MNI US MARKETS ANALYSIS - Price Action Thin Ahead of FOMC

Highlights:

• Labour Day across Europe keeps volumes, price action extremely thin
• Markets cautious FOMC could take more hawkish view on inflation characterization
• ADP Employment Change, ISM Manufacturing in focus ahead of the Fed

US TSYS: Overnight Gains Reversed Ahead Of A Key Session

• Treasuries have reversed overnight gains with European holidays thinning early volumes ahead of a key session.
• Cash yields sit between roughly unchanged to 1bp higher on the day, with 2s10s at -34.3bps within recent ranges.
• TYM4 sits at yesterday’s joint lows of 107-12+ on low volumes that are yet to breach 200k. The trend needle points south with support seen at 107-04 (Apr 25 low) after which lie Fibo projections starting with 106-27.
• Today sees the FOMC decision, Treasury’s quarterly refunding announcement, labor data ahead of Friday’s payrolls release and ISM manufacturing after yesterday’s slide in the MNI Chicago PMI.
• Fed: FOMC decision (1400ET) and press conference (1430ET) - PREVIEW HERE.
• Data: Weekly MBA data (0700ET), ADP employment Apr (0815ET), S&P Global US mfg PMI Apr final (0945ET), JOLTS Mar (1000ET), Construction spending Mar (1000ET), ISM mfg Apr (1000ET)
• Treasury: Quarterly refunding announcement (0830ET) – PREVIEW HERE.
• Bill issuance: US Tsy 17W Bill auction (1130ET)

STIR: Less Than 30bps Of Fed Cuts Priced For 2024

• Fed Funds implied rates hold yesterday’s post-ECI increase after a further push higher late in the session.
• Ahead of today’s heavy docket with labor data and ISM mfg before the FOMC decision, a first cut in December is getting close to only just being fully priced at 28bps.
• Cumulative cuts from 5.33% effective: 0bp for today's meeting, 2bp Jun, 5.5bp Jul, 13bp Sep, 19bp Nov and 28bp Dec.

US TSYS/SUPPLY: May Refunding: Coupon Sizes Set To Remain Steady

Treasury makes its Quarterly Refunding Announcement at 0830ET/1330UK today. MNI's preview (PDF here) recaps the near-term financing outlook announced Monday, and assesses coupon auction size projections for today's release and possible contours of the buyback program that is expected to be unveiled. To recap:

• Coupon Sizes Set To Remain Steady: In February’s refunding announcement, Treasury said that “based on current projected borrowing needs, Treasury does not anticipate needing to make any further increases in nominal coupon or FRN auction sizes, beyond those being announced today, for at least the next several quarters.”
• It appears that market participants are taking the Treasury’s word, as we have not seen any analyst previews of the May refunding that expect a coupon size increase. Indeed, consensus is that there will be no increases to coupon sizes through the rest of 2024 at least. (See our preview linked above for more).
• This steady rather than heavier supply outlook will be helped by the expected slowdown in Fed QT, and it is assumed that Treasury will handle modest deviations in the fiscal trajectory via bill vs bond issuance.
• The estimated issuance schedule through October is below. Not listed here are TIPS and floating-rate notes: 2Y FRN sizes are set to remain steady per guidance ($28B in May/Jun and Aug/Sep, $30B in Jul and Oct).

US TSYS/SUPPLY: May Refunding: Buybacks In Focus

Today's expected buyback announcement should provide final details how the program will work, and a schedule for the upcoming quarter (if applicable). Here, we recap expectations based on previous Treasury communications and analyst notes:

• Objectives: There are two key goals from buybacks: cash management and liquidity support. The cash management operations are designed to smooth out cash holdings around major tax dates, while liquidity support ops will be used to build liquidity across the yield curve by buying back selected off-the-run securities from market participants.
• Schedule: Treasury plans to conduct operations in 9 buckets across-the-curve for nominal coupon and TIPS securities - see table below. Liquidity support operations are planned for each bucket once or twice per quarter, around 1 operation weekly. For cash management operations, regular operations are envisaged though will likely occur predominantly just before major tax payment dates.
• Sizes: For liquidity ops: Maximum $30B / quarter, with $4B max per nominal bucket per quarter, and $1B per TIPS bucket per quarter, though there could be modest adjustments made in future. For cash management: Maximum of $120B / year.
• Expectations for today: There is a wide range of expectations for what Treasury will actually announce for the upcoming quarter.
• Some analysts expect cash management buybacks may be initiated quickly given the high TGA cash balance on hand, but the guidance suggests that such buybacks will occur around major tax dates (ie June if not September), and others believe that current market conditions don’t make large liquidity buybacks urgent.
• General expectations are for larger liquidity buyback sizes to be set for shorter-dated instruments (up to the $4B max) with one op per quarter, and smaller but more frequent operations (2x per quarter) for longer-dated instruments. TIPS would see maximum $1B purchases in each of the 2 buckets, once a quarter.

