MNI US MARKETS ANALYSIS - UK CPI, RBNZ Add Hawkish Tilt

Highlights: 

• UK CPI, RBNZ rate decision add hawkish tilt to session
• Services CPI prompts pricing out of June BoE rate cut
• FOMC Minutes take focus and any discussion of the burden of proof for cuts will be closely scrutinized

US TSYS: Cheaper On UK CPI But TY Recent Lows Intact

• Treasuries maintain the sell-off seen after less moderation than expected in UK CPI inflation, although the long-end remains above the week’s lows to consolidate yesterday’s flattening.
• Cash yields sit 2-4bps higher on the day, led by 3s. 2s10s little changed at -42bps (-0.5bp).
• TYM4 trades at 109-00+ (- 07) on solid volumes a little above 300k. The week’s low at 108-30+ provides tentative support before a more meaningful 108-29 (20-day EMA) and a key 108-15 (May 14 low).
• A TU/FV/UXY fly block provided the most meaningful pre-NY flow, looking for an extension of the recent 5-Year richening on that structure (representing a similar trade to London flow seen in late April).
• The FOMC minutes headline today’s session but existing home sales could be of note with asymmetrical risk to market reaction from a downside surprise, before the 20Y auction after two successive strong sales.
• Data: MBA mortgage report May 17 (0700ET), Existing home sales Apr (1000ET)
• Fedspeak: Goolsbee opening remarks (0940ET), FOMC minutes (1400ET)
• Note/bond issuance: US Tsy $16B 20Y Bond sale - 912810UB2 (1300ET)
• Bill issuance: US Tsy $60B 17W Bill Auction (1130ET)

STIR: UK CPI Beat Helps Near-Term Fed Rates Hit Joint Highs

• Fed Funds implied rates have pushed to joint highs for near-term meetings, with the 5.28% for July the touching the peak seen just before the May 1 FOMC decision.
• Implied rates for meetings later this year also push higher on the day but remain within ranges, e.g. the Dec’24 at 4.92% (+2bps) vs the 5.05% seen pre-FOMC.
• Cumulative cuts from 5.33% effective: 0.5bp Jun, 5bp Jul, 18bp Sep, 25bp Nov and 41bp Dec
• Overnight Fedspeak from Goolsbee (’24 voter) – must take a longer look at inflation data, be patient – after a trio of Bostic (’24), Mester (’24 retiring June) and Collins (’25).
• Bostic: Will take a longer time for rates to drive decisions.
• Mester: Think inflation will come down but take longer, too soon to tell where inflation is going. Not take a big risk holding rates steady now with a healthy jobs market.
• Collins: Will take longer to see progress needed to adjust rates, in a period where patience really matters. Underlying neutral rate may be higher in medium term.
• A lighter day for Fed appearances ahead with focus instead on the FOMC minutes. Preview here.
• 0940ET - Goolsbee (’24 voter) gives opening remarks (no text or Q&A)
• 1400ET - FOMC minutes from Apr 30/May 1 meeting

STIR: OI Points To Long Setting & Short Cover In SOFR Futures On Tues, Fresh Longs In U4 Dominate

The combination of yesterday's modest uptick in most SOFR futures and preliminary OI data point to a mix of net long setting and short cover through the blues.

• Long setting dominated in the whites and greens, while short cover dominated in the reds and blues (in net pack OI terms).
• Canadian CPI data and some focus on the less hawkish elements of the latest address from Fed Governor Waller facilitated the modest rally, with the move paring back from extremes in the second half of NY trade.
• Heavy screen buying in SOFR futures dominated on the flow side (~40K lifted during the time Waller was speaking), with the net OI change in that contract reflective of fresh longs being set.

EUROPE ISSUANCE UPDATE

UK auction results:

• Decent 5-year gilt auction with almost the same bid-to-cover as last month's launch of the 4.125% Jul-29 gilt and a tighter tail.
• The lowest accepted price of 99.637 exceeded the pre-auction mid-price of 99.625. The average price of 99.664 has not been seen since around 8:20BST this morning. No real price impact following the auction.
• GBP4bln of the 4.125% Jul-29 Gilt. Avg yield 4.199% (bid-to-cover 3.2x, tail 0.6bp).

Greece auction results:

• E250mln of the 3.375% Jun-34 GGB. Avg yield 3.51% (bid-to-cover 3.34x).

Germany auction results:

• E4bln (E3.283bln allotted) of the 2.20% Feb-34 Bund. Avg yield 2.53% (bid-to-offer 2.32x; bid-to-cover 2.82x).

Austria syndication: Final terms

• E4.0bln of the 15-year Jul-39 RAGB inc E250mln retained by the issuer (MNI expected E3.5-5.0bln). Spread set at MS+39bps (guidance was MS+41bps area), Books closed in excess of E31bln.

