MNI US MARKETS ANALYSIS - Long End US Yields Dictate Play

US TSYS: Paring Losses At The NY Crossover, Still Bear Steeper On The Day

• Treasuries have pared losses around the NY crossover after the 10Y touched a fresh cycle high of 4.98% in an extension of yesterday’s sell-off. They still see a further bear steepening with cash benchmarks 0.5-5bp cheaper.
• 2s10s have touched session highs of -26.7bps, closing in on the -24.5bps seen after payrolls at highs since Oct’22.
• TYZ3 trades at 105-19 (-09) off fresh lows of 105-12+ for another sizeable step towards latest support seen at 105-01+ (2.0% 10-dma envelope). Cumulative volumes are again elevated at 450k.
• Fedspeak: Powell headlines at 1200ET but we also hear from multiple FOMC participants with various prepared remarks to be released, including Vice Chair Jefferson.
• Data: Initial jobless claims for a payrolls reference week, Philly Fed mfg and existing homes sales.
• Note/bond issuance: US Tsy sells $22B 5Y TIPS (1300ET)
• Bill issuance: US Tsy sells $95B 4-week and $85B 8-week bills (1130ET)

US 10Y TECHS: (Z3) Trips Bear Trigger

• RES 4: 109-20 High Sep 19
• RES 3: 108-31 50-day EMA
• RES 2: 107-19/108-16 20-day EMA / High Oct 12
• RES 1: 106-15+ High Oct 18
• PRICE: 105-18 @ 11:39 BST Oct 19
• SUP 1: 105-12+ Intraday low
• SUP 2: 105-01+ 2.0% 10-dma envelope
• SUP 3: 104-26 2.00 proj of the Jul 18 - Aug 4 - Aug 10 price swing
• SUP 4: 104-17+ Low Jul’07

Treasuries traded lower again Wednesday and remain soft today as the global rout on bonds continues. Key support at 106-03+, the Oct 4 low, has given way, confirming a resumption of the downtrend. The move down has exposed the 2.0% 10-dma envelope support of 105-01+next. Key short-term trend resistance has been defined at 108-16, Oct 12 high, where a break is required to highlight a short-term reversal. Initial firm resistance is at 107-19.

STIR: Fed Cuts Continue To Be Trimmed, Powell In Focus Ahead

• Fed Funds implied rates have seen a further trimming of cut expectations overnight in a continuation of yesterday’s move.
• Rates for near-term meetings are in familiar ranges including a cumulative +14bp to a terminal 5.47% effective for January, but the Dec’24 now stands at 4.83% (+3.5bp on the day, +14.5bp since just before retail sales on Tuesday).
• This Dec’24 rate continues to close the gap on the 2024 median dot of 5-5.25% and equates to 64bp of cuts for 2024 for new recent month lows.
• Chair Powell clearly headlines the docket with his address to the Economic Club of NY including prepared remarks at 1200ET, although we also hear from multiple FOMC members including Vice Chair Jefferson albeit only in welcoming remarks.

SOFR Seemingly Sees Mix Of Positioning Swings On Wednesday

The mix of preliminary OI data and Wednesday’s twist steepening on the SOFR strip point to the following net positioning swings:

• Whites: An apparent mix of long setting and short cover, with the former dominating on a pack basis.
• Reds: Apparent long cover dominating on a pack basis.
• Greens: Apparent short setting seen through the pack.
• Blues: Apparent short setting seen through most of the pack, including the largest round of apparent short setting on the strip (in SFRU6).

EUROPE ISSUANCE UPDATE:

• E1.026bln of the 2.15% Oct-25 Obli. Avg yield 3.508% (bid-to-cover 2.69x)
• E2.221bln of the 0.80% Jul-29 Obli. Avg yield 3.679% (bid-to-cover 1.92x)
• E1.669bln of the 3.55% Oct-33 Obli. Avg yield 4.067% (bid-to-cover 2.14x).

