MNI US MARKETS ANALYSIS - US Curve Twist Flattens Pre-Data Deluge

MNI (LONDON) - Highlights:

• US curve sits twist flatter ahead of data deluge, with ISM services the highlight
• USD/JPY again crests at new cycle high, buoyed by firm equities
• OAT backdrop firms as right-wing majority odds fade further

US TSYS: Twist Flatter Ahead Of A Data Deluge Including ISM Services

• Treasuries have seen a reasonable twist flattening, as the front-end reverses yesterday’s rally despite lower oil prices (perhaps better reflecting the stronger JOLTS openings, plus arguably sizeable bill issuance today) but the longer end follows most EGBs slightly richer on French political developments.
• Today sees a particularly heavy data docket ahead of Independence Day closures.
• Cash yields sit between 2bp higher (2s) and 1.5bp lower (30s), with 2s10s at -33bps (-2.3bps). The latter is off yesterday’s high of -27.4bps which marked the highest since early May having swung strongly from a YTD low of -50.8bps in late June.
• TYU4 is unchanged at 109-15, within yesterday’s range, on somewhat more typical volumes of 270k after heavy overnight sessions in recent days.
• The bear threat remains within support at 109-02+ (Jul 1 low) stopping just short of a key support at 109-00+ (Jun 10 low).
• Data: Weekly MBA mortgages (0700ET), Challenger Job cuts Jun (0730ET), ADP employment Jun (0815ET), Weekly jobless claims (0830ET), Trade balance (0830ET), S&P Global US Services/Composite PMI Jun final (0945ET), ISM services Jun (1000ET), Factory orders May (1000ET)
• Fedspeak: Williams in r* panel in Sintra (1200ET, text + Q&A), FOMC Minutes (1400ET)
• Bills issuance: US Tsy $85B 4W, $80B 8W (1000ET), US Tsy $60B 17W (1130ET)

STIR: Fed Rates Rangebound Ahead Of Data Deluge; Williams First Up

• Fed Funds implied rates sit in the higher end of recent ranges from the past two weeks (but still firmly within CPI-induced ranges) ahead of a deluge of data including a range of labor indicators before ISM services.
• Cumulative cuts from 5.33% effective: 2.5bp Jul, 18bp Sep, 26bp Nov, 45bp Dec and 58bp Jan