Highlights:
- Treasuries firmer, but underperform China-triggered EGB rally
- FX options isolate AUD, NZD over CPI print
- ECB sticks to June rate cut script
US TSYS: Underperforming EGB Rally Ahead Of CPI and Retail Sales
- Treasuries trade firmer, notably underperforming the rally in EGBs attributed to China considering a proposal for local governments to buy millions of unsold homes.
- Firm focus is on today’s US CPI report which lands along with retail sales for a heavy data docket.
- Cash yields sit 1.5-2bp lower, for a mild bull flattening with 2s10s at -38bps (-0.7bps) for its lowest since May 7 briefly and before that Apr 19.
- TYM4 has lifted to a high of 109-08 (+ 04+) on solid volumes approaching 300k.
- It has poked through channel top resistance and tests a key resistance at 109-09+ (May 3 high) after which lies 109-22+ (Fibo retracement of Feb 1 – Apr 25 bear leg). On the flip side, a hotter than expected CPI print could see a shift closer to support at 108-15 (May 14 low) having spiked lower in the snap reaction to surprisingly strong PPI main readings.
- Data: MBA mortgages May 10 (0700ET), CPI Apr (0830ET), Retail Sales Apr (0830ET), Empire mfg May (0830ET), Business inventories Mar (1000ET), NAHB index May (1000ET), TIC flows Mar (1600ET)
- Fedspeak: VC Barr testifies (1000ET), Kashkari fireside chat (1200ET), Gov. Bowman Blockchain Summit (1520ET)
- Bill issuance: US Tsy $60B 17W Bill auction (1130ET)
2Y yields pull further away from 5% ahead of CPISource: Bloomberg
STIR: Fed Rate Path Drifts A Little Lower With CPI Eyed
- Fed Funds implied rates have nudged lower overnight in an extension of yesterday’s decline ahead of US CPI (preview here) and retail sales 0830ET.
- Front-end Tsys notably underperform the rally in EGBs attributed to China considering a proposal for local governments to buy millions of unsold homes.
- Cumulative cuts from 5.33% effective: 1.5bp Jun, 8.5bp Jul, 21bp Sep, 30bp Nov and 45bp Dec.
- Today’s monetary policy-relevant Fedspeak is likely restricted to Kashkari. He spoke last week saying the Fed will keep rates steady if inflation data warrants whilst there’s a high bar for a rate hike but he wouldn’t rule it out. He envisaged penciling in two or fewer cuts for 2024 in the June SEP.
- 1000ET – VC Supervision Barr (voter) testifies before the House on regulator oversight (incl text)
- 1200ET – Kashkari (non-voter) fireside chat on economy (no text)
- 1520ET – Gov. Bowman (voter) on financial landscape (no text)
MNI: US CPI Preview: Testing Persistence Of Q1 “Bump” In Disinflation Path
- We have published and e-mailed to subscribers the MNI US CPI Preview.
- Please find the full report including MNI analysis and views from 21 analysts here: https://roar-assets-auto.rbl.ms/files/64129/USCPIPrevMay2024.pdf
US TSY FUTURES: OI Points To Mix Of Net Short Cover & Long Setting Following PPI
The combination of yesterday’s rally in Tsy futures and preliminary OI data points to a mix of net long setting and short cover in the wake of the PPI data.
- The two-way nature of the the immediate price action that followed the PPI release and proximity to today’s CPI data likely limited the size of the net positioning swings.
- Net long setting in FV futures essentially accounted for all of the net curve positioning movement (in DV01 equivalent terms), with the modest net long setting (TY, US & WN) and short cover (TU & UXY) seen elsewhere effectively offsetting.
- A reminder that the initial hawkish reaction to yesterday’s firmer-than-expected headline PPI readings was more than countered by the largely negative revisions in the same dataset and less worrying feedthrough into PCE.
