MNI US MARKETS ANALYSIS - Overnight USD Vols Elevated as Markets Await CPI

US TSYS: Cross-Market Inputs Cancel Out, Tight Ranges In Play Ahead Of NY Hours

The combination of the move away from best levels in EGBS & Gilts post-German ZEW data and slightly firmer oil prices keeps Tsys in tight ranges pre-NY, capping the modest spill over bid derived from Gilts post-UK labour market data.

• TYZ3 holds to a very narrow 0-05 band as a result, last +0-01+, with Monday’s high located just above best levels of the session.
• Cash Tsys run flat to 1.5bp richer, with a modest flattening impulse seen.
• Little in the way of pre-NY movement in FOMC-dated OIS. Terminal pricing of 5.46% come December remains evident on the strip, before 36bp of cuts are priced through June ’24.
• NFIB small business optimism data has crossed, with the familiar early news wire release evident. The index softened a little more than the BBG survey consensus expected, although the deterioration vs. the month prior was relatively small, with the index comfortably below the 100 level.
• 10-Year Tsy supply headlines a limited NY docket, with headline flow surrounding GOP-based impeachment discussions and the risk of a government shutdown also on the radar.

STIR FUTURES: Very Little Change In Fed Path, Terminal In Dec After Switching Yesterday

• Fed Funds implied rates are near unchanged from yesterday’s close, keeping to yesterday’s development of the terminal remaining at a similar level but technically being kicked back a month to December (cumulative +12.5bp to 5.46%).
• Cumulative hikes from 5.33% effective: +1.5bp Sep (unch), +11.5bp Nov (+0.5bp), +12.5bp Dec (unch).
• Cuts from terminal: 37bp to Jun’24 and 103bp to Dec’24 (both unch). The first cut from current levels is still very close to fully priced with the June meeting.
• The day’s limited data has seen the NFIB small business survey slightly miss expectations for overall optimism but within it, planned price increases almost fully unwound last month’s decline.

Source: Bloomberg

US TSYS: OI Indicates Short Setting Dominated On Monday

The combination of Monday’s cheapening and preliminary open interest data point to a mix of short setting and long cover in Tsy futures, although net short setting seemingly dominated.

• TY futures appeared to be the only contract that saw long cover in net terms, with signs of net short setting across the remainder of the curve.
• That left the DV01-adjusted net OI swing near the +$2.5mn mark, even though the largest DV01-adjusted OI swing came via the apparent long cover in TY futures.

EUROPE ISSUANCE UPDATE:

EU-bond syndication update:

• E5bln WNG of the new 7-year Dec-30 EU-bond. Books in excess of E35bln. Spread set at MS+2bps.

Slovenia USD syndication update:

• 10-year Sep-33 USD SLOREP. IPTs: 3.875% Aug-33 UST + 100bps area.

Dutch auction result:

• E2.495bln of the 0% Jan-26 DSL. Avg yield 3.04%.

German auction result:

• E5.5bln (E4.46bln allotted) of the 3.10% Sep-25 Schatz. Avg yield 3.100% (bid-to-cover 1.31x).

Gilt auction result:

• GBP900mln of the 0.125% Mar-51 linker. Real yield 1.330% (bid-to-cover 2.54x).

BOE: Breeden gives away little on her own views but could influence model changes

• Breeden gave little away about her individual views on monetary policy, instead sticking to the party line of what the BOE's forecasts were and saying that she agreed with the BOE's existing models on the transmission mechanism. The first half of the hearing she sounded very much like she would just vote with the other internal members without much input.
• However, where she feels she can make a difference is to help to incorporate some of the behavioural aspects into the Bank's models. And she elaborated on this by noting that there were differences between how hikes impacted different households' behaviours differently.
• Overall, she does seem to be largely in line with other internal members on the MPC and doesn't seem as though she will be a huge outlier - but it also seems as though her influence will likely grow as time goes on towards helping steer those other internal members.
• She will observe the discussions for the September MPC decision and be actively involved and then have a vote for the November decision.

FOREX: Greenback Recoups Monday Losses, GBP Fades Alongside BoE Terminal Pricing

• The greenback is furtively firmer just ahead of NY hours, with the USD Index recouping a large part of yesterday's losses, which are deemed corrective at these levels. The USD Index remains comfortably inside the medium-term uptrend drawn off the July low, and the trend will resume on gains back above 105.157.
• Meanwhile, the single currency is among the poorest performers, largely a function of USD strength and the proximity to Thursday's ECB release. Markets remain evenly split on those seeing further tightening from the governing council this week, and those seeing a pause for policy rates at this juncture. EUR/USD printed a pullback low at 1.0712, but steered clear of fresh weekly lows.
• Rates rallied on the back of the UK labour market report, with some BoE-dated OIS contracts shedding as much as 6bps, prompting the terminal policy rate to slip back below 5.65%. Rate differentials and some broader USD demand have weighed on cable, with spot slipping as low as 1.2463, taking out the first downside level at 1.2472,. 1.2446 is the next notable support, marking last week's base and the lowest print since the 8 June.
• There are few datapoints or macro releases due Tuesday, with both the ECB and Federal Reserve inside their pre-decision media blackout periods. The next data of note crosses tomorrow, with the US CPI release for August.

