MNI US MARKETS ANALYSIS - Rates More Sensitive to Hawkish NFP

Highlights:

• NFP should prove key for determining 25 vs. 50bps cut in September
• Rates markets look more sensitive to a hawkish release
• FX options isolate funding currencies for outsized reaction

US TSYS: Off Highs But Post Labor Day Trend Rally Extends Before Payrolls

• Treasuries have slowly extended the week’s trend rally seen since Labor Day, aided today by weak European equities and industrial data.
• Cash yields are mostly 3bps lower across the curve, with 2s10s at -1.4bp pulling back after yesterday’s trip back into positive territory.
• 2Y yields briefly pushed below 3.70% (currently 3.714%) for the first time since global risk-off fallout after last month’s payrolls, whilst 10s are just about holding their breach (currently 3.697%).
• TYZ4 is at 114-30 (+06) off a latest high of 115-00+ on modest cumulative volumes of 290k.
• The contract is approaching the bull trigger at 115-19 (Aug 5 high) after which lies the round 116-00, whilst a stronger payrolls report could see support at 113-28 (20-day EMA) start to come more into play again.
• Data: Payrolls Aug (0830ET) – MNI Preview here.
• Fedspeak: Williams keynote remarks (0845ET, text + Q&A), Waller on economic outlook (1100ET, text + Q&A), Goolsbee on CNBC (1130ET)

STIR: 112bp Of Fed Cuts Over Three 2024 Meetings Ahead Of Payrolls

• Fed Funds implied rates continue to see some of the week’s dovish labor data weigh, primarily JOLTS and ADP having faded stronger than expected jobless claims.
• Cumulative cuts from 5.33% effective: 35.3bp Sep, 73bp Nov, 112bp Dec, 144bp Jan and 212bp June.
• Payrolls is clearly the major risk event today – see the MNI Preview here: https://media.marketnews.com/USNFP_Sep2024_Preview_156b327b83.pdf
• It is followed by permanent FOMC voters Williams (0845ET) and Waller (1100ET) offering the last major steers before the blackout begins ahead of the Sep 17-18 FOMC meeting. Both only last notably spoke on Jul 17 (i.e. pre Jul 30-31 FOMC).  
• NY Fed’s Williams said the prior three months had shown closer to the disinflation trend that the Fed wants to see whilst the labor market remains strong, with the Fed then set to learn “a lot” between July and September.
• Fed Gov. Waller said we were getting closer to the time when a rate cut is warranted, judging that the labor market was in a sweet spot but it needed to be kept there. He generally deemed the data consistent with achieving a soft landing.
• Chicago Fed’s Goolsbee (’25 voter) also appears on CNBC (1130ET) having already said yesterday to MarketWatch that the trending economic data and the appearance of more warning signs about a cooling labor market justifies multiple rate cuts, starting soon.
• Recall that the minutes to the Fed’s discount rate meetings in July the directors of the NY Fed and Chicago Feds voted to cut the primary credit discount rate by 25bps. Those are separate to Presidents Williams and Goolsbee but the latter two could well have been some of the members who - in the language of the separate FOMC minutes - "could have supported" a rate cut at the July meeting.

US TSYS: /STIR: Hawkish NFP Outcome Poses Greatest Risk To Market Positioning

We think that a ‘hawkish’ labor market report would have more impact on U.S. rates than a ‘dovish’ reading.

• This week’s already-released labor market data has conditioned market participants for a soft reading, with the BBG ‘whisper number’ moving from 165K to 150K over the past couple of days.
• Fed Funds futures price ~35bp of cuts for this month and ~110bp of easing through December.
• What’s more, positioning in Tsy and SOFR futures feels long, while plenty of SOFR option plays targeting a 50bp cut later this month have been seen.
• This means that even an in-line reading could generate a mildly hawkish market reaction.
• Also note that positioning and market pricing contrasts with recent Fedspeak and our DC policy team’s work, which has pointed to a more cautious approach to cuts, even with the Fed clearly against further softening of the labor market.
• Our full NFP preview can be found here.
• Watch for post-data, pre-blackout comments from Fed’s Waller & Williams, which are the last scheduled opportunities for pre-FOMC guidance.

OPTIONS: Markets Isolate Funding Currencies for NFP Reaction

• Markets have isolated funding currencies as carrying the greatest NFP-tied risk into the data today, with options trades adding the most notable vol premium for JPY and CHF relative to all other currencies in G10.
• This further reinforces the view that today's NFP print will prove critical for rate expectations and could spur the next phase of strength for CHF and JPY - with assumed Fed rate cuts and the subsequent tightening of rate differentials a key driver this year.  
• Vol markets added an overnight premium of over 13 points for USD/JPY and over 10 points for USD/CHF for options rolling off at today's cut, blowing out the implied break-evens across both pairs. USD/JPY prices a near 150 pip swing on today's data, close to three times the YTD average for a routine session.
• This raises the focus on the bear trigger and key support at 141.70, with December 2023's low just below at 140.25. That said, rates markets are clearly primed for more significant reaction in case of a hawkish surprise today, meaning 144.64, the 50% retracement for the downleg off the Sep03 high should be considered.
• NFP Preview here: https://media.marketnews.com/USNFP_Sep2024_Preview_156b327b83.pdf
• Rates markets set-up here: https://marketnews.com/us-tsys-stir-hawkish-nfp-outcome-poses-greatest-risk-to-market-positioning

STIR: Cover Dominated In Most SOFR Futures On Thursday

OI data suggests that yesterday’s twist flattening in SOFR futures was mostly driven by cover of existing longs and shorts.

• We will post more on the pre-NFP positioning setup across U.S. rates shortly.

FOREX: USD/JPY Eyes Bear Trigger and Pullback Low Pre-NFP

• Ahead of the NFP report for August, JPY has rallied further, extending strength on the week and keeping USD/JPY pinned toward the pullback lows posted in early August at 141.70.
• The August jobs report should prove key Friday and could set the tone for the Fed rate decision on September 18th. Consensus looks for +165k today and a lower U/E rate of 4.2%, but the whisper number looks lower at 152k and the broad USD weakness posted since the beginning of this week makes it clear markets are gearing for a soft number.
• With September pricing pinned between a 25 and a 50bps rate cut from the Fed, conviction in either direction should prove market-moving today, with the USD Index just 0.4% off the bear trigger and key support at 100.514.
• Overnight USD vols were well bid into the Thursday close, suggesting markets ascribe a high likelihood of a sharp market move upon release today. EUR/USD overnight vols topped 14 points yesterday, the highest level since mid-December's central bank deluge, meaning markets price a ~75 pip swing in the pair.
• Outside of the jobs report, the CAD equivalent is also due, and follows a third consecutive BoC rate cut this week. A soft U/E rate (exp. at 6.5% from 6.4% prior) could trigger pricing for further cuts ahead.

OPTIONS: Expiries for Sep06 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.1000(E1.3bln), $1.1030-50(E813mln), $1.1100(E1.1bln), $1.1150(E751mln), $1.1175(E582mln)
• USD/JPY: Y145.90-00($1.9bln)
• USD/CAD: C$1.3485-00($1.1bln), C$1.3565-85($1.5bln)

EQUITIES: Bullish Theme in E-Mini S&P Intact Despite Extension of Sell-Off

• Eurostoxx 50 futures have reversed course this week and a bearish tone - a correction - remains intact for now. The move down has resulted in a break of both the 20- and 50-day EMAs. This paves the way for a pullback towards 4805.47 initially, a Fibonacci retracement. Initial firm short-term resistance has been defined at 4998.00, the Sep 3 high. Clearance of this level would reinstate the recent bullish theme.
• A bullish theme in S&P E-Minis remains intact. However, this week’s sharp sell-off highlights the start of a corrective cycle. The pullback has resulted in a breach of the 20-day EMA and the pair has pierced support at the 50-day average, at 5520.21. A clear break of this EMA would signal scope for a deeper retracement towards 5459.75, a Fibonacci retracement. Key near-term resistance has been defined at 5669.75, the Sep 3 high.

COMMODITIES: WTI Futures Maintain a Softer Tone, Trading Close to Weekly Lows

• WTI futures maintain a softer tone following this week’s sharp sell-off. The break lower resulted in a breach of key support at $70.88, the Aug 5 low. The clear break of this level confirms a resumption of the downtrend that started Apr 12 and paves the way for an extension towards $66.66, a Fibonacci projection. MA studies are in a bear-mode position highlighting a clear downtrend. Initial resistance is at $73.66, the 20-day EMA.
• The trend condition in Gold is unchanged and remains bullish. Moving average studies are in a bull-mode set-up and this continues to highlight a dominant uptrend. Furthermore, a bullish price sequence of higher highs and higher lows remains intact. Sights are on $2536.4 next, a Fibonacci projection. The 20-day EMA has been pierced. The next firm support to watch lies at $2443.9, the 50-day EMA. S/T weakness is considered corrective.

MNI (LONDON)

Date	GMT/Local	Impact	Country	Event
06/09/2024	1230/0830	***	US	Employment Report
06/09/2024	1230/0830	***	CA	Labour Force Survey
06/09/2024	1230/0830	**	US	WASDE Weekly Import/Export
06/09/2024	1245/0845		US	New York Fed's John Williams
06/09/2024	1400/1000	*	CA	Ivey PMI
06/09/2024	1500/1100		US	Fed Governor Christopher Waller
06/09/2024	1700/1300	**	US	Baker Hughes Rig Count Overview - Weekly