Highlights:
- Payrolls report could be messy, providing final hurdle ahead of the election
- Markets see higher inflation expectations, shallower BoE cuts underpinning GBP
- Equities offered as earnings send mixed messages
US TSYS: Early Gains Pared Ahead Of A Likely Messy Payrolls Report
- Treasuries have reversed earlier gains to leave them modestly lower across the curve, with the intraday pressure coming from both EGBs and Gilts alike rather than more idiosyncratic UK flows of the past two days.
- Cash yields are 0.5-2bp higher on the day, with increases led by 3s.
- 10Y yields at 4.297% hover within touch of recent highs of 4.3365% (Oct 29) at what were highs since early July and could very easily challenge this on a stronger than expected payrolls report.
- 2s10s at 11.4bps (-0.2bps) is within recent ranges.
- TYZ4 trades close to the day’s lows of 110-09+ (-05+) having remained within yesterday’s range throughout, on softer than recent average volumes of 295k.
- The bear cycle is still in play with support at 110-04+ (Oct 31 low) after which lies the round 110-00.
- Data: Payrolls report Oct (0830ET), S&P Global US mfg PMI Oct final (0945ET), Construction spending Sep (1000ET), ISM mfg Oct (1000ET)
STIR: Just Under 100bp Of Fed Cuts By Mid-2025 Ahead Of Payrolls
- Fed Funds implied rates have firmed in London hours to leave the path out to Q1 close to where it was prior to yesterday’s mixed data.
- There are greater increases further into 2025 though, likely a factor of spillover from the very large shift in BoE terminal rate expectations since Wednesday’s Budget plus US data pointing to real GDP Y/Y growth in Q4 some 50bps higher than the Fed’s median projection from September.
- Cumulative cuts from 4.83% effective: 23.3bp Nov, 42bp Dec, 57bp Jan, 99bp June.
- Re-upping the MNI Payrolls Preview ahead of today's release at 0830ET/12300BST: https://media.marketnews.com/USNFP_Nov2024_Preview_c885bc51dc.pdf
- Dallas Fed’s Logan gives welcoming remarks today but shouldn’t touch on monetary policy, coming in the FOMC’s blackout period.
US TSY FUTURES: OI Suggests Cover Dominated On Thursday
OI data suggests that cover of existing positions dominated in Tsy futures during Thursday’s twist flattening of the curve.
- Net long cover was seemingly seen in TU through UXY futures, with net short setting apparent in US futures and net short cover seen in WN futures.
- Note that yesterday’s final OI data provided notable adjustments from the sizable swings seen in the preliminary readings. We did indicate our doubts surrounding the accuracy of the initial readings in yesterday’s SOFR OI bullet.
| 31-Oct-24 | 30-Oct-24 | Daily OI Change | OI DV01 Equivalent Change ($) |
TU | 4,498,066 | 4,502,793 | -4,727 | -172,556 |
FV | 6,189,769 | 6,252,677 | -62,908 | -2,636,927 |
TY | 4,554,636 | 4,626,268 | -71,632 | -4,541,332 |
UXY | 2,201,848 | 2,220,063 | -18,215 | -1,600,980 |
US | 1,833,870 | 1,821,104 | +12,766 | +1,646,273 |
WN | 1,726,159 | 1,729,814 | -3,655 | -733,034 |
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| Total | -148,371 | -8,038,556 |
STIR: OI Points To Short Setting Further Out The SOFR Strip On Thursday
Long cover seemed to provide the most prominent positioning move in white SOFR futures on Thursday, although net pack OI was only a little lower on the day in the grander scheme of things.
- Short setting then seemed to dominate further out the strip, with only limited pockets of apparent long cover identified beyond the whites.
- Long end swings seemed to dominate on the day, with little reaction to the data.
