MNI US MARKETS ANALYSIS - Tech Sector Pressured As Equity Sell Off Extends

FED/STIR: Analysts On Balance Lean To 25bp Cut In September But With Risks Of 50bps

• Further fallout from Friday’s payrolls release has seen Fed Funds implied rates continue to slide to more than fully price 50bp of cuts for September (currently 62bp lower than 5.33% effective) and even see non-trivial risk of an inter-meeting cut (FFQ4 has 7bp of cuts).
• The latest dovish re-pricing goes beyond analyst views, with a majority of those reviewed below sticking to a 25bp cut, albeit some heavily leaning on the August NFP report as a potential risk of a 50bp cut in September.
• Citi, JPM and NWM are currently most dovish with explicit calls for 50bp cuts, and JPM noted rationale for an intermeeting cut but judged Powell wouldn’t want to add more noise.

MNI BOE Review - August 2024: Finely balanced delivery

• In line with our own and most analysts' base cases, the BOE delivered the first 25bp cut of the cycle through a 5-4 vote in which some members voting for a cut described their decision as "finely balanced."
• We look in detail at the rationale for the cut, updated forward guidance and the new projections (both short-term and over 2-3 years).
• We also look at the potential for a (temporary) 8 member MPC and the voting outlook for the September / November meetings.
• For the full PDF including summaries of over 25 sellside views click here: MNI BoE Review - Aug24.pdf

US TSYS: Firmly Richer And Steeper In Global Risk-Off, ISM Services In Spotlight

• Treasuries have seen some large two-way trade in recent hours but on balance remain firmly richer and steeper on the day as large risk-off flows have been seen globally in reaction to Friday’s payrolls report.
• Cash yields are currently 4-13bp lower, with the front end leading declines as Fed rate cut expectations surge further and even emergency cuts are considered – see the STIR section below.
• 2s10s at -1bps probes its first non-negative reading since mid-2022.
• TYU4 has seen the bull cycle remain firmly in play, at 114-19 (+ 14+) off an earlier high of 115-01+ amidst massive cumulative volumes of 1.2 million.
• Next resistance is seen at 115-17 (Fibo projection) whilst the nature of the upswing means support isn’t seen until 112-21 (Aug 2 low).
• ISM services takes on even greater importance than usual. Recall that June's ISM Services index came in far weaker than expected with the lowest reading (48.8) since early in the Covid pandemic in May 2020, whilst new orders plunged into contraction territory with its first sub-50 reading since Dec’22. The median analyst expectation is for a rebound in the headline index to 51.0. A failure to return to expansionary territory above 50.0 would add another notch to the recessionary scorecard, with confirmatory weakness in the underlying subindices (prices paid, employment, new orders) applying further pressure on the Fed to ease policy.
• Data: S&P Global US Services/Comp PMI Jul final (0945ET), ISM Services Jul (1000ET)
• Fed: Goolsee on CNBC (0830ET), SLOOS (1400ET), Daly moderated discussion (1700ET)
• Bill issuance: US Tsy $76B 13W, $70B 26W Bill auctions (1130ET)

US TSY FUTURES: OI Suggests Net Long Setting Dominated Following NFP

Friday’s OI data points to net long setting dominating as a soft labour market report drove a meaningful round of dovish Fed repricing and fuelled speculation of a potential intra-meeting rate cut as markets put greater weight behind the idea of a Fed policy error.

• A little over $13mn of net OI DV01 equivalent was added across the curve, as the recent positioning theme extended further.
• TU seemed to provide the only exception, seeing modest net short cover on the day.

US TSY FUTURES: OI Points to Mix Of Long Setting & Short Cover In SOFR Futures Post-NFPs

OI data suggests that net long setting dominated in the whites during Friday’s NFP-driven dovish repricing, while short cover was more prominent further out the strip.

• A reminder that the labour market report drove a meaningful round of dovish Fed repricing and fuelled speculation of a potential intra-meeting rate cut as markets put greater weight behind the idea of a Fed policy error.
• Greater details surrounding market pricing and adjusted sell-side Fed calls can be found here.

