MNI (LONDON) - Highlights:
- PPI eyed for further inflation clues after soft CPI print
- Fed pricing eyes September as most likely cut
- BoJ rate checks keep JPY traders on their toes
US TSYS: Modest Bear Steepening Awaiting Further Inflation Cues
- Treasuries have modestly bear steepened overnight, with front rates somewhat pinned after yesterday’s dovish CPI report but the longer end seeing a larger retracement. Today sees further inflation firmly in focus with PPI and U.Mich inflation expectations headlining.
- Cash yields are 0.8-2bp higher, with 2s10s at -29.1bps (+1bp) extending yesterday’s steepening as it approaches most recent highs of -27.4bp from Jul 2.
- TYU4 at 110-28+ (- 08+) has now retraced about half of yesterday’s lurch higher on soft CPI, with solid cumulative volumes of 350k.
- Yesterday's high of 111-10+ saw clearance of 111-01 (Jun 14 high), reversing a previously bearish threat and instead signaling scope towards 111-13 (Mar 25 high).
- Data: PPI Jun (0830ET), U.Mich Jul prelim (1000ET)
- No further Fedspeak or issuance today.
STIR: Holding Three Fed Cuts To January Ahead Of PPI and U.Mich
- Fed Funds implied rates continue to have seen very little retracement in the dovish shift after yesterday’s CPI report (barring July which is back to similar levels but only ever had very low odds of any change).
- Cumulative cuts from 5.33% effective: 1.5bp Jul, 25bp Sep, 39bp Nov, 60bp Dec and 77bp Jan – see table for changes since CPI and last week’s softer run of labor data and ISM services.
- The median FOMC participant of course only saw a single 25bp cut at the June SEP.
- Today’s focus is on PPI inflation at 0830ET before U.Mich preliminary inflation expectations at 1000ET.
- There’s no further scheduled Fedspeak today. A little earlier today, Bloomberg quotes Chicago Fed’s Goolsbee (’25 voter, leaning dove) that recent inflation data seem “pretty favorable” and more data like the last two months would boost confidence.
US TSY FUTURES: OI Data Points To Aggressive Net Long Setting Following CPI
Preliminary OI data and yesterday’s post-CPI rally in Tsy futures points to aggressive net long setting, with TY futures alone seeing over $5mn of net DV01 equivalent OI added.
- While the risks to existing market positioning definitely lay with a ‘hawkish’ CPI print, the reaction to the much-softer-than-expected data reveals plenty of space to add longs if fundamentals permit.
- Soft demand metrics and pricing at the latest 30-Year Tsy auction facilitated further bull steepening of the curve later in the day, although didn’t prevent the addition of fresh net longs in WN futures.
| 11-Jul-24 | 10-Jul-24 | Daily OI Change | OI DV01 Equivalent Change ($) | |
| TU | 4,300,913 | 4,289,022 | +11,891 | +452,042 |
| FV | 6,397,500 | 6,369,491 | +28,009 | +1,185,584 |
| TY | 4,583,356 | 4,504,170 | +79,186 | +5,140,758 |
| UXY | 2,075,789 | 2,071,940 | +3,849 | +346,343 |
| US | 1,669,741 | 1,669,539 | +202 | +26,766 |
| WN | 1,678,639 | 1,668,774 | +9,865 | +2,014,661 |
| Total | +133,002 | +9,166,153 |
US OUTLOOK/OPINION: Soft Core Goods CPI At Odds With Recent Stronger PPI Trend [1/2]
- There has been plenty of early interest in today’s PPI release after yesterday’s surprisingly soft CPI.
- As we touched upon in the MNI Inflation Insight sent yesterday (see here), CPI core goods was one of the few areas that was stronger than expected.
- It still saw another month of deflation (-0.12% M/M, down four consecutive months and having increased in only one of the past fourteen months). Strip out used cars and core goods inflation was just 0.04% M/M after -0.12% M/M, averaging 0% for the year to date.
- As for PPI inflation, the main core measures were much softer than expected back in May with ex food & energy at just 0.05% M/M. It has been volatile though, including a 0.50% M/M jump in April which has left the YTD average at 0.3% M/M.
- The consistent gap with core goods is unusual by post-pandemic standards [see chart – it’s more akin to 2017-18], suggesting either some further price pressures are in the pipeline or that firms are finding it harder to pass cost increases on.
US OUTLOOK/OPINION: Core PCE Estimates Sit At Circa 0.15% M/M Pre-PPI [2/2]
- Consensus looks for a 0.2% M/M increase for PPI ex food & energy. A beat could drive an initially hawkish reaction but we feel the overriding impact should be what happens to some PCE-relevant components.
- Those include: airfares (CPI airfares were -5% in June after -3.6%, PPI airfares were -4.3% in May); vehicle insurance (CPI 0.9% in June after -0.1%, PPI 1.1% in May); the wide range of PPI healthcare services that feed into PCE (CPI dental, one of the few that feeds into PCE, was 0.02% in June after 1.15% vs PPI health care services 0.17% in May for a very crude relative comparison); and portfolio management fees (expected to rebound after -1.8% in May).