- Note that yesterday’s final OI data provided notable adjustments from the sizable swings seen in the preliminary readings. We did indicate our doubts surrounding the accuracy of the initial readings in yesterday’s SOFR OI bullet.
| 31-Oct-24 | 30-Oct-24 | Daily OI Change |
| Daily OI Change In Packs |
SFRU4 | 1,268,892 | 1,261,929 | +6,963 | Whites | -3,889 |
SFRZ4 | 1,150,723 | 1,162,529 | -11,806 | Reds | +43,212 |
SFRH5 | 1,023,027 | 1,019,887 | +3,140 | Greens | +23,505 |
SFRM5 | 898,339 | 900,525 | -2,186 | Blues | +9,617 |
SFRU5 | 712,483 | 703,337 | +9,146 |
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SFRZ5 | 867,969 | 859,330 | +8,639 |
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SFRH6 | 597,861 | 574,937 | +22,924 |
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SFRM6 | 583,764 | 581,261 | +2,503 |
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SFRU6 | 523,894 | 515,853 | +8,041 |
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SFRZ6 | 627,055 | 620,129 | +6,926 |
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SFRH7 | 384,673 | 377,757 | +6,916 |
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SFRM7 | 317,486 | 315,864 | +1,622 |
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SFRU7 | 264,882 | 257,914 | +6,968 |
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SFRZ7 | 245,182 | 247,138 | -1,956 |
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SFRH8 | 196,278 | 193,525 | +2,753 |
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SFRM8 | 159,757 | 157,905 | +1,852 |
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GBP: What Do the Sell-Side Think of GBP After the Budget? (1/2)
We wrote yesterday that an aggressive surge in volumes prompted GBP to begin to re-correlate with Gilt weakness, despite initial resilience through the first phase of the market reaction to the UK Budget Aggressive Pick-Up in Volumes Pressures GBP to Multi-Month Lows . We see the market response this week as being a rational, and potentially stickier, reaction to higher inflation expectations and the risk of increased issuance: Yield Jump Notable Not Exceptional, Could Be Sticky Given Drivers , while the magnitude of the move, while notable, is not particularly rare for Gilts in recent years.
- Sell-side analysts flag the risks for GBP ahead as being the BoE's response to the spending plans at next week's rate decision, any potential fallout for business confidence ahead, and whether shallower BoE easing expectations can back up the GBP into year-end.
- BBG analyst consensus for Dec31 remains 1.3000 for GBP/USD, however options markets have become more pessimistic on GBP over the past few sessions, with implied pricing suggesting a 32% chance (from 28%) of GBP/USD below 1.2750 at year-end, while the odds for trading above 1.3250 have declined to 20.8% from 25.2% at the beginning of the week.
ING write that the main consideration is that this is not a rerun of the post 2022 mini-budget market turmoil, with tax rises meaning the risk of unfunded spending is kept in check, and LDI funds are nowhere close to the leverage levels of 2022.
- Their view is that GBP can drop a bit further as the readjustment to higher bond supply runs its course, but with GBP short-term swap rates having received a lift from the BoE repricing (only one cut expected in 2024 now), rate differentials can soon offer a floor to the pound. They stick with their recent call that cable will be close to 1.28 on US Election Day.
MUFG write that the negative market reaction highlights that the Gilt market is uneasy over the need to absorb additional government borrowing. They still expect the BoE to cut rates more than the market is expecting but the outlook for higher yields to remain in place for longer now could encourage a stronger GBP when the Gilt market eventually settles down.
JPM write that GBP momentum will depend partly on the magnitude of the hit to business confidence. If the hit is large then Sterling weakness could have further to run. Already stretched long GBP positioning also presents a risk.
- The highly front loaded spending package has prompted JPM to upgrade their 2025 UK growth view by 0.5% increases the risk of a pause in cuts from BoE.
Deutsche Bank write that the stakes are now also higher for next week's BoE. The hawkish repricing of the front-end increases the onus on the central bank to not pivot dovishly despite the large miss on services inflation last month and the Governor's hints at a more "activist" stance a few weeks ago.
- Conversely, the MPC sticking to its more cautious messaging on cuts from the last meeting should then see GBP catchup to the signal from rates, and recover some of its lost ground.
