) of the 2.60% Aug-34 Bund. Avg yield 2.08% (bid-to-offer 1.63x; bid-to-cover 1.98x).
FOREX: JPY Hits Reverse as Ishiba Doubles Down on Defeating Deflation
- Having held as the best performer across G10 FX on Tuesday, the JPY is weaker against all others headed into the Wednesday crossover, however EUR/JPY remains below both yesterday's highs and the down-trending 50-dma crossing today at Y160.60. Following Ishiba's formal ascension to the premiership Tuesday, today he has conducted meetings with BoJ's Ueda and reiterated his focus on defeating deflation - backed up by reports that the new cabiinet is unlikely to want the BoJ to rush into further tightening.
- The volley of rockets from Iran to Israel hurt risk appetite in Tuesday trade, but markets have adopted the view that broader risk remains regionally contained - albeit with the still-elevated oil price. Brent crude futures remains north of $75/bbl - up over $3/bbl on the week, which continues to lend support to oil-tied FX including NOK and CAD. EUR/NOK has broken to weekly lows, nearing next support at the 11.6616 100-dma.
- Today's ADP Employment Change stats will provide the latest look at the labour market ahead of Friday's payrolls release. Markets expect the ADP headline at +125k, an uptick from the prior of a similar magnitude to what consensus expects on Friday.
- A litany of central bank speakers should also keep markets busy. ECB's Kazaks, Lane, Simkus, Elderson and Schnabel are all set to make appearances - and are likely to keep an October rate cut on table, echoing the near-universal view shift among the sell-side to a 25bps rate cut step on the 17th. Appearances from Fed's Bowman, Barkin and Musalem should also provide headline risk. Hammack of Cleveland is also due to make welcoming remarks, but policy-relevant commentary is unlikely.
OPTIONS: Expiries for Oct02 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.1025(E1.8bln), $1.1100(E976mln), $1.1115-25(E1.8bln), $1.1200(E671mln)
- USD/JPY: Y144.00($753mln)
EQUITIES: Shallow Pullback in E-Mini S&P Considered Corrective
- Eurostoxx 50 futures traded sharply higher last week resulting in a clear break of 5024.00, the Sep 3 high. This confirms a resumption of the bull leg that started Aug 5 and cancels a recent bearish theme. It also suggests that the latest outback is likely a correction. Scope is seen for a continuation of the trend with sights on 5138.24, a Fibonacci projection, and the 5200 handle further out. Key short-term support to watch is 4919.85, the 50-day EMA.
- A bull cycle in S&P E-Minis remains intact and the latest shallow pullback is considered corrective. Last week’s fresh cycle highs reinforce a bullish theme and note that moving average studies are in a bull-mode setup, highlighting a dominant uptrend. Scope is seen for a climb towards 5868.50, a Fibonacci projection, and 5900.00 further out. On the downside, initial support to watch is 5723.22, the 20-day EMA. Key support lies at 5652.72, the 50-day EMA.
COMMODITIES: WTI Futures Respect Resistance at 50-Day EMA
- WTI futures traded in a volatile manner Tuesday and the contract has recovered from its recent lows. Resistance at the 50-day EMA, at $71.69, remains intact. A clear breach of this EMA is required to highlight a stronger reversal that would open $76.40, the Aug 26 high. A reversal lower would refocus attention on the key support and bear trigger at $64.61, the Sep 10 low. Clearance of this level would resume the downtrend.
- Gold is unchanged and bulls remain in the driver’s seat. Recent gains confirm a resumption of the primary uptrend and maintain the bullish price sequence of higher highs and higher lows. Moving average studies are in a bull-mode set-up, highlighting a clear uptrend and positive market sentiment. The focus is on $2690.2 next, a Fibonacci projection. Firm support lies at $2596.8, the 20-day EMA.
| Date | GMT/Local | Impact | Country | Event |
| 02/10/2024 | 1100/0700 | ** |  US | MBA Weekly Applications Index |
| 02/10/2024 | 1200/1400 |  EU | ECB's Elderson participates in European Affairs Webinar | |
| 02/10/2024 | 1215/0815 | *** | US | ADP Employment Report |
| 02/10/2024 | 1300/0900 | US | Cleveland Fed's Beth Hammack | |
| 02/10/2024 | 1430/1030 | ** | US | DOE Weekly Crude Oil Stocks |
| 02/10/2024 | 1500/1100 | US | Fed Governor Michelle Bowman | |
| 02/10/2024 | 1615/1215 | US | Richmond Fed's Tom Barkin | |
| 02/10/2024 | 1645/1845 | EU | ECB's Schnabel Walter Eucken Lecture | |
| 03/10/2024 | 0130/1130 | ** |  AU | Trade Balance |
| 03/10/2024 | 0630/0830 | *** |  CH | CPI |
| 03/10/2024 | 0700/1700 | AU | MNI Connect Video Conference on Australian Economic & Policy Developments | |
| 03/10/2024 | 0700/0300 | * |  TR | Turkey CPI |
| 03/10/2024 | 0830/0930 |  GB | BOE's Decision Maker Panel | |
| 03/10/2024 | 0900/1100 | ** | EU | PPI |
| 03/10/2024 | 1230/0830 | *** | US | Jobless Claims |
| 03/10/2024 | 1230/0830 | ** | US | WASDE Weekly Import/Export |
| 03/10/2024 | 1400/1000 | *** | US | ISM Non-Manufacturing Index |
| 03/10/2024 | 1400/1000 | ** | US | Factory New Orders |
| 03/10/2024 | 1430/1030 | ** | US | Natural Gas Stocks |
| 03/10/2024 | 1440/1040 | US | Fed's Raphael Bostic, Neel Kashkari | |
| 03/10/2024 | 1530/1130 | ** | US | US Bill 04 Week Treasury Auction Result |
| 03/10/2024 | 1530/1130 | * | US | US Bill 08 Week Treasury Auction Result |