MNI US MARKETS ANALYSIS - Technical USD Backdrop Begins to Deteriorate

US TSYS: Geopolitics And Dovish Fed Rhetoric Fuel Early Bull Flattening

The Treasury curve has bull flattened in overnight trade, with yields sustaining a sharp drop in early European trade.

• Front futures remain just off session highs, which were October's best levels: Dec 10Y futures (TY) up 17/32 at 108-08 (L: 107-21 / H: 108-11). The 2-Yr yield is down 0.7bps at 4.9631%, 5-Yr is down 6bps at 4.5536%, 10-Yr is down 9.3bps at 4.5603%, and 30-Yr is down 10.7bps at 4.7257%.
• A few factors fuelling the Treasury rally: more geopolitical risk (the sharp rally in the morning came alongside news of two-way missile fire between Israel and Lebanon), and further softening in Fed tightening rhetoric (Gov Bowman, at the hawkish end of the FOMC, said rates "may" need to rise further, vs last week "likely be appropriate").
• Later we hear from Waller, Bostic and Collins, and we also get the minutes of the FOMC's September meeting.
• The main event data-wise is September PPI, which unusually comes out before the CPI data tomorrow - attention will be on key components that feed into the Fed's preferred PCE measure.
• The supply highlight is $35B 10Y re-opening.

STIR: Mixed SOFR Positioning Swings On Tuesday

The combination of yesterday’s cheapening through the SOFR blues and preliminary open interest data point to a mix of fresh short setting and long cover in net terms, with the latter dominating in the whites and reds, while the greens were titled towards short setting and net positioning was fairly neutral in blues.

OI Points To Mix Of Positioning Swings On Tuesday

The combination of the twist flattening of the Tsy futures curve and preliminary open interest data point to the following positioning swings on Tuesday.

• TU & FV futures seemingly saw fresh shorts added on net.
• TY & UXY futures seemingly saw long cover on net.
• US & WN futures seemingly saw short cover on net.

EGB ISSUANCE UPDATE:

Gilt Auction Results:

• GBP3.75bln of the new 4.625% Jan-34 Gilt. Avg. Yield 4.444% (bid-to-cover 3.12x). Compared to the September auction of the 3.25% Jan-33 gilt the tail was tighter and the bid-to-cover stronger.

• E1bln 1.25% Aug-48 Bund. Avg Yield 2.89% (Bid-to-cover 1.40x, allotted 0.806Bln)
• E1.5bln 0% Aug-52 Bond. Avg Yield 2.87% (Bid-to-cover 2.85x, allotted 1.226Bln)

FOREX: Moving Averages Could Signal Shift in S/T Momentum

• A rollover in US yields off the highs over the past few sessions has prompted a pause in the USD index’s medium-term uptrend posted off the July lows, with prices breaking below the channel base of the multi-month uptrend.
• The USD index is softer today for a seventh consecutive session, and a negative close would mark the longest losing streak since July 2020. The recent weakness has helped trigger some technical signals across major pairs that could signal a near-term bottom and presage a corrective bounce:

1. Both EUR/USD and GBP/USD are on track to close above the 20-day EMA for the first time since August, a level that has helped define the downtrend across both pairs.
2. A close and firm break above these levels would confirm a positive shift in short-term momentum, opening retracement levels at 1.0643, 1.0764 in EUR/USD, and 1.2459 for GBP/USD.

FOREX: USD Hampered by Further Pullback in US Yields

• Markets trade with a risk-off feel, as prices remain sensitive around Israeli headlines and any potential for escalation. US Treasury futures rallied on the back of headlines confirming an exchange of fire between Israel and Lebanon, with US 10y yields coming under pressure and undermining the greenback. The subsequent pullback in the USD saw more weight go through on comments from Fed's Bowman, who moderated her language on rates, stating that the Fed "may need" to raise rates further, potentially becoming less prescriptive on the need for further tightening.
• The moves in the USD helped nudge EUR/USD (briefly) to a new daily high at 1.0628. This further narrowed the gap with next notable resistance of 1.0674 - the Sep 21 high. More broadly, EUR/USD is beginning to show some signs of bottoming out - the pair closed above the 20-day EMA yesterday for the first time since late August - another possible signal of stabilisation in the price.
• Haven flows are evident in the strength in CHF, which is the best performing currency in G10 at the NY crossover. Fittingly, risk proxy currencies including AUD and NZD are performing more poorly.
• US PPI data takes focus Wednesday, with the final demand headline expected to slow to 0.3% on the month, 1.6% on a Y/Y basis. Ex food and energy data is expected broadly unchanged. The Fed minutes for their September rate decision also cross, with markets looking to gauge the FOMC's appetite for further hikes later this year.
• Outside of data, speeches are scheduled from ECB's de Cos & Villeroy as well as Fed's Waller, Bostic and Collins.