FOREX: NFP Provides Final Market Hurdle Ahead of Election Results
- GBP is firmer so far Friday, recouping a small part of the sharp losses suffered into the Thursday close. Markets continue to digest the technicalities and background pressures on the budget and Reeves' spending plans outlined on Wednesday, with the currency likely receiving some support from higher inflation expectations for next year, twinned with more muted pricing for the BoE's easing cycle across 2025.
- Despite GBP's intraday strength, EUR/GBP remains much firmer on the week, with the cross having shown above the reversal trigger and back above 0.8400 - leaving next week's BoE decision as a critical driver of the cross that's broken major resistance.
- The JPY is softer against all others as markets pare a small part of the post-BoJ rally. This has kept USD/JPY clear of the 200-dma on the daily charts, with 151.55 undercutting as support.
- Lastly, the greenback is mixed-to-higher, with US 10yr yields holding inside yesterday's range, with NFP seen as the last market hurdle before focus shifts wholly to the election due next week. Polling still sees the election as too-close-to-call, providing further support for vols at these levels.
- Focus for the Friday session rests on the US Nonfarm Payrolls release for October, within which markets will be watching closely for the magnitude of the impact from both Hurricanes across the South-eastern states as well as strike action hitting staffing at major firms including Boeing over the course of the month.
OPTIONS: Expiries for Nov01 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.0750(E699mln), $1.0800-03(E1.1bln), $1.0840-50(E1.4bln), $1.0895-00(E1.4bln), $1.0925-30(E510mln)
- USD/JPY: Y152.00($575mln), Y153.00($606mln)
- GBP/USD: $1.2900(Gbp584mln)
- EUR/GBP: Gbp0.8340(E719mln)
- NZD/USD: $0.6100(N$720mln)
- USD/CAD: C$1.3885($620mln), C$1.3940($618mln)
- USD/CNY: Cny7.1500($854mln)
EQUITIES: E-Mini S&P Trading Below 20- and 50-Day EMAs
- Eurostoxx 50 futures have traded lower this week. The move down has resulted in a breach of support at 4914.00, the Oct 16 low. Note that 4884.06, 38.2% of the Aug 5 - Sep 30 bull cycle, has also been cleared. This exposes 4815.50 next, the 50.0% retracement point. Initial firm resistance has been defined at 5015.00, the Oct 29 high, where a break is required to highlight a reversal.
- S&P E-Minis traded sharply lower Thursday. The contract has cleared both the 20- and 50-day EMAs - an important short-term bearish development. The break lower signals scope for an extension and has exposed the next support at 5724.00, the Oct 2 low. Clearance of this level would open 5637.60, a Fibonacci retracement. Initial firm resistance is 5831.57, the 20-day EMA. Key resistance and the bull trigger is 5927.25, the Oct 17 high.
COMMODITIES: Latest Recovery in WTI Futures Deemed Technically Corrective
- A bearish theme in WTI futures remains intact and the latest recovery appears to be a correction. A resumption of weakness would expose $65.99, the Oct 1 low, and $64.16, the Sep 10 low and a key support. For bulls, a clear reversal would refocus attention on the key short-term resistance at $77.70, the Oct 8 high. Clearance of this level would resume to the recent uptrend. Initial resistance is at $72.34, the Oct 24 high.
- The trend condition in Gold is unchanged and Thursday’s pullback is - for now - considered corrective. Recent gains resulted in a breach of $2685.6, the Sep 26 high, confirming a resumption of the primary uptrend and maintaining the price sequence of higher highs and higher lows. Sights are on the $2800.0 handle next. Firm support is $2707.3, the 20-day EMA. A clear break of this EMA would highlight a short-term top.
| Date | GMT/Local | Impact | Country | Event |
| 01/11/2024 | - | *** |  US | Domestic-Made Vehicle Sales |
| 01/11/2024 | 1230/0830 | *** |  US | Employment Report |
| 01/11/2024 | 1345/0945 | *** |  US | S&P Global Manufacturing Index (final) |
| 01/11/2024 | 1400/1000 | *** |  US | ISM Manufacturing Index |
| 01/11/2024 | 1400/1000 | * |  US | Construction Spending |