Highlights:
- Treasuries outperforming EGBs ahead of thin Friday schedule
- MNI UK Deep Dive - BOE Long-Term QT and FQ2 DMO Operations
- Fed rate path just above pre-CPI levels
US TSYS: Outperforming EGBs Ahead Of A Particularly Thin Docket
- Treasuries sit twist steeper on the day, outperforming a sell-off in EGBs attributed to hawkish ECB commentary re a July cut being unlikely.
- with the longer end pushing lower to continue to close the gap to pre CPI & retail sales levels after the front end
- Cash yields sit 0.5bp lower (2s) to 2bps higher (20s and 30s), with long end yields continuing to close the gap to pre CPI & retail sales levels after the front end did so yesterday.
- TYM4 has pushed lower to 109-12 (- 03+) on subdued volumes of 230k. Support is seen at 109-7+ (50-day EMA) before a key 108-15 (May 14 low), but the technical trend remains bullish despite the latest pullback with resistance seen at 109-31+ (May 16 low).
- Today’s docket is particularly thin and with scheduled Fedspeak unlikely to touch on monetary policy, leaving flows and headlines in the driving seat.
- Data: Conf. Board Leading Index Apr (1000ET)
- Fedspeak: Waller with an introduction from Kashkari (1015ET), Daly commencement speech (1215ET)
STIR: Fed Rate Path Sits Just Above Pre-CPI/Retail Sales Levels
- Fed Funds implied rates have held the bulk of yesterday’s climb, aided by stronger than expected non-oil import prices. It saw some lift their core PCE estimates (e.g. GS +1bp to 0.26% M/M, JPM +3bps to 0.26% M/M).
- It leaves a rate path slightly higher than prior to Wednesday’s CPI and retail sales data.
- Cumulative cuts from 5.33% effective: 1.5bp Jun, 7bp Jul, 21bp Sep, 30bp Nov and 45bp Dec.
- Bostic (’24 voter) late yesterday: if the outlook unfolds as he expects, referring to slowly moderating inflation and continued economic momentum, “then it could be appropriate for us to reduce rates toward the end of the year” [he has previously looked at one cut late in the year]. He’s watching May and June inflation to make sure it doesn’t revert higher.
- Fedspeak ahead looks unlikely to touch on monetary policy.
- 1015ET – Waller (voter) on payments innovation (text, no Q&A) introduced by Kashkari (non-voter)
- 1215ET – Daly (’24) commencement speech (text, no Q&A)
US TSY FUTURES: OI Points To Short Setting & Long Cover Mix On Thurs As Yields Pared CPI-Driven Fall
The combination of yesterday's move lower in Tsy futures and preliminary OI data points to a mix of net short setting (TU, UXY & US) and long cover (FV, TY & WN), with the latter dominating in net curve terms.
- Firmer-than-expected import price data weighed on Tsys on Thursday, with yields unwinding much of the move that came in the wake of the CPI print.
- Higher-for-longer Fedspeak also factored in.
- Still, net OI swings remained fairly contained, as has been the case for much of the week.
- Our best guess is that futures positioning still screens short across the curve, albeit influenced by basis trade.
| 16-May-24 | 15-May-24 | Daily OI Change | OI DV01 Equivalent Change ($) | |
| TU | 4,038,991 | 4,035,283 | +3,708 | +130,576 |
| FV | 6,223,767 | 6,252,609 | -28,842 | -1,181,385 |
| TY | 4,373,030 | 4,393,428 | -20,398 | -1,300,829 |
| UXY | 2,137,604 | 2,128,345 | +9,259 | +799,583 |
| US | 1,621,483 | 1,617,908 | +3,575 | +461,522 |
| WN | 1,668,679 | 1,672,722 | -4,043 | -809,866 |
| Total | -36,741 | -1,900,399 |
STIR: OI Points To Mix Of Short Setting & Long Cover In SOFR Futures On Thursday
The combination of yesterday’s move lower in SOFR futures and preliminary OI data points to a mix of net short setting and long cover across the strip.
- The whites saw net short setting dominate, as the latest rounds of higher-for-longer Fedspeak and firmer-than-expected import price data filtered in.
- Short setting also seemed to dominate in the greens and blues, meanwhile, the reds saw net long cover dominate in net pack OI terms.
- Yesterday's inputs leave ~45bp of Fed cuts priced through year end, reversing the CPI-induced dovish move. That is still a little more dovish than the ~40bp that was priced late last week.
| 16-May-24 | 15-May-24 | Daily OI Change | Daily OI Change In Packs | ||
| SFRH4 | 935,329 | 938,235 | -2,906 | Whites | +55,970 |
| SFRM4 | 1,181,939 | 1,131,194 | +50,745 | Reds | -13,422 |
| SFRU4 | 1,093,956 | 1,101,712 | -7,756 | Greens | +3,135 |
| SFRZ4 | 1,263,803 | 1,247,916 | +15,887 | Blues | +5,888 |
| SFRH5 | 781,224 | 781,100 | +124 | ||
| SFRM5 | 797,108 | 805,603 | -8,495 | ||
| SFRU5 | 711,761 | 712,525 | -764 | ||
| SFRZ5 | 818,581 | 822,868 | -4,287 | ||
| SFRH6 | 530,338 | 528,512 | +1,826 | ||
| SFRM6 | 525,093 | 526,119 | -1,026 | ||
| SFRU6 | 420,599 | 418,161 | +2,438 | ||
| SFRZ6 | 359,692 | 359,795 | -103 | ||
| SFRH7 | 250,732 | 248,691 | +2,041 | ||
| SFRM7 | 186,666 | 186,779 | -113 | ||
| SFRU7 | 173,094 | 169,430 | +3,664 | ||
| SFRZ7 | 162,146 | 161,850 | +296 |
UK: MNI UK Deep Dive: BOE Long-Term QT and FQ2 DMO Operations
- We look at recent usage of the STR facility and what it means for policy going forward.