US TSY FUTURES: OI Points To Limited Positioning Moves On Tuesday

Yesterday’s sell off in Tsy futures and preliminary open interest data points to a mix of net short setting (TU, FV, UXY, US & WN) and net long cover (TY), although the moves largely offset, leaving net curve OI little changed on the day.

• A reminder that Tsys were pressured by the latest ‘hawkish’ data input as the Q1 ECI reading printed above expectations.
• We will provide further colour on broader Tsy market positioning ahead of today's FOMC decision.

STIR: OI Suggests Short Setting Dominated In SOFR Futures On Tuesday

The combination of yesterday’s weakness in SOFR futures and preliminary open interest data points to net short setting across much of the SOFR futures strip, with only limited pockets of net long cover seen through the blues.

• This came as the Q1 ECI data triggered the latest round of hawkish Fed repricing, leaving ~28bp of ’24 cuts priced into FOMC-dated OIS ahead of today’s decision,. That represents the shallowest path of cuts priced into ’24 during the current cycle
• Looking ahead to today’s FOMC decision and press conference, Chair Powell is expected to tilt more cautious on the inflation outlook than in previous appearances, with potential flashpoints for markets including whether he acknowledges that 3 cuts are less likely to be the base case for the FOMC in 2024, and/or whether June is too early for the first cut.

Gilt Auction Results

• That was a soft auction of the 4.625% Jan-34 gilt with a relatively wide 1.0bp tail and the LAP coming in at 101.910, below the pre-auction mid-price of 101.959.
• The price of the 4.625% Jan-34 gilt fell to an intraday low of 101.871 after the results were published and we are still now trading below the LAP at 101.895 at the time of writing.
• GBP3.75bln of the 4.625% Jan-34 Gilt. Avg yield 4.371% (bid-to-cover 3.1x, tail 1bp).

FOREX: USD/CHF Edges to New YTD Highs Amid Holiday-Thinned Volumes

• CHF is the poorest performer in G10 amid a quiet and thin trading session in Europe. USD/CHF sits just below new YTD highs printed at 0.9224 today, building on the strength noted across Tuesday trade. The Wednesday high is just 20 pips shy of the bull trigger and Oct’23 high of 0.9244 and the 50% retracement for the downleg off the Dec’22 high at 0.9240.
• Labour Day market holidays across the continent keep many markets closed, and that's filtered into currency market activity. Cumulative G10 FX volumes are ~30% below average for this time of day - however liquidity and volumes should shore up slightly through the NY crossover.
• JPY is softer as markets continue to lean back against intervention-inspired gains, and the recovery off lows for AUD has helped that cross stabilise above Y102.00, and any renewed rally will likely re-spark concerns over official action to mute JPY volatility.
• Focus for the duration of the session rests on the ISM Manufacturing data for April, where markets expect a modest moderation in the prices paid component to 55.4 from 55.8, ahead of the Fed rate decision. While headline policy is expected unchanged, markets remain cognizant of the risk of a change in language surrounding the characterization of inflation - a notable hawkish risk as markets continue to price out the likelihood of Fed rate cuts across 2024.

AUD: Markets Identify AUD as Carrying Most Notable FOMC Risk Premium in G10

• Overnight vols are uniformly higher across G10 FX as the market captures today’s FOMC decision, but the risk premium added is most notable in AUD, with overnight implied rising close to 8 points and touching a new YTD high of 18.5 points in the process – pressing the break-even on an ATM straddle to around 45 pips.
• While there’s little directional skew in front-end of the AUD/USD risk reversals curve (1w risk reversals are inline with longer-run averages), markets remain cognizant of the hawkish risks surrounding today’s Fed meeting, with some on the sell-side eyeing potential for more hawkish language on the characterization of inflation.
• A negative AUD/USD reaction to today’s Fed decision eyes the Apr22 low of 0.6407 ahead of the bear trigger at 0.6363 – although options markets are pricing a very low likelihood of such a move into the Thursday NY cut.
• More broadly, AUD getting little/no support from rallying Chinese markets also bodes poorly for the currency. The near 15% rally off lows for the CSI 300 has done little to reverse the outright short positioning in the currency – last week’s CFTC report showed little recovery from the largest short position on record in AUD, which currently amounts to ~40% of open interest.