FX OPTIONS: Expiries for Oct11 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0450(E824mln), $1.0500-20(E1.3bln), $1.0600(E531mln), $1.0625-40(E1.1bln)
• USD/JPY: Y147.00-15($1.0bln), Y148.20-25($1.1bln), Y148.55($709mln), Y150.35-40($650mln)
• AUD/USD: $0.6475(A$617mln)
• USD/CAD: C$1.3420($1.0bln), C$1.3540($567mln)

BONDS: Firmer & Flatter on Geopolitical Tension, U.S. Matters & Decent Demand at Gilt Auction

Two-way missile fire between Israel and Lebanon has been at the fore thus far, which allowed the early London core global FI bid to develop further.

• Flattener flow in U.S. Tsy futures and Fedspeak also provided support.
• The latest ECB consumer survey revealed a modest mark higher in inflation expectations, although there wasn’t a tangible market reaction given other drivers.
• Elsewhere, ECB Governing Council member Knot provided familiar rhetoric.
• Bund futures tag fresh session highs in recent trade, with bulls now eying 130.40, the 50-dma. German cash benchmarks are little changed to 9bp richer. Supply results will cross imminently.
• EGB spreads to Bunds are generally tighter on the day, with Portugal the exception (0.5bp wider).
• Gilt futures have also broken initial technical resistance levels, as flagged elsewhere, with a solid launch of the new 10-year 4.625% Jan-34 gilt helping support prices in recent dealing. Cash benchmarks run flat to 9bp richer.
• Overnight REC/KPMG labour market data revealed that starting salaries and pay for temporary workers saw the slowest increase in two and a half years during September, while a swifter rate of job cuts was also flagged in the survey. This is the latest sign of a cooling domestic labour market.

EQUITIES: Recent Recovery in Eurostoxx 50 Futures Deemed Corrective

• Eurostoxx 50 futures trend conditions remain bearish, with Friday’s rally and the follow through early this week deemed corrective in nature. The contract has traded below 4128.00, the Sep 27 low. This confirms a resumption of the downtrend that started late July and signals scope for a move towards 4055.40, a Fibonacci retracement point. Initial firm resistance is at 4270.80, the 50-day EMA. A break of this average would signal a possible short-term base.
• A bear cycle in S&P E-minis remains in play, despite Friday’s sharp corrective rally and the follow through this morning. The contract traded lower last Wednesday, confirming a resumption of the bear leg once again. This maintains the price sequence of lower lows and lower highs and signals scope for weakness towards 4194.75, the May 24 low. Pivot resistance is 4441.61, the 50-day EMA

COMMODITIES: Bearish Theme in Gold Remains on Pause Following Latest Gains

• WTI futures traded lower last week, but started the week on a stronger footing. The recent bearish price action resulted in a break of support at $88.19, the Sep 26 low. The contract has also cleared support at the 50-day EMA, at $84.46. This signals scope for a deeper retracement towards the $80.00 handle and $79.57, a Fibonacci retracement point. Initial firm resistance is at $87.71, the 20-day EMA. A break would signal a possible reversal.
• A bearish theme in Gold was put on pause Monday after a second session of gains. Monday’s bounce put prices back above $1850. Nonetheless, the recent sell-off resulted in a break of support at $1901.1 and this was followed by a breach of $1884.9, the Aug 21 low. This confirmed a resumption of the downtrend that started early May. The focus is on $1804.9, the Feb 28 low and a key support. On the upside, firm resistance is at $1878.2, the 20-day EMA.