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MNI US MARKETS ANALYSIS - US 30y Yield Fails to Sustain New Highs

Highlights:

  • The US 30y yield touched 5% and a new cycle high before abating into NY hours
  • USD sees scant support from steeper curve
  • ADP Employment Change, ISM Services to provide more labour market clues

US TSYS: 30Y Yield Topped 5% Briefly

  • Cash Tsys running mostly weaker, off overnight lows after 30Y yield topped 5% for first time since late 2007 briefly (5.009%), wings flirting with steady to mildly higher. Tsy 10Y yields have been marking higher highs for weeks, tapped 4.8799% high around the London crossover, curves steeper but off highs: 3M10Y currently 69.445 (+2.464) vs. -62.860 high, 2Y10Y -32.945 (+2.947) vs. -29.979 high.
  • Heavy overnight futures volume (TYZ3 >565k) as 10Y contract fell to a fresh cycle low of 106-03.5, currently trades 106-15 (-5.5). Bear trend remains intact, initial technical support at 106-00 followed by 105-27.5 (3% lower Bollinger Band).
  • Economic data picks up in earnest with ADP Private Employment at 0815ET, S&P Services/Composite PMIs at 0945, followed by ISM services and durables/cap goods orders at 1000ET. Treasury auctions $4B 17W bills at 1130ET.
  • Fed speakers Gov Bowman at a community bank conference (10.25ET) and Chicago Fed Goolsbee open remarks at a bank conf (1030ET) followed by a moderated discussion with former Bank of India Gov Rajan at 1500ET.
  • Rate hike projections moderate into early 2024: November 30.5% w/ implied rate change of +7.6bp to 5.405%. Projections ease slightly for next two meetings: December cumulative of 12.5bp at 5.452%, January 2024 11.9bp at 5.448%. Fed terminal at 5.455% in Jan'24.
  • Headline watching: aftermath of House Speaker McCarthy ousting late Tuesday and who will fill the void (front runners Scalise and Jordan).

US TSYS: Short Setting Seemed To Dominate Again On Tuesday

The combination of yesterday’s outright cheapening and preliminary open interest data point to a mix of net short setting and long cover across the Tsy futures curve on Tuesday.

  • Looking more granularly, only US futures appeared to be subjected to net long cover, while the largest round of apparent short setting (in DV01 equivalent terms) came in FV futures.
  • ~$3.8mn of DV01 equivalent net OI was added across the Tsy futures curve.
03-Oct-2302-Oct-23Daily OI ChangeOI DV01 Equivalent Change ($)
TU3,959,2663,925,344+33,922+1,284,718
FV5,633,1385,590,477+42,661+1,769,722
TY4,786,6264,765,911+20,715+1,302,218
UXY1,893,0981,891,601+1,497+130,637
US1,408,3721,418,967-10,595-1,361,423
WN1,562,9871,559,025+3,962+720,493
Total+92,162+3,846,365

SOFR: OI Points to Mix Of Short Setting & Long Cover On SOFR Strip On Tuesday

The mix of the bear steepening on the SOFR curve on Tuesday and preliminary open interest data point to a mix of net positioning swings on the strip.

  • The whites and reds were seemingly dominated by long cover, albeit with pockets of apparent short setting seen.
  • Meanwhile, the greens and the blues were seemingly dominated by short setting, with pockets of apparent long cover seen.
03-Oct-2302-Oct-23Daily OI ChangeDaily OI Change In Packs
SFRU31,004,1431,013,069-8,926Whites-1,952
SFRZ31,385,4221,400,502-15,080Reds-17,332
SFRH4971,662958,839+12,823Greens+11,699
SFRM4937,516928,285+9,231Blues+10,371
SFRU4809,462815,251-5,789
SFRZ4933,626942,902-9,276
SFRH5544,299547,093-2,794
SFRM5571,278570,751+527
SFRU5496,302505,554-9,252
SFRZ5509,028499,596+9,432
SFRH6311,072309,236+1,836
SFRM6268,304258,621+9,683
SFRU6215,903206,576+9,327
SFRZ6180,474180,775-301
SFRH7130,769130,352+417
SFRM7137,049136,121+928

EUROPE ISSUANCE UPDATE

German 7Y Auction Result:

  • E3bln 2.40% Nov-30 Bund. Avg Yield 2.890% (Bid-to-cover 2.67x, allotted E2.392Bln)

Gilt Auction Results:

  • GBP4.25bln 3.50% Oct-25 Gilt. Avg. Yield 4.964% (bid-to-cover 2.61x).
  • A fairly average auction for the 3.50% Oct-25 gilt with the tail of 1.1bp broadly in line with recent auctions and the lowest accepted price below the pre-auction mid-price again (as it was in the last 3.50% Oct-25 gilt auction in August).
  • After initially pulling back on the publication of the results, the 3.50% Oct-25 gilt is now trading between the LAP and the average auction price.

FOREX: Early USD Support Fades, Putting Greenback Weaker into NY Crossover

  • Currency markets are relatively steady heading into the US crossover, with the greenback edging lower in recent trade as the relentless rise in US yields abates off the cycle high. The US sovereign curve has traded higher and steeper again in Europe, putting the 30y yield briefly at 5% and tipping the 10y yield to a fresh cycle best.
  • The greenback initially saw support, tipping the likes of EUR/USD and GBP/USD to new pullback lows of 1.0451 and 1.2037 respectively. This impact faded following the cash equity open on the continent, helping both pairs spill back into positive territory.
  • Resultingly, the greenback is among the poorer performers in G10, with NZD similarly weak. EUR, GBP and AUD are faring better, running in contrast to their poor performance earlier this week.
  • Markets are no clearer on whether the Japanese authorities formally intervened in currency markets yesterday after the sharp pullback after prices showed above Y150.00. The Japanese finance minister, top currency official and a government spokesman declined to comment, leaving traders waiting until the end of the month for any official confirmation from the BoJ.
  • The US labour market takes focus going forward, with the September ADP employment change and ISM services data set for release. Markets expect ADP gains to slow to 150k from 177k, while ISM services is also seen lower this month. Markets remain on watch for any further clues on the labour market ahead of Friday's NFP release, at which consensus looks for job gains of 170k.