- We will cover Tsy market positioning in a little more detail ahead of today’s CPI release.
| 14-May-24 | 13-May-24 | Daily OI Change | OI DV01 Equivalent Change ($) | |
| TU | 4,031,650 | 4,050,479 | -18,829 | -681,827 |
| FV | 6,201,124 | 6,166,653 | +34,471 | +1,413,120 |
| TY | 4,396,256 | 4,386,338 | +9,918 | +631,737 |
| UXY | 2,143,634 | 2,150,151 | -6,517 | -561,323 |
| US | 1,603,989 | 1,603,856 | +133 | +17,061 |
| WN | 1,655,298 | 1,651,955 | +3,343 | +662,938 |
| Total | +22,519 | +1,481,707 |
STIR: OI Points To Mix Of Long Setting & Short Cover In SOFR Futures After PPI
The combination of yesterday’s uptick in most SOFR futures and preliminary OI data points to net short cover dominating in the whites and reds (it is hard to be sure with the whites given the unchanged price status of SFRH4 & M4, while net long setting was seen in SFRU4 & Z4).
- Further out, there seemed to be a very light bias towards long setting in the green and blue packs, with pockets of net short cover also seen.
- The two-way nature of the immediate price action that followed the PPI release and proximity to today’s CPI data likely limited the size of the net positioning swings.
- A reminder that the initial hawkish reaction to yesterday’s firmer-than-expected headline PPI readings was more than countered by the largely negative revisions in the same dataset and less worrying feedthrough into PCE.
- Market implied pricing for the Fed rate path stuck to recent ranges as a result.
- We will cover U.S. short end positioning in a little more detail ahead of today’s CPI release.
| 14-May-24 | 13-May-24 | Daily OI Change | Daily OI Change In Packs | ||
| SFRH4 | 938,599 | 956,985 | -18,386 | Whites | -11,331 |
| SFRM4 | 1,109,057 | 1,120,533 | -11,476 | Reds | -25,835 |
| SFRU4 | 1,103,596 | 1,093,827 | +9,769 | Greens | +1,037 |
| SFRZ4 | 1,213,479 | 1,204,717 | +8,762 | Blues | +2,547 |
| SFRH5 | 789,758 | 798,471 | -8,713 | ||
| SFRM5 | 782,132 | 788,745 | -6,613 | ||
| SFRU5 | 705,086 | 713,197 | -8,111 | ||
| SFRZ5 | 825,619 | 828,017 | -2,398 | ||
| SFRH6 | 513,961 | 513,421 | +540 | ||
| SFRM6 | 529,882 | 531,997 | -2,115 | ||
| SFRU6 | 420,079 | 419,179 | +900 | ||
| SFRZ6 | 362,565 | 360,853 | +1,712 | ||
| SFRH7 | 250,023 | 248,574 | +1,449 | ||
| SFRM7 | 184,852 | 182,929 | +1,923 | ||
| SFRU7 | 173,906 | 175,062 | -1,156 | ||
| SFRZ7 | 150,170 | 149,839 | +331 |
EUROPE ISSUANCE UPDATE:
UK auction results:
* Despite a 0.7bp tail (which is tighter than the last 10-year green gilt auction that was in December), and also in spite of a healthy 3.52x bid-to-cover, the lowest accepted price at the 0.875% Jul-33 Green Gilt auction was below the prevailing secondary market price as the auction closed.
* So we have seen a marginally bigger move lower in this gilt than in other similar maturity gilts (although the trend for all gilts in the past 15 or so minutes has been lower).
* We would describe this as a slightly disappointing auction overall.
* GBP3bln of the 0.875% Jul-33 Green Gilt. Avg yield 4.072% (bid-to-cover 3.52x, tail 0.7bp).
Germany auction results:
* E1bln (E819mln allotted) of the 1.80% Aug-53 Bund. Avg yield 2.62% (bid-to-offer 2.83x; bid-to-cover 3.45x).
