Highlights:
- Fed Funds show much greater odds of a 50bp cut from the FOMC next week after yesterday’s articles from the WSJ (including ex-Powell adviser Jon Faust saying it’s a “close call”) and the FT.
- Greenback weakness is most noticeable against the Japanese yen, with its sensitivity to moves in core fixed income remaining at elevated levels.
- Later today, we have preliminary UMich sentiment and inflation expectations data.
US TSYS: Firmly Bull Steeper on Extension of 50bp Cut Speculation
- Treasuries have extended the gap higher seen with the Asia open on increased speculation that next week’s Fed decision is a closer call between a 25bp or 50bp cut than markets had been expecting after this week’s CPI and PPI data.
- Today’s scheduled focus is on inflation data, with international prices offering a last, albeit minor, potential tweak to core PCE estimates before U.Mich inflation expectations. Markets are also likely to remain on tenterhooks for any other (possibly clearer) blackout steers.
- Cash yields range from 1.8-6.3bps lower, with 2Y yields leading declines.
- 2s10s at 7bps (+3.3bp) hovers close to recent fleeting highs of 8bps, otherwise last higher in mid-2022. .
- The bull steepening has increased through European hours, with the longer end pulling back more notably from earlier highs.
- The long-end naturally lags but also sees additional impetus for the move after yesterday's 30Y auction tailed by 1.5bps.
- TYZ4 sits at 115-13+ (+ 07+) on solid cumulative volumes approaching 400k. It’s off an earlier high of 115-18+ which eclipsed yesterday’s 115-17+ but remained below the 115-23+ seen pre-CPI.
- The trend needle points north with further resistance seen at 115-31 (Fibo projection of Aug 8-21-Sep 3 swing) before the round 116-00.
- Data: Import/exports prices Aug (0830ET), U.Mich Sep prelim (1000ET)
STIR: Odds of 50bp Sep Fed Cut Rise on Dovish Press Articles & Ex Fed Comments
- Fed Funds show much greater odds of a 50bp cut from the FOMC next week after yesterday’s articles from the WSJ (including ex-Powell adviser Jon Faust saying it’s a “close call”) and the FT.
- Former NY Fed President Dudley also sees a strong case for a 50bp cut, although that should be less of a surprise, as he previously pointed to the potential for such a move.
- Cumulative cuts from 5.33% effective: 36bp Sep (28bp pre-WSJ), 75bp Nov, 116bp Dec (103bp pre-WSJ), 153bp Jan and 230bp June (215bp pre-WSJ).
- OIS prices 33bp of cuts for next week.
- Implied rates for the next two meetings are now only slightly higher than what was seen ahead of Governor Waller’s failure to express an explicit preference for a 50bp move post-payrolls.
- Meanwhile, end-2024 rates have more than reversed the lift from a rental inflation-led core CPI beat.
- We highlighted some key differences between the latest WSJ article and the 2022 steer. A reminder that the latter instance signalled an upsizing of rate hikes during a Fed blackout period.
- Regarding the initial WSJ article, we wrote yesterday on the differences in the situation from its 2022 steer to upsizing hikes to 75bps.
US TSY FUTURES: OI Points to Mix of Short Setting & Long Cover on Thursday
OI data points to a mix of short setting and long cover as Tsy futures settled lower on Thursday, with those positioning swings roughly offsetting in curve-wide DV01 terms
- We have seen a recovery rally since then, which may have included short cover from some shorter-term accounts.
| 12-Sep-24 | 11-Sep-24 | Daily OI Change | OI DV01 Equivalent Change ($) |
|---|---|---|---|---|
TU | 4,357,485 | 4,369,944 | -12,459 | -493,618 |
FV | 6,381,653 | 6,377,827 | +3,826 | +170,959 |
TY | 4,858,825 | 4,798,317 | +60,508 | +4,103,550 |
UXY | 2,122,984 | 2,125,962 | -2,978 | -281,528 |
US | 1,731,749 | 1,731,636 | +113 | +16,022 |
WN | 1,704,070 | 1,719,706 | -15,636 | -3,541,652 |
|
| Total | +33,374 | -26,267 |
ECB: Lagarde Comments on Negotiated Wages Contributes to Post-Meeting Sentiment
In yesterday’s press conference, President Lagarde noted that negotiated wage growth will remain elevated “in the first half of 2025, but then it is definitely on a declining path”. Previous press conferences had pointed to 2024 as a year with elevated/volatile negotiated wage growth, which would then decline from 2025 onwards. In other words, the onset of a sustained moderation in negotiated wage growth was pushed back a little.