France syndication: Final terms

• Books closed in excess of E31bln of the 20-year Jul-43 OATei. Spread set at FRTR 1.80% Jul-40 RY + 7bps (guidance was + 9bps area), Books closed in excess of E40bln.

Latvia syndication: Guidance

• 10-year USD Bond. Guidance at $Benchmark Long 10Y Fixed (July 30, 2034) +115 Area

Portugal syndication: Spread Set

• E3bln of the June 2054 Bond. Books in excess of E14bln, Spread Set at Mid-Swaps +115Bps

UK: Speculation Surrounding Snap Election Escalates After Low Inflation Print

Correction: Fixed typo in title. Media speculation surrounding the prospect of PM Rishi Sunak calling a snap general election in the summer has intensified following the low inflation print recorded this morning. Jason Groves at the Daily Mail posts on X: "Westminster rumour mill in overdrive that Sunak is about to call election for July 4. May yet prove to be unfounded but No 10 currently silent on the question."

• Political betting markets have recorded a notable shift in the past 24 hours, with the implied probability of a Q224 general election rising from 14.3% on 21 May to 33.3% at present according to data from Smarkets (see chart below).
• Calling an early eleciton would be a extremely risky move for Sunak and his centre-right Conservative party. The gov't is coming off the back of a set of extremely poor local election results at the start of May, and opinion polling continues to show the Conservatives trailing the main opposition centre-left Labour party by anywhere between 16% and 27% over the past seven days. Even the lower end of that range, if replicated in a general election, would result in a comfortable Labour majority.
• The broad expectation among political pundits is for the election to take place in Oct-Nov 2024, allowing the economic 'feel good' of lower inflation and potentially lower interest rates to have become more pronounced.

Chart 1. Betting Market Implied Probability of Next General Election Date (by Quarter), %

Source: Smarkets

NZD: EURNZD Tests Support Trendline Following Hawkish RBNZ

• NZD is outpacing broader G10 FX on the more hawkish-than-expected RBNZ decision, at which the bank kept rates unchanged but signalled that policy would be kept much tighter, for much longer, and could even resume raising interest rates until inflation and inflation expectations are curtailed.
• Forecasted cuts are now seen well into 2025, filtering through to NZDUSD registering a fresh 2-month high above 0.6150. Most recent Kiwi gains have been underpinned by the optimistic risk environment and the latest central bank rhetoric could pose further upside risks for the currency.
• Price action on Wednesday has also seen EURNZD trade down to the lowest level since March 11, closely coinciding with a test of trendline support, a line drawn from the December 2022 lows.
• Further supportive price action for equities and the accompanying hawkish RBNZ rhetoric could see momentum pick up through this level. A sustained breach of the uptrend line could target a move down to 1.7443, the February 23 low.
• Initial resistance for the cross is at the 20-day EMA, intersecting today at 1.7866.

FOREX: GBP, NZD On Top as Gap For Policy Easing Narrows

• GBP surged on the back of the hotter-than-expected UK inflation print, with the services CPI component of particular interest, and seen limiting the Bank of England's ability to cut rates as soon as June. Markets now price fewer than 2 full 25bps rate cuts across 2024, helping underpin GBP's outperformance into the NY crossover.
• GBP/USD rallied sharply on release to touch a new daily high of 1.2761. While the move has faded somewhat, the continued heaviness with which EUR/GBP is trading shows that it's a USD recovery - rather than any reversal of interpretation in the UK inflation reading.
• NZD is outpacing broader G10 on the more hawkish-than-expected RBNZ decision, at which the bank kept rates unchanged but signalled that policy would be kept much tighter, for much longer, and could even resume raising interest rates until inflation and inflation expectations are curtailed. Forecasted cuts are now seen well into 2025, communications that have sent AUD/NZD to new one month lows. The cross tested support at 1.0857 before rebounding.
• The Fed minutes and existing home sales data take focus ahead. The moderation in inflation in April clearly came as a relief to several FOMC participants, most of whom saw the data as encouraging after a hot Q1 – but still needed more evidence before cutting rates. In the minutes, any discussion of the burden of proof for cuts will therefore be closely scrutinized.

OPTIONS: Demand for AUD/NZD Upside Evident Despite Hawkish RBNZ Hold

• No surprise to see a surge in FX options volumes covering NZD overnight following the hawkish RBNZ decision and subsequent follow-through NZD strength. AUD/NZD was of particular focus, with most trades following the RBNZ's hawkish hold - interestingly, they're dominated by OTM calls, with 1.1100, 1.1350-00 and 1.14 strikes in particular focus.
• Similarly, after UK CPI, GBP hedges have taken the spotlight, as EUR/GBP notional shoots higher thanks to demand for puts shortly following the data. 0.8475 strikes traded in size, the bulk which expire on June 21st, thereby capturing the BoE decision on the day before.
• Most notable expiries rolling off at today's NY cut include E621mln at 1.0830 in EURUSD,$2.2bln at 155.50-60 in USDJPY and $797mln at 1.3680 in USDCAD

EQUITIES: Uptrend in US Equities Remains Intact

The uptrend in S&P E-Minis remains intact and the contract is holding on to its latest gains. Recent gains have resulted in a break of a 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. A bullish theme in Eurostoxx 50 futures remains intact and the latest pullback appears to be a correction. Last week’s gains resulted in a break of key resistance at 5079.00, the Apr 2 high, to confirm a resumption of the uptrend. This opens 5127.70 next, a Fibonacci projection.