* E1bln (E845mln allotted) of the 2.50% Aug-54 Bund. Avg yield 2.62% (bid-to-offer 2.60x; bid-to-cover 3.07x).
EFSF Syndication RfP:
* "Today, EFSF has sent a Request for Proposal to a selection of banks from the EFSF/ESM Market Group with regards to an upcoming transaction, subject to market conditions."
* Note that we had flagged the likelihood of either an ESM or EFSF transaction as upcoming. We expect a transaction on 20 May.
FOREX: Greenback Falters as Markets Wary of CPI Surprise
- The greenback trades poorly on the day, with the USD Index lower for a third consecutive session. The 50-dma provided solid support for the index earlier in May, and this week's weakness points to another imminent test - crossing at 104.775 today.
- Pre-positioning ahead of US CPI remains key, with markets wary of an out-of-consensus print following the volatile PPI release on Tuesday. Markets expect Y/Y core inflation to slow to a new post-pandemic low of 3.6%, and the determinants of PCE will come under particular scrutiny for gauging any Fed policy response.
- NOK trades well, outperforming all others in G10 and aiding a slide below the 50-dma of 10.8053 in USD/NOK to touch a new May low. China easing rhetoric has picked up, with risk proxy currencies being the main beneficiary. Reports overnight suggested that Chinese local governments will be empowered to buy up unsold housing inventories - the latest sign that the authorities could be becoming more activist in underpinning the economy.
- ECB speak so far Wednesday has stuck to the party line - with Villeroy, Rehn and Muller unsurprisingly pointing to a June rate cut - but with less commitment to policy direction beyond that point. EUR is softer against most others, but continues to hold the bulk of the recent rally. EUR/GBP consolidates just below the 200-dma of 0.8605.
- Outside of the US inflation print, retail sales for April also cross - seen slowing across all main metrics and in particular the ex-autos category. Fed's Barr, Kashkari and Bowman are also set to speak.
OPTIONS: Antipodean FX Isolated in Pre-CPI Vol Swings
- In typical pre-CPI trade, front-end FX vols are well bid, with G10 overnights cresting close to YTD highs and reinforcing the perceived importance of the US inflation print later today.
- AUD, NZD are isolated in posting the most notable vol premium this month, underlining their risk proxy status, sensitivity to the Fed policy cycle and the importance of recent positioning cycles - which have seen NZD shorts account for over 20% of open interest, contrasting with a sharp positive momentum shift in the AUD net position since the nadir in mid-March.
- AUD/USD overnight vols neared 20 points this morning, the highest in just under a year, blowing out the break-even on an ATM straddle to near 60 pips - well over double the swing implied by average background vol so far in 2024.
- Across EM currencies, MXN and ZAR vols are posting the most sizeable two-day vol premiums (8.4 and 8.0 vol points respectively) ahead of the CPI print, potentially suggesting greater sensitivity in these currencies into the Thursday NY cut. Interestingly, both currencies also exhibit notable political risk premia, with both Mexico and South Africa holding Presidential election polls toward the end of the month.
OPTIONS: Expiries for May15 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.0600-15(E1.4bln), $1.0640-50(E1.2bln), $1.0665-75(E1.6bln), $1.0750(E918mln), $1.0789-00(E1.2bln), $1.0820-25(E690mln), $1.0850(E595mln)
- GBP/USD: $1.2440-55(Gbp1.2bln)
- USD/JPY: Y155.50-60($510mln), Y156.00(1.2bln)
- AUD/USD: $0.6600(A$1.5bln)
- USD/CAD: C$1.3940($1.1bln)
- USD/CNY: Cny7.2000($822mln), Cny7.3000($611mln)
EQUITIES: EuroStoxx Rally Confirms Resumption of Uptrend
- S&P E-Minis traded higher yesterday as the contract extends the bull cycle from Apr 19. This highlights scope for a continuation higher and attention is on the key resistance and bull trigger at 5333.50, the Apr 1 high.