- We don’t think this statement was intended to be hawkish for 2025/2026 policy expectations though. It could even be interpreted as Lagarde preparing markets for an elevated negotiated wages outcome in Q1/Q2 2025, but not painting such a development as a major cause for concern.
- Nevertheless, the remarks likely added to post-meeting sentiment, whereby expectations for an October cut were reduced.
- Although a move in October was not explicitly ruled out by Lagarde, she admitted that the meeting was “a relatively short period of time compared with other intervals that we’ve had in the past”.
- That means there will be relatively little data to feed into the ECB’s “data-dependent and meeting-by-meeting approach”.
- Source reporting after the decision confirmed that an October cut was unlikely (echoing the MNI Policy Team’s reporting heading into the meeting).
- There remains some speculation that a dovish Fed decision (i.e. a 50bp cut) could tempt the ECB into an October cut, but we think both outcomes remain unlikely.
MNI ECB REVIEW - SEPTEMBER 2024: Back in December
- The ECB cut the deposit rate by 25bp as expected and narrowed the policy rate corridor as indicated back in March. President Lagarde reiterated the data-dependent and meeting-by-meeting approach, as well as explicitly stating that despite the obvious downward trajectory there is no predetermined policy rate path.
- As we stated in our preview of the meeting, given that inflation is now much closer to target but with some pieces of the puzzle still missing (particularly with respect to domestic price pressures), there is little to be gained from pre-committing to specific policy decisions, but much to be gained from retaining some flexibility and optionality.
- Despite recognising weaker economic activity and highlighting the recent moderation in wage growth, the tone of the press conference still reflected a challenging ‘last mile’ and in that sense felt a touch hawkish on inflation.
- Ultimately, however, we feel that this just affirms that October is off the table, but that growth and wage dynamics will likely provide sufficient cover for another cut in December. More broadly, absent a material downside shock, the ECB’s cautious approach in the face of uncertainty augurs for a quarterly pace of policy rate cutting.
- For the full publication please see here.
FRANCE: Barnier Facing Difficulty in Putting Cabinet Together
Prime Minister Michel Barnier is facing difficulty in putting together his cabinet, with another potential minister announcing today that he had been contacted about joining the gov't, only to refuse the invitation. Stéphane Le Foll, who served as Minister of Agriculture under former president Francois Hollande said this morning that in a call on 10 Sep he had been invited by Barnier to become a minister. Le Foll said that he gave "a firm and definitive" no, but wished the new PM "a lot of courage", adding that he expected Barnier to lead a "right-wing gov't".
- Le Foll is the second member of the centre-left Socialist Party (PS) to have publicly refused the offer of joining the Barnier gov't after Mayor of Saint-Ouen-sur-Seine Karim Bouamrane did the same earlier this week.
- The refusal of PS figures (so far) to join the Barnier gov't further narrows the pool of possible ministers and could limit the ability of the new administration to garner support in the National Assembly.
- The actions of the far-right National Rally (RN) will prove crucial. If the party abstains on any censure votes the Ensemble-Les Republicains bloc will outweigh the leftist New Popular Front (NFP). However, if they vote against Barnier then the RN's deputies combined with those of the left would be able to remove the gov't. Earlier, RN spox Sebastien Chenu said "If there are tax increases, obviously we will go as far as censorship..."
FOREX: Further Volatile Swings for Japanese Yen, USDJPY Approaches 140.25
- With press articles and ex-Fed commentary boosting the chances of a 50bp FOMC cut next week, the USD index has fallen 0.35% on Friday. As expected, the greenback weakness is most noticeable against the Japanese yen, with its sensitivity to moves in core fixed income remaining at elevated levels.
- Accordingly, USDJPY has broadly been on the back foot, trading down to a 140.65 low ahead of the European open and then reaching as low as 140.41 in recent trade. Price action narrows the gap to a key support at 140.25, the Dec 28 low, which would place the pair at its lowest level since July 2023.