FX OPTIONS: Expiries for Oct04 NY cut 1000ET (Source DTCC)

  • EUR/USD: $1.0475(E841mln)
  • USD/JPY: Y148.00($567mln), Y148.50($723mln), Y150.00($766mln)
  • EUR/JPY: Y154.00(E520mln)
  • AUD/USD: $0.6490(A$550mln), $0.6700(A$1.4bln)

BONDS: Early Sell Off Moderates After Bears Probe Round Numbers/Tech Support

Momentum from Tsys in Asia-Pac hours spilled over in the early rounds of London trade, with a fresh wave of cheapening pressure seen.

  • Still, bears couldn’t hold the move above 3.00% in German 10-Year yields (last 2.96%), nor the move above the 5.00% mark in 30-Year Tsys (last 4.93%). Technical support in gilt futures held.
  • The failure of bears to consolidate moves through round numbers, coupled with the scale of the recent cheapening and lack of meaningful headline flow, allowed bonds to rebound from worst levels.
  • Lighter net long positioning in Tsys (as outlined by the latest J.P.Morgan client survey) may give some scope to add to longs when such round numbers (roughly) hold, while the usual talk of profit taking also does the rounds given the speed and scope of the recent moves.
  • A block buy in TY futures also helped the stabilisation.
  • The German curve twist flattens on the day, while gilts and Tsys twist steepen.
  • Bund, gilt & TY futures operate comfortably off session cheaps.
  • EGBs are little changed to a touch wider vs. Bunds.
  • Comments from ECB President Lagarde and BoE Governor Bailey failed to add to the respective policy debates.

EQUITIES: Recent Move Lower in E-Mini S&P Confirms Resumption of Bear Leg

  • Eurostoxx 50 futures trend conditions remain bearish and the latest bounce has been corrective. 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 4226.20, the 20-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. The contract traded lower yesterday, confirming a resumption of the bear leg and maintaining the price sequence of lower lows and lower highs. This signals scope for weakness towards 4242.15, a Fibonacci retracement point. A break of this level would open 4194.75, the May 24 low. Pivot resistance is 4453.89, the 50-day EMA. Ahead of the 50-day average is resistance at 4401.10, the 20-day EMA.

COMMODITIES: Gold Remains Close to its Lowest Levels Since March

  • WTI futures started the week on a bearish note and a corrective cycle is in play. The contract has traded through support at $88.19, the Sep 26 low. The breach highlights a short-term top and signals scope for a move towards the 50-day EMA, which intersects at $84.56 today. A clear break of this average would strengthen a bearish condition. On the upside, key short-term resistance has been defined at $95.08, the Sep 28 high.
  • Gold started this week’s session on a bearish note and the metal is trading just above this week’s low. 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 $1890.9, the 20-day EMA.

DateGMT/LocalImpactFlagCountryEvent
04/10/20231100/0700**US MBA Weekly Applications Index
04/10/20231140/1340EU ECB's de Guindos speaks at Cyprus CB Conference
04/10/2023-UK BoE's Bailey Interview in Prospect Magazine
04/10/20231215/0815***US ADP Employment Report
04/10/20231345/0945***US IHS Markit Services Index (final)
04/10/20231400/1000***US ISM Non-Manufacturing Index
04/10/20231400/1000**US Factory New Orders
04/10/20231400/1600EU ECB's Panetta speaks at ECB MP Conference
04/10/20231425/1025US Fed Governor Michelle Bowman
04/10/20231430/1030**US DOE Weekly Crude Oil Stocks
04/10/20231600/1800EU ECB's Lagarde speaks at Columbia University
05/10/20230030/1130**AU Trade Balance
05/10/20230600/0800**DE Trade Balance
05/10/20230645/0845*FR Industrial Production
05/10/20230700/0900**ES Industrial Production
05/10/20230730/0930**EU IHS Markit Final Eurozone Construction PMI
05/10/20230830/0930UK BOE DMP Survey
05/10/20230830/0930**UK IHS Markit/CIPS Construction PMI
05/10/20230945/1145EU ECB's Lane, BOE Broadbent and Riksbank Breman at ECB MP Conference
05/10/20231230/0830***US Jobless Claims
05/10/20231230/0830**US WASDE Weekly Import/Export
05/10/20231230/0830**CA International Merchandise Trade (Trade Balance)
05/10/20231230/0830**US Trade Balance
05/10/20231300/0900US Cleveland Fed's Loretta Mester
05/10/20231400/1000*CA Ivey PMI
05/10/20231400/1600EU ECB's de Guindos speaks at ECB MP Conference
05/10/20231430/1030**US Natural Gas Stocks
05/10/20231530/1130US Richmond Fed's Tom Barkin
05/10/20231530/1130**US US Bill 04 Week Treasury Auction Result
05/10/20231530/1130*US US Bill 08 Week Treasury Auction Result
05/10/20231600/1200US San Francisco Fed's Mary Daly
05/10/20231615/1215US Fed Vice Chair Michael Barr

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