Average results for the Spain auction with the bid-to-cover for the 10-year Obli boosted by the smaller auction size (following the syndication earlier this week). The stop price was above the pre-auction mid-price for all three Oblis on offer this morning. All three Oblis are now trading below the stop price of the auction - but moves have not been substantial.

• E4.295bln of the 2.50% Sep-26 OAT. Avg yield 3.32% (bid-to-cover 2.77x)
• E2.31bln of the 2.75% Oct-27 OAT. Avg yield 3.25% (bid-to-cover 2.9x)
• E2.984bln of the 2.75% Feb-29 OAT. Avg yield 3.3% (bid-to-cover 2.59x)
• E1.66bln of the 2.50% May-30 OAT. Avg yield 3.3% (bid-to-cover 2.73x)

As with the Spanish auction we have seen the stop prices all exceeding the pre-auction mid-prices in the MT OAT auction. However, the total nominal amount issued today was E11.249bln versus a target range of E10.0-11.5bln. This marks the first time that the top of the target range has not been sold since February 2021 at a MT OAT auction (although note that recent LT OAT auctions have not all been at the top of the target range). Overall we would still class this as an average auction.

• E675mln of the 0.10% Mar-26 OATei. Avg yield 0.66% (bid-to-cover 3.57x)
• E515mln of the 0.10% Mar-29 OATei. Avg yield 0.74% (bid-to-cover 3.64x)
• E558mln of the 0.10% Mar-36 OATi. Avg yield 1.19% (bid-to-cover 2.31x).

AUSTRIA TRIPLE TRANCHE SYNDICATION:

• New 7-year Oct-30 RAGB. Spread set at MS+3bps. Books in excess of E17.6bln. Size: EUR benchmark.
• 0.25% Oct-36 RAGB tap. Spread set at MS+30bps. Books in excess of E18bln. Size: EUR benchmark.
• 1.85% May-49 Green RAGB tap. Spread set at MS+53bps. Size: E1bln WNG (plus E250mln retention). Books in excess of E11.8bln (incl. E1.345blm JLM interest).

FOREX: Rates Dictate Play, Keeping USD Firm

• Rates markets continue to dictate play early Thursday, with the further run higher for longer-end yields putting markets under more pressure. Both 10- and 30-y US yields again hit the best levels since 2007 as the steepening move accelerated and markets continue to bake-in the higher-for-longer theme across asset prices. This has supported the greenback across Thursday trade, keeping the USD Index within range of recent highs.
• Equity markets are lower across the board through the European morning, with poor performance across China and Hong Kong markets feeding directly into poor trade on the continent. The broad risk-off is helping support the JPY and CHF, both of which are toward the top-end of the G10 table.
• AUD and NZD are faring more poorly, with the firmer USD, softer labour market data and disappointing Chinese home sales data working against the currency. The technical backdrop remains bearish on the currency, with short-term gains still considered corrective. Attention is on $0.6286, the Oct 3/13 low. A clear break of this support would confirm a resumption of the trend and open 0.6215, a Fibonacci projection.
• Weekly jobless claims from the US are the data highlight Thursday, with existing home sales and the Philly Fed Business Outlook the other key releases. While data will be watched, the appearance from Fed's Powell will likely take more focus.
• The Fed chair speaks from the Economic Club in New York. While markets expect little from the Fed on rates at the November meeting, the near 50/50 pricing for another 25bps hike at some point across this cycle leaves an element of uncertainty and will be key for the trajectory of the USD across the week.

Rates Pricing Dictates Play, Boosts EUR/GBP to Best Since May

• GBP has faded to trade toward the bottom-end of the G10 table, putting GBP/USD lower by 45pips on the day and 125 pips off the Monday highs. CB rate pricing continues to dictate play, with BoE pricing for the November fading by as much 1.5bps, while ECB pricing holds more steady.
• Resultingly, EUR/GBP has broken above the 200-dma for the first time since August last year, accelerating the move on the break of 0.8706, the late September highs. Clearance of this level as well as 0.8701 puts prices at the best levels since May.
• No subsequent follow through in options pricing, however, with front-end risk reversals in the cross unmoved and holding close to multi-month lows, at 0.25 points in favour of calls at present.