FX OPTIONS: Overnight USD Vols Buoyed Pre-CPI

• Overnight USD vols on the front foot as they look to capture tomorrow's US CPI release (CPI seen picking up to 0.6% M/M, 3.6% Y/Y on the headline).
• USD overnight vols are firmer across G10, with AUD/USD, GBP/USD and EUR/USD contracts adding 9, 8 and 7 points respectively since the beginning of the week. This widens the break-even on an overnight USD/JPY straddle to ~80 pips from just 25 pips as of Monday.
• Meanwhile, USD/ZAR overnight vols have surged to the highest levels since early July on a closing basis, identifying the risk surrounding EM currencies and the sensitivity to Fed tightening cycle. USD/ZAR overnight vols have cleared 20 points - likely to fade headed into the release, but remain elevated as the contract captures the event.
• EUR vols could remain elevated beyond tomorrow's US CPI release, with markets also factoring Thursday's ECB decision, at which markets remain split on a 25bps hike, or a hold from the GC.

FX OPTIONS: Expiries for Sep12 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0650-65(E1.8bln), $1.0700(E1.2bln), $1.0720-25(E1.3bln), $1.0770-75(E920mln), $1.0800-20(E1.2bln), $1.0830-35(E531mln), $1.1000(E1.2bln)
• USD/JPY: Y140.00($1.1bln), Y146.50-65($725mln), Y146.85-00($540mln)
• GBP/USD: $1.2350-55(Gbp968mln)
• EUR/GBP: Gbp0.8600-20(E644mln), Gbp0.8880-00(E603mln)
• AUD/USD: $0.6250(A$936mln)
• NZD/USD: $0.5835(N$605mln), $0.5950-65(N$837mln)
• USD/CAD: C$1.3700($512mln)
• USD/CNY: Cny7.3000($982mln)

EGBS: Generally a Little Firmer on Weaker Equities & Bid in Gilts, Before German ZEW Trims Gains

A bid in UK bonds, in the wake of domestic labour market data, helped Bunds away from worst levels of the day, which allowed Monday’s low in futures to hold after an early test.

• Weakness in benchmark European equity indices also aided the bid in FI.
• The expectations component of the latest German ZEW survey wasn’t as soft as expected, but was still negative, while the current conditions metric saw a more pronounced deterioration vs. exp. The expectations component has allowed Bunds to move away from best levels.
• Bund futures last +10.
• German cash benchmarks bull flatten, sitting flat to 2bp richer.
• Most core/semi-core EGB curves see similar moves.
• Peripherals are mixed in spread terms, with BTPs (1bp tighter, July Wides holding) & GGBs (1bp wider) providing the extremes to the range of spread moves (vs. Bunds). Peripheral curves have generally twist flattened.
• Dutch Jan-26 DSL supply was digested smoothly, with Schatz supply and the EU 7-Year syndication providing the other regional rounds of issuance to note today.

GILTS: Off Labour Market-Induced Bests, Breeden Comments Eyed

The post-data move away from best levels in EGBs helps gilts further away from session bests.

• That leaves gilt futures +50, after a brief and limited foray above last week’s highs failed to result in a break of 95.00 (short-term technicals remain bearish sub-95.79).
• Cash gilts 1-6bp richer, bull steepening.
• The initial rally & steepening impulse was fuelled by labour market data that revealed the latest signs of loosening, although wages remain at elevated levels.
• BoE-dated OIS softened in the wake of the release. The liquid contracts now sit off dovish extremes, +0.5bp to -5bp as the strip twist flattens.
• ~21.5bp of tightening is priced for this month’s meeting, while terminal policy rate pricing is below 5.65% i.e. markets continue to price less than 2 further 25bp hikes from the BoE.
• SONIA futures sit flat to +8.5, with greens outperforming.
• Comments from BoE MPC nominee Breeden have pointed to weak UK economic activity, along with upside risks to the Bank’s inflation outlook. Her appearance in front of the Treasury Select Committee is ongoing. No market reaction thus far.
• Next week’s CPI release presents the next major point of note on the domestic data docket, with monthly economic activity data slated for tomorrow.

EQUITIES: Recent Gains in E-Mini S&P Considered Corrective

• Despite the latest recovery, a bear cycle in Eurostoxx 50 futures remains in play. Price has recently pierced key support at 4187.00, the Aug 18 low and a bear trigger. A clear break of this level would strengthen bearish conditions and open 4177.40 next, a Fibonacci retracement. Key resistance has been defined at 4358.00, the Aug 30 high. Initial firm resistance is seen at 4282.20 the 20-day EMA.
• The E-mini S&P contract traded higher Monday. For now, gains are considered corrective and a bear cycle remains in play. Key resistance has been defined at 4597.50, the Sep 1 high. A break is required to reinstate the recent bullish theme. A resumption of weakness would signal scope for a move towards the key support and bear trigger at 4397.75, the Aug 18 low. Clearance of this support would highlight a short-term reversal.

COMMODITIES: WTI Futures Remain Close to Recent Highs

• The uptrend in WTI futures remains intact and price is trading closer to its latest highs. The recent break of resistance at $84.16, the Aug 10 high, confirmed a resumption of the uptrend and this maintains the bullish price sequence of higher highs and higher lows. Note that MA studies are in a bull mode position, highlighting positive sentiment. Sights are on the $90.00 handle. Initial firm support to watch lies at $83.39, the 20-day EMA.
• Gold is consolidating and trading closer to last week’s lows. Key support to watch lies at $1903.9, the Aug 25 low. A break of this level would be viewed as a bearish development and highlight the fact that the recovery between Aug 21 - Sep 1 has been a correction. This would expose $1884.9, the Aug 21 low. On the upside, initial firm resistance is seen at $1930.2, the 50-day EMA. Key resistance is at $1953.0, the Sep 4 high.