- We touched on the wide range of analyst core PCE estimates in yesterday’s inflation insight that should narrow closer to new consensus after today’s PPI data depending on their prior assumptions for the above categories.
- They currently average out at ~0.145% M/M after the particularly soft 0.08% M/M in May. That would see the three-month rate slow from 2.7% to 2.0% annualized. For perspective, that’s after the 4.5% in the three months to Mar in a move back towards the 1.6% to Dec and 2.2% to Sep.
- Scotia (0.0 or even -0.1%), Wells Fargo (rounded 0.1), Jefferies (0.10), Cit (0.13), Nomura (0.136)
- TD (0.18), JPM (0.19), HSBC (0.20), GS (0.20), BofA (0.21), MS (0.21)
FOREX: JPY Rate Checks Keep Markets Volatile, But EUR/JPY Recovers Well
- After yesterday's suspected official intervention in the JPY, markets were volatile again overnight, with supposed rate checks from the BoJ in EUR/JPY keeping markets on edge. The cross printed a new pullback low of 171.52 on the rate check, however prices have recovered well across Friday morning trade.
- USD/JPY's slide yesterday exposed key support in the pair at the 50-dma of 157.81 - a level pierced, but not convincingly broken yet this week. A particularly USD negative reaction to today's data releases will further raise concerns that the authorities could sell again into an already soft market.
- Antipodean currencies are outperforming, with AUD and NZD firmer against all others. A more solid equity backdrop is supporting high beta currencies, with core Europe cash markets and US futures all trading in positive territory ahead of the key earnings releases later today - Citigroup, JPMorgan, Wells Fargo and BNY Mellon are all set to report ahead of the open today.
- Yesterday's softer-than-expected CPI print will be weighing on market's minds ahead of the PPI release later today, after which markets will have a much better idea of shape of PCE headed into the next Fed meeting at the end of July. Fed rates pricing continues to eye the September meeting as the most likely turning point for interest rates.
Expiries for Jul12 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.0600(E2.5bln), $1.0650(E1.6bln), $1.0685-00(E2.5bln), $1.0800(E1.7bln), $1.0820-25(E910mln), $1.0850(E968mln), $1.0870-75(E588mln), $1.0890-00(E991mln)
- USD/JPY: Y160.50($1.2bln), Y161.95-00($1.3bln)
- AUD/USD: $0.6790-00(A$965mln)
- USD/CAD: C$1.3630-50($2.2bln)
EQUITIES: Trend Conditions in E-Mini S&P Remain Bullish Despite Thursday's Dip
- A bull cycle in Eurostoxx 50 futures remains intact. Attention is on resistance at 5039.84, 61.8% of the May 16 - Jun 14 sell-off. It was pierced last week, a clear break of it would be a positive development and suggest scope for an extension of the bull cycle that started Jun 14. This would open 5082.32, the 76.4% retracement. A stronger reversal would instead expose 4846.00, the Apr 19 low and a key support.
- The trend condition in S&P E-Minis is bullish and the contract traded to a fresh trend high once again Thursday. The continuation higher confirms a resumption of the uptrend and maintains the bullish sequence of higher highs and higher lows. Moving average studies are in a clear bull-mode set-up too and this continues to highlight positive market sentiment. Sights are on the 5713.31, a Fibonacci projection. Firm support is at 5559.64, the 20-day EMA.
COMMODITIES: WTI Futures Extend Recovery From Wednesday's Low
- WTI futures have recovered from Wednesday’s low and the recent bear leg appears to have been a correction. Recent cycle highs reinforced bullish conditions, signalling scope for a continuation higher near-term. Moving average studies are in a bull-mode set-up too, highlighting a rising trend. Sights are on $85.27, the Apr 12 high and a bull trigger. Initial firm support to watch is $79.91, the 50-day EMA.
- Gold remains constructive and Thursday's rally reinforces short-term bullish conditions. Recent gains have resulted in a breach of $2387.8, the Jun 7 high. This undermines a recent bearish theme and a clear break represents a bullish development that opens the key resistance at $2450.1, May 20 high. Initial support to watch lies at the 50-day EMA, at 2332.8. A clear break of this average would alter the picture and expose $2277.4, May 3 low.
| Date | GMT/Local | Impact | Country | Event |
| 12/07/2024 | 1230/0830 | *** |  US | PPI |
| 12/07/2024 | 1230/0830 | * |  CA | Building Permits |
| 12/07/2024 | 1300/0900 | * | CA | CREA Existing Home Sales |
| 12/07/2024 | 1400/1000 | ** | US | U. Mich. Survey of Consumers |
| 12/07/2024 | 1600/1200 | *** | US | USDA Crop Estimates - WASDE |
| 12/07/2024 | 1700/1300 | ** | US | Baker Hughes Rig Count Overview - Weekly |
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