COMMODITIES: Bearish WTI Theme Remains Intact

Gold is unchanged. The medium-term trend structure remains bullish. Monday’s initial gains resulted in a print above resistance at $2431.5, the Apr 12 high and bull trigger. The break confirms a resumption of the primary uptrend and paves the way for a climb towards 2452.5 next. A bearish theme in WTI futures remains intact and short-term gains are considered corrective. Price has recently traded below the 50-day EMA, strengthening a bearish set-up that highlights potential for a deeper correction.

Date	GMT/Local	Impact	Country	Event
22/05/2024	1100/0700	**	US	MBA Weekly Applications Index
22/05/2024	1245/1345		GB	BOE's Breeden Panellist on macroprudential policies
22/05/2024	1400/1000	***	US	NAR existing home sales
22/05/2024	1400/1000	*	US	Services Revenues
22/05/2024	1430/1030	**	US	DOE Weekly Crude Oil Stocks
22/05/2024	1700/1300	**	US	US Treasury Auction Result for 20 Year Bond
22/05/2024	1800/1400	***	US	FOMC Minutes
23/05/2024	2300/0900	***	AU	Judo Bank Flash Australia PMI
23/05/2024	0030/0930	**	JP	Jibun Bank Flash Japan PMI
23/05/2024	0715/0915	**	FR	S&P Global Services PMI (p)
23/05/2024	0715/0915	**	FR	S&P Global Manufacturing PMI (p)
23/05/2024	0730/0930	**	DE	S&P Global Services PMI (p)
23/05/2024	0730/0930	**	DE	S&P Global Manufacturing PMI (p)
23/05/2024	0800/1000	**	EU	S&P Global Services PMI (p)
23/05/2024	0800/1000	**	EU	S&P Global Manufacturing PMI (p)
23/05/2024	0800/1000	**	EU	S&P Global Composite PMI (p)
23/05/2024	0830/0930	***	GB	S&P Global Manufacturing PMI flash
23/05/2024	0830/0930	***	GB	S&P Global Services PMI flash
23/05/2024	0830/0930	***	GB	S&P Global Composite PMI flash
23/05/2024	1000/0600	***	TR	Turkey Benchmark Rate
23/05/2024	-		EU	G7 Finance/CB Meet
23/05/2024	1230/0830	***	US	Jobless Claims
23/05/2024	1230/0830	**	US	WASDE Weekly Import/Export
23/05/2024	1345/0945	***	US	S&P Global Manufacturing Index (Flash)
23/05/2024	1345/0945	***	US	S&P Global Services Index (flash)
23/05/2024	1400/1600	**	EU	Consumer Confidence Indicator (p)
23/05/2024	1400/1000	***	US	New Home Sales
23/05/2024	1430/1030	**	US	Natural Gas Stocks
23/05/2024	1500/1100	**	US	Kansas City Fed Manufacturing Index
23/05/2024	1530/1130	*	US	US Bill 08 Week Treasury Auction Result
23/05/2024	1530/1130	**	US	US Bill 04 Week Treasury Auction Result
23/05/2024	1700/1300	**	US	US Treasury Auction Result for TIPS 10 Year Note
23/05/2024	1900/1500		US	Atlanta Fed's Raphael Bostic
24/05/2024	2301/0001	**	GB	Gfk Monthly Consumer Confidence
24/05/2024	2330/0830	***	JP	CPI
24/05/2024	0600/0700	***	GB	Retail Sales
24/05/2024	0600/0800	***	DE	GDP (f)
24/05/2024	0600/0800	**	SE	PPI
24/05/2024	0645/0845	**	FR	Manufacturing Sentiment
24/05/2024	0700/0900	**	ES	PPI
24/05/2024	0700/0900		EU	ECB's Schnabel speech at Germany PhD conference
24/05/2024	1230/0830	*	CA	Quarterly financial statistics for enterprises
24/05/2024	1230/0830	**	CA	Retail Trade
24/05/2024	1230/0830	**	US	Durable Goods New Orders
24/05/2024	1335/0935		US	Fed Governor Christopher Waller
24/05/2024	1400/1000	**	US	U. Mich. Survey of Consumers
24/05/2024	1700/1300	**	US	Baker Hughes Rig Count Overview - Weekly