EQUITIES: E-Mini S&P Trading Close to Weekly Lows

Eurostoxx 50 futures are holding on to their recent gains from 4762.00, the Apr 19 low. The contract has breached the 20-day EMA and resistance at 4990.00, the Apr 15 high. This continues to highlight a potentially stronger reversal and the end of the correction between Apr 2 - 19. An extension higher would expose the bull trigger at 5079.00, the Apr 2 high. Key support lies at 4762.00. Initial support to watch is 4877.40, the 50-day EMA. The S/T trend condition in S&P E-Minis remains bearish and the latest recovery appears to have been a correction. The contract has recently traded through the 50-day EMA, signalling scope for a continuation lower. A resumption of the bear leg would open 4907.57, a Fibonacci retracement. Firm resistance at 5132.17, the 20-day EMA, has been pierced, a clear break would signal a reversal and expose key resistance at 5333.50, Apr 1 high.

COMMODITIES: WTI Futures Below Support at 50-Day EMA at $81.23

WTI futures traded lower yesterday. The contract is testing support at the 50-day EMA, at $81.23. A clear break of this average would strengthen a short-term bearish theme and highlight scope for a deeper correction. This would open $76.07, the Mar 11 low. Key resistance and the bull trigger has been defined at $86.97, the Apr 12 high. Initial resistance is at $84.46, the Apr 26 high. Gold traded lower Tuesday and breached initial support at $2291.6, the Apr 23 low. The precious metal has breached the 20-day EMA and this highlights a corrective cycle. A continuation lower would signal scope for an extension towards $2239.5, the 50-day EMA. Note that a short-term bear cycle would allow a significant overbought condition to unwind. Key resistance and the bull trigger is at $2431.5, the recent Apr 12 high.

Date	GMT/Local	Impact	Country	Event
01/05/2024	1100/0700	**	US	MBA Weekly Applications Index
01/05/2024	-	***	US	Domestic-Made Vehicle Sales
01/05/2024	1215/0815	***	US	ADP Employment Report
01/05/2024	1230/0830	***	US	Treasury Quarterly Refunding
01/05/2024	1345/0945	***	US	IHS Markit Manufacturing Index (final)
01/05/2024	1400/1000	***	US	ISM Manufacturing Index
01/05/2024	1400/1000	*	US	Construction Spending
01/05/2024	1400/1000	***	US	JOLTS jobs opening level
01/05/2024	1400/1000	***	US	JOLTS quits Rate
01/05/2024	1430/1030	**	US	DOE Weekly Crude Oil Stocks
01/05/2024	1800/1400	***	US	FOMC Statement
01/05/2024	2015/1615		CA	BOC Governor at Senate Banking Committee
02/05/2024	2350/0850		JP	BoJ Meeting Minutes
02/05/2024	0130/1130	*	AU	Building Approvals
02/05/2024	0130/1130	**	AU	Trade Balance
02/05/2024	0630/0830	***	CH	CPI
02/05/2024	0630/0830	**	CH	Retail Sales
02/05/2024	0715/0915	**	ES	IHS Markit Manufacturing PMI (f)
02/05/2024	0745/0945	**	IT	S&P Global Manufacturing PMI (f)
02/05/2024	0750/0950	**	FR	IHS Markit Manufacturing PMI (f)
02/05/2024	0755/0955	**	DE	IHS Markit Manufacturing PMI (f)
02/05/2024	0800/1000	**	IT	PPI
02/05/2024	0800/1000	**	EU	IHS Markit Manufacturing PMI (f)
02/05/2024	1230/0830	***	US	Jobless Claims
02/05/2024	1230/0830	**	US	WASDE Weekly Import/Export
02/05/2024	1230/0830	**	US	Trade Balance
02/05/2024	1230/0830	**	US	Preliminary Non-Farm Productivity
02/05/2024	1230/0830	**	CA	International Merchandise Trade (Trade Balance)
02/05/2024	1245/0845		CA	BOC's Macklem appears at House finance committee.
02/05/2024	1400/1000	**	US	Factory New Orders
02/05/2024	1430/1030	**	US	Natural Gas Stocks
02/05/2024	1530/1130	**	US	US Bill 04 Week Treasury Auction Result
02/05/2024	1530/1130	*	US	US Bill 08 Week Treasury Auction Result
02/05/2024	2015/2215		EU	ECB's Lane lecture at University of Stanford