- We don't think that we are approaching the equilibrium level of reserves yet, but think that we are getting closer and hence usage of the STR facility will continue - but primarily as a "digestion" tool around large issuance events and redemptions.
- Longer-term, we expect the pace of active gilt QT sales to be at roughly half their current pace in the next year of operations (from October and announced at the September MPC meeting).
- We also set our our expectations for the DMO's issuance operations in the FQ2 period (July to September) where there are 19 auctions and 2 syndications scheduled.
For more see the full PDF here: https://roar-assets-auto.rbl.ms/files/64270/MNI_UK_DeepDive_May_2024_Preview.pdf
CHINA-RUSSIA: Putin Talks Up Trade & 'No Limits Partnership' In Harbin Visit
(MNI) London - Speaking in the city of Harbin, in China's far northeast, Russian President Vladimir Putin says that the recently-announced increase US tariffs on a number of Chinese products - including electric vehicles - 'were an example of unfair competition'. Putin posits that 'Washington imposed the tariffs because Chinese electric cars had got better'.
- Putin met with Chinese VP Han Zheng during his trip to Harbin, the capital of Heilongjiang province and a city with close links to Russia.
- While Putin's talks with President Xi Jinping in Beijing on 16 May focused on sizeable global issues, with frequent references to the perceived actions of the West, the Harbin trip appears to be more focused on encouraging cultural links and trade between China and Russia. The embedding of the 'no-limits partnership' between the two countries is viewed as crucial for propping up the Russian economy amid strict Western sanctions on Moscow.
- Earlier, Liu Bin, director of the Department of Europe and Central Asia of the Chinese Foreign Ministry, claimed that both China and Russia 'will continue to adhere to the principle of 'non-alignment with blocs, non-confrontation and non-targeting of third parties'.
FOREX: Greenback Follows Yields Higher as Markets in Bounceback Mode
- The greenback trades firmer against all others in the final trading day of the week, gaining on the back of an extension of the recovery in US Treasury yields. The US 10y yield is now north of yesterday's high, and retracing a large part of the post-CPI move lower.
- As a result, most major pairs are lower, with EUR/USD back below the 1.0850 mark and close to daily lows ahead of the NY crossover. ECB speak has largely stuck to the recent comms strategy, flagging June as the likely first cut, but a less certain outlook beyond the first easing step.
- Eurozone final CPI data confirmed the broad deceleration seen in the April flash release. Chinese industrial production and retail sales data came in mixed, with IP topping expectations, but retail sales coming up short. The challenges facing the Chinese economy remain a focus for policymakers, with PBOC's Tao on the wires this morning to shed more light on four separate housing market policies - but the headlines failed to trigger any broad risk rally. AUD remains among the poorest performers in G10.
- Data releases are few and far between Friday, leaving focus on central bank communications. ECB's Vasle, Holzmann & Kazaks are still set to speak, as well as Fed's Waller, Kashkari and Daly.
OPTIONS: Expiries for May17 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.0800-10(E1.0bln), $1.0850(E2.3bln), $1.0875(E637mln)
- USD/JPY: Y153.80-00($1.4bln), Y155.00($1.7bln), Y155.50-60($819mln), Y156.00($542mln)
- AUD/USD: $0.6650-60(A$1.3bln)
- NZD/USD: $0.5880(N$1.3bln)
- USD/CAD: C$1.3675($827mln), C$1.3720-35($1.1bln)
EQUITIES: S&P Extends Bull Cycle
- S&P E-Minis have traded higher this week as the contract extends the bull cycle from Apr 19. Bullish trend conditions remain intact. Recent gains have resulted in a break of key resistance at 5333.50, Apr 1 high. This confirms a resumption of the primary uptrend and signals scope for a climb to 5372.73.
- Eurostoxx 50 futures maintain a bullish tone despite yesterday’s pullback. This week’s gains resulted in a break of key resistance at 5079.00, the Apr 2 high, to confirm a resumption of the uptrend and maintain the price sequence of higher highs and higher lows.
COMMODITIES: Bearish Oil Theme Persists
- The medium-term trend structure in Gold is unchanged and remains bullish. This is reinforced by moving average studies that are in a bull-mode position. Near-term, a continued push higher would refocus attention on $2431.50, the Apr 12 high and bull trigger.
- A bearish theme in WTI futures remains intact and the current consolidation phase appears to be a pause in the trend. Price has recently breached the 50-day EMA, strengthening a short-term bearish set-up that highlights potential for a deeper correction.
| Date | GMT/Local | Impact | Country | Event |
| 17/05/2024 | 1230/0830 | * |  CA | International Canadian Transaction in Securities |
| 17/05/2024 | 1415/1015 |  US | Fed Governor Christopher Waller | |
| 17/05/2024 | 1700/1300 | ** | US | Baker Hughes Rig Count Overview - Weekly |
| 18/05/2024 | 2145/1745 | US | Fed Governor Adriana Kugler |
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