- Eurostoxx 50 futures are holding onto this week’s gains. The contract has breached key resistance at 5079.00, the Apr 2 high, to confirm a resumption of the uptrend and maintain the bullish sequence of higher highs and higher lows.
COMMODITIES: M/T Trend Structure Bullish for Gold
- A bearish theme in WTI futures remains intact and the contract continues to trade closer to its recent lows. Price has recently breached the 50-day EMA, strengthening a short-term bearish set-up that highlights potential for a deeper correction.
- The medium-term trend structure in Gold remains bullish and this is reinforced by moving average studies that are in a bull-mode position. Near-term, a push higher would refocus attention on 2431.50, the Apr 12 high and bull trigger.
| Date | GMT/Local | Impact | Country | Event |
| 15/05/2024 | 1100/0700 | ** |  US | MBA Weekly Applications Index |
| 15/05/2024 | 1215/0815 | ** |  CA | CMHC Housing Starts |
| 15/05/2024 | 1230/0830 | *** | US | CPI |
| 15/05/2024 | 1230/0830 | ** | CA | Monthly Survey of Manufacturing |
| 15/05/2024 | 1230/0830 | *** | US | Retail Sales |
| 15/05/2024 | 1230/0830 | ** | US | Empire State Manufacturing Survey |
| 15/05/2024 | 1300/0900 | * | CA | CREA Existing Home Sales |
| 15/05/2024 | 1400/1000 | * | US | Business Inventories |
| 15/05/2024 | 1400/1000 | ** | US | NAHB Home Builder Index |
| 15/05/2024 | 1400/1000 | US | Fed Vice Chair Michael Barr | |
| 15/05/2024 | 1405/1505 |  GB | Bernanke Review of Bank of England Forecasting | |
| 15/05/2024 | 1430/1030 | ** | US | DOE Weekly Crude Oil Stocks |
| 15/05/2024 | 1600/1200 | US | Minneapolis Fed's Neel Kashkari | |
| 15/05/2024 | 1920/1520 | US | Fed Governor Michelle Bowman | |
| 15/05/2024 | 2000/1600 | ** | US | TICS |
| 16/05/2024 | 2350/0850 | *** |  JP | Japan GDP 1st Estimate |
| 16/05/2024 | 0130/1130 | *** |  AU | Labor Force Survey |
| 16/05/2024 | 0430/1330 | ** | JP | Industrial Production |
| 16/05/2024 | 0600/0800 | ** |  NO | Norway GDP |
| 16/05/2024 | 0800/1000 | ** |  IT | Italy Final HICP |
| 16/05/2024 | 1100/1200 | GB | BOE's Greene Speech at Make UK on Labour Market | |
| 16/05/2024 | 1230/0830 | *** | US | Jobless Claims |
| 16/05/2024 | 1230/0830 | ** | US | WASDE Weekly Import/Export |
| 16/05/2024 | 1230/0830 | ** | US | Import/Export Price Index |
| 16/05/2024 | 1230/0830 | *** | US | Housing Starts |
| 16/05/2024 | 1230/0830 | ** | US | Philadelphia Fed Manufacturing Index |
| 16/05/2024 | 1315/0915 | *** | US | Industrial Production |
| 16/05/2024 | 1400/1000 | US | Fed Vice Chair Michael Barr | |
| 16/05/2024 | 1430/1030 | ** | US | Natural Gas Stocks |
| 16/05/2024 | 1430/1030 | US | Philadelphia Fed's Pat Harker | |
| 16/05/2024 | 1530/1130 | * | US | US Bill 08 Week Treasury Auction Result |
| 16/05/2024 | 1530/1130 | ** | US | US Bill 04 Week Treasury Auction Result |
| 16/05/2024 | 1600/1200 | US | Cleveland Fed's Loretta Mester | |
| 16/05/2024 | 1950/1550 | US | Atlanta Fed's Raphael Bostic |
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