FOREX: Japanese Yen Significantly Extends Rally, USDJPY Trades Below 142.00

• Recession fears in the US continue to be the dominating driver of risk-off sentiment across global markets. The sharp moves for both core yields and major equity indices have filtered through to substantial strength for the Japanese Yen, extending its huge rally since Mid-July.
• USDJPY (-3.08%) has registered a near 500-pip range Monday, and lows of 141.70 so far bring the pair’s post US-CPI pullback to an impressive 12.4%. We have significantly narrowed the gap to the December low of 140.25, a level which represents the most notable level of immediate support.
• Non-greenback safe havens continue to be the currencies of choice as the market sees greater scope for bold easing from the Fed. There is non-negligible pricing of an inter-meeting FOMC cut noted and a cumulative ~126bp of easing priced into Fed Funds futures through the Dec FOMC. USDCHF is also down 1% and the pair has traded back below 0.8500. Markets will be eyeing the 0.8333 low from December, which would be the lowest level for the pair since the removal of the EURCHF floor in 2015.
• Elsewhere, risk sensitive currencies in G10 are suffering, with AUD (-0.97%) the major laggard ahead of tomorrow’s RBA decision. The likes of NZD and GBP also trade on the back foot, although losses have been more contained up to this point.
• Bucking the trend, the Euro outperforms which is likely tied to its lofty weighting within the USD index. The single currency is further assisted by EURGBP (0.7%) grinding its way higher, following the close back above the notable 0.8500 pivot.
• In emerging markets, USDMXN currently trades up 3.00% as the risk off theme develops and attractive carry positions such as MXNJPY (-5.4%) continue to plummet. In similar vein USDZAR is up 1.4%.
• The July ISM Services report takes on even greater importance than usual, as the next major US data point after the poor July employment report. A failure to return to expansionary territory above 50.0 would add another notch to the recessionary scorecard.

FX OPTIONS: Expiries for Aug05 NY cut 1000ET (Source DTCC)

• EURUSD; 1.0900 (718mln), 1.0930 (226mln), 1.0975 (802mn).
• AUDUSD: 0.6600 (3.53bn).

EQUITIES: Impulsive Bear Leg In S&P E-Minis

S&P E-Minis traded lower late last week and the contract remains soft. The move lower paves the way for a test of 5185.50, 76.4% retracement of the Apr 19 - Jul 16 bull leg. Clearance of this level would signal scope for an extension towards 5092.00, the May 2 low. Today’s intraday high of 5345.50 marks initial resistance.

• A bear threat in EUROSTOXX 50 futures remains present and the contract is trading lower today as it starts the week on a bearish note. Last week’s sell-off resulted in a break of 4846.00, the Apr 19 low. The breach highlights a stronger reversal and signals scope for an extension towards 4478.81 next, 2.236 proj of the Jun 6 - 14 - Jul 12 price swing. Firm resistance is 4940.25, the 50-day EMA. First resistance is 4656.00, today’s intraday high.

COMMODITIES: Bear Cycle In Oil Futures Remains Intact

Gold traded higher last week. The recent move down appears to have been a correction. The yellow metal did manage to pierce support at the 50-day EMA - at $2373.2. A clear break of this average would signal scope for a deeper retracement towards $2277.4, the May 3 low and a key support. For bulls, last week’s gains are constructive. Sights are on $2483.7, the Jul 17 high, and a bull trigger. Clearance of this hurdle resumes the uptrend.

• In the oil space, a bear threat in WTI futures remains present and the contract has traded lower today as it extends the current downtrend. Sights are on the next key support at $72.23, the Jun 4 low. It has been pierced, a clear break would reinforce bearish conditions and pave the way for an extension towards $70.73, the Feb 5 low. Key resistance is seen at $78.88, the Aug 1 high. Short-term gains would allow an oversold condition to unwind.