- Strength for the low yielders has also boosted the Swiss Franc, with USDCHF down 0.3%, although it is worth noting the pair remain around 50 pips higher on the week.
- Elsewhere, the likes of AUD, NZD and CAD remain broadly unchanged against the dollar, as potential gains are offset by cross/JPY flow.
- EURUSD stands 0.15% stronger on the session, mainly owing to its weighting within the DXY and is more reflective of the adjustment to Fed pricing. EURUSD has breached initial resistance at 1.1091, the Sep 09 high, and the market’s focus will be on key short-term resistance at 1.1155, the Sep 6 high. A break of it would be a bullish technical development.
- Later today, we have preliminary UMich sentiment and inflation expectations data. Chinese activity data will be eyed over the weekend.
RATINGS: Updates on Spain & Greece Headline After Market
Sovereign credit rating reviews of note scheduled for after hours on Friday include:
- Fitch on Germany (current rating: AAA; Outlook Stable) & Malta (current rating: A+; Outlook Stable)
- Moody’s on Greece (current rating: Ba1; Outlook Stable), Luxembourg (current rating: Aaa, Outlook Stable) & Spain (current rating: Baa1, Outlook Positive)
- S&P on Croatia (current rating: BBB+; Outlook Positive) & Spain (current rating: A; Stable)
- Scope Ratings on South Africa (current rating: BB; Outlook Stable)
EQUITIES: This Week’s Recovery E-Mini S&P Highlights a Bullish Reversal
- Despite a short-term bounce, Eurostoxx 50 futures continue to trade closer to their recent lows. The latest move down has resulted in a break of both the 20- and 50-day EMAs. A resumption of the bear leg would signal scope for weakness towards 4686.53, a Fibonacci retracement point. Initial key short-term resistance has been defined at 4998.00, the Sep 3 high. First resistance is at 4865.79, the 50-day EMA.
- This week’s recovery in S&P E-Minis, highlights a bullish reversal and the end of the corrective cycle between Sep 3 - 6. The contract is trading above the 20- and 50-day EMAs and a continuation higher would signal scope for a test of 5669.75, the Sep 3 high. Clearance of this level would open 5721.25, the Jul 16 high and bull trigger. On the downside, a reversal lower and a breach of 5394.00, the Sep 6 low, would reinstate a bearish theme.
COMMODITIES: Thursday's Gains Reinforce Bullish Structure in Gold
- WTI futures remain in a bearish condition. Tuesday’s strong sell-off reinforces current conditions and confirmed an extension of the bear cycle. This suggests that the most recent bounce is a short-term correction. A resumption of the downtrend would open $63.93 next, a Fibonacci projection point, ahead of the psychological $60.00 handle. Firm resistance is at $71.32, the 20-day EMA.
- A bullish structure in Gold remains intact and yesterday’s gains have reinforced this theme - the metal traded to a new all-time high. This ends the recent consolidation - a pause in the uptrend - and maintains the bullish price sequence of higher highs and higher lows. MA studies are in a bull-mode set-up, highlighting a clear uptrend. The focus is on $2584.0, a Fibonacci projection. Firm support lies at $2501.2, the 20-day EMA.
MNI (LONDON)
| Date | GMT/Local | Impact | Country | Event |
| 13/09/2024 | - | *** |  CN | Money Supply |
| 13/09/2024 | - | *** | CN | New Loans |
| 13/09/2024 | - | *** | CN | Social Financing |
| 13/09/2024 | - |  EU | ECB's Lagarde in Eurogroup meeting | |
| 13/09/2024 | 1230/0830 | ** |  US | Import/Export Price Index |
| 13/09/2024 | 1230/0830 | ** |  CA | Wholesale Trade |
| 13/09/2024 | 1400/1000 | ** | US | U. Mich. Survey of Consumers |
| 13/09/2024 | 1700/1300 | ** | US | Baker Hughes Rig Count Overview - Weekly |
| 14/09/2024 | 0200/1000 | *** | CN | Fixed-Asset Investment |
| 14/09/2024 | 0200/1000 | *** | CN | Retail Sales |
| 14/09/2024 | 0200/1000 | *** | CN | Industrial Output |
| 14/09/2024 | 0200/1000 | ** | CN | Surveyed Unemployment Rate M/M |
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