FX OPTIONS: Expiries for Oct19 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0560(E823mln), $1.0600(E515mln)
• USD/JPY: Y147.90-00($564mln), Y149.45-50($724mln), Y150.00($753mln), Y150.50($769mln)
• GBP/USD: $1.2142-60(Gbp1.1bln), $1.2200-15(Gbp2.8bln)
• EUR/GBP: Gbp0.8600-15(E1.1bln), Gbp0.8700(E618mln)
• NZD/USD: $0.5920-40(N$980mln)
• USD/CNY: Cny7.2500($1.1bln), Cny7.2825($1.2bln), Cny7.3500($1.4bln)

BONDS: Bulk of Early London Cheapening Holds as Bearish Momentum Extends

The early cheapening in EGBs and gilts largely holds after an extension of the bearish momentum dominated core global FI markets during Asia-Pac and early European trade.

• Technical breaks, a reiteration of the Fed’s higher for longer narrative and data revealing Chinese shedding of U.S. Tsys (albeit in August) were cited as contributary factors across several desks.
• U.S. Tsy yields have registered fresh cycle highs across the curve.
• That leaves Bund futures -20 or so, with the next technical support level a handful of ticks below session lows at 127.21. German cash benchmarks run 1.5-2.5bp cheaper.
• BTPs remain under widening pressure, with the well-documented Italian fiscal issues and the recent source reports/ECB comms playing down the need for imminent TPI deployment adding extra layers of weakness beyond the outright core global FI sell off. The proximity to a run of Italian sovereign credit rating reviews, given the aforementioned fiscal issues, will also be factoring in. 10-Year BTP yields sit above 5% as a result.
• Continued EGB supply is also providing some background pressure for the broader space.
• Gilt futures have cleared initial technical support leaving bears to focus on the Oct ’22 lows. The contract last prints -50, while cash gilt yields are flat to 5bp higher, with 10s seeing the most weakness. BoE pricing is now off hawkish session extremes, with the OIS strip twist steepening.

EQUITIES: E-Mini S&P Extends Pullback from 50-Day EMA

• A bearish theme in Eurostoxx 50 futures remains in play and this week’s move signals the end of the recent Oct 4 - 12 corrective cycle. Note too that resistance at the 50-day EMA, at 4241.70, remains intact. A clear break of this average is required to signal scope for a stronger correction. Sights are on the bear trigger at 4082.00, the Oct 4 low. Clearance of this level would confirm a resumption of the downtrend.
• S&P e-minis found resistance last week at 4430.50 (Oct 12 high) and this means that - for now - resistance at the 50-day EMA, at 4422.22, remains intact. A clear breach of the average is required to strengthen bullish conditions and this would open 4486.12, trendline resistance drawn from the Jul 27 high. On the downside, a deeper pullback would open 4235.50, the Oct 4 low and bear trigger.

COMMODITIES: Bullish Theme in Gold Continues to Be Strengthened

• WTI futures traded higher yesterday and the contract remains firm. The latest recovery has highlighted a key support at $81.50, the Oct 6 low. The medium-term trend condition remains bullish and an extension higher would expose the bull trigger at $95.03, the Sep 28 high. Clearance of this hurdle would confirm a resumption of the uptrend. For bears, a move through $81.50, would instead highlight potential for a stronger bear cycle.
• Gold traded higher Wednesday, extending the reversal from $1810.5, the Oct 6 low. The yellow metal has pierced key resistance at $1953.0, the Sep 1 high. A clear break of this level would further strengthen a bullish theme and open $1987.5, the Jul 20 high. Note that moving average studies still highlight a broader bear trend condition, however, prices would need to trade below last Friday's low of $1868.8 to signal a reversal.