MNI US MARKETS ANALYSIS - Skip Talk Remains a Weight on Front-End Fed Pricing

US TSYS: Bear Flatter After Debt Deal House Passage, Heavy Data Docket Ahead

• Cash Tsys sit cheaper across the board for a bear flattening, reversing the rally after June skip talks. The move cheaper has been buoyed by the passage of the debt ceiling bill through the House and stronger than expected China Caixin mfg PMI in a reversal of weakness seen in the official PMIs a day earlier.
• It comes ahead of a heavy data docket with a distinct labor market focus before tomorrow’s NFP report, along with ISM manufacturing.
• 2YY +4.0bp at 4.442%, 5YY +3.5bp at 3.789%, 10YY +2.7bp at 3.669%, 30YY +1.2bp at 3.873%.
• TYU3 trades 9 ticks lower at 114-05+, off a session low of 114-01 that came close to support at 114-00 (May 31 low) after which lies 112-29+ (May 26 low). Volumes track above recent averages at 300k.
• Data: Challenger Job Cuts May (0730ET), ADP employment (0815ET), Weekly jobless claims (0830ET), final ULC/productivity Q1 (0830ET), S&P Global Mfg PMI May final (0945ET), ISM Mfg May (1000ET), Construction spending Apr (1000ET)
• Fedspeak: Harker (1300ET, incl text)
• Bill issuance: US Tsy $35B each 4W and 8W bill auctions – 1130ET

FOMC Skip Talk Still Weighs On June/July, Some Lift Further Out

• FOMC-dated OIS implied rates for the next two meetings continue to be weighed by yesterday’s back-to-back support for skipping a June hike from Gov. and VC nominee Jefferson (voter) and Harker (’23 voter).
• The market only prices around 1/3 chance of a June hike from ~2/3 yesterday, and still doesn’t fully price a hike ahead, but subsequent meetings have seen some recovery higher ahead of a today’s labor-heavy data releases before Friday's payrolls report.
• Cumulative changes from 5.08% effective: +9bp Jun (+0.5bp on the day), +20.5bp Jul (unch), +15bp Sep (+1bp), +2bp Nov (+2bp), -13.5bp Dec (+4bp) and -32bp Jan (+5bp) – table below for comparison with pre-Chicago PMI levels.
• A repeat appearance from Harker at 1300ET including text remains the sole scheduled Fedspeak in the last two days before the media blackout starts Fri midnight.

ECB Pricing Firms A Touch, Remains Within Recent Range

A firming in ECB terminal rate pricing has been observed today, alongside a rebound in FOMC-dated OIS from yesterday’s late NY levels.

• Still, terminal ECB pricing remains hemmed in the previously established range, showing just above the 3.75% mark. The dated OIS curve is a little steeper on the day, but the moves remain fairly contained, with the liquid contracts little changed to ~5bp higher.
• Preliminary May Eurozone CPI data was softer than the wider consensus (albeit based on a stale survey), including a welcome downtick in the rate of services inflation, and final manufacturing PMI data was generally a touch firmer than flash (excluding the French release)
• ECB speak from Lagarde, de Guindos, Rehn & Knot generally reaffirmed their respective pre-existing lines of thought.
• Typically hawkish comments from ECB’s Kazaks pointed to uncertainty re: the eventual ECB terminal rate, alongside a need to remain at the terminal level for a while after it is reached.
• Comments from Bank of France chief Villeroy and the accounts covering the most recent ECB monetary policy meeting will cross later today.

EUROPE ISSUANCE UPDATE

Spain auction results

• E2.207bln of the 2.80% May-26 Bono. Avg yield 3.049% (bid-to-cover 2.03x)
• E2.076bln of the 0.80% Jul-29 Obli. Avg yield 3.076% (bid-to-cover 1.81x)
• E1.737bln of the 1.90% Oct-52 Obli. Avg yield 3.978% (bid-to-cover 1.73x)
• E514mln of the 0.70% Nov-33 Obli-Ei. Avg yield 1.131% (bid-to-cover 1.8x)

• E6.388bln of the 3.00% May-33 OAT. Avg yield 2.85% (bid-to-cover 1.86x)
• E1.989bln of the 2.50% May-43 OAT. Avg yield 3.29% (bid-to-cover 1.94x)
• E2.621bln of the 3.00% May-54 OAT. Avg yield 3.37% (bid-to-cover 1.88x).

Slovakia syndication update:

• 10-year Jun-33 SlovGb. Size: 2.0bln. Spread set at MS+80bps

FOREX: Dollar Rallies Capped as Jefferson Weighs on Hike Chances

• The greenback is broadly inline with yesterday's close, with the USD Index holding within range of yesterday's cycle high at 104.70. The bipartisan debt ceiling deal cleared the House late yesterday, leaving the Senate as the final step for Biden and McCarthy's deal.
• Having pulled lower on Fed's Jefferson talking up the possibility of a rate pause yesterday, rallies have been short-lived, potentially keeping a short-term lid on prices.
• Eurozone inflation for May came in below expectations for the flash estimate, but the drifting consensus after soft French and German prints yesterday has allowed EUR/USD to bounce off overnight lows and allow for EUR/GBP to trade higher for the first session in five.
• A firmer equity backdrop (e-mini S&P +0.2%, EuroStoxx50 futures +1.2%) has aided a pullback in the JPY - leaving USD/JPY just below the Y140 handle and levels that preceded the unscheduled tripartite meeting earlier this week. Markets remain on watch for any further comments from Kanda or the BoJ.
• Focus shifts to a deluge of US data - as markets look to gauge the condition of the jobs market ahead of NFP Friday. ADP Employment Change, weekly jobless claims and the May Manufacturing ISM are all due - with focus on the latter after Wednesday's poor MNI Chicago PMI release. Central bank speak includes ECB's Lagarde, Villeroy and Fed's Harker.

FX OPTIONS: Expiries for Jun01 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0670-85(E757mln), $1.0700(E2.0bln), $1.0725-35(E2.3bln), $1.0770(E1.1bln)
• USD/JPY: Y139.00($501mln)
• GBP/USD: $1.2390-00(Gbp583mln)
• EUR/GBP: Gbp0.8800-10(E723mln)
• USD/CNY: Cny7.0500($968mln)

EQUITIES: E-mini S&P Trend Condition Remains Bullish

• S&P E-minis trend conditions remain bullish and the latest pullback is, for now, considered corrective. Last week’s bounce from 4114.00, May 24 low, means that support around the 50-day EMA remains intact. The average intersects at 4134.83 and a clear break of it is required to signal a reversal.
• Eurostoxx 50 futures traded lower again Wednesday and in the process, cleared the 50-day EMA and support at 4252.00, the May 25 low. Price has also pierced support at 4233.00, the May 4 low and a key short-term level.

COMMODITIES: Crude Stabilises Ahead of Weekend's OPEC Meet

• The bear cycle in Gold remains intact and short-term gains are - for now - considered corrective. The yellow metal has this week pierced $1942.4, trendline support drawn from Nov 3 2022. A clear breach of this trendline would reinforce bearish conditions.
• WTI futures remain in a bear mode position. The strong sell-off this week has resulted in a break of support at $69.39, the May 15 low. The clear breach strengthens bearish conditions and paves the way for weakness towards $63.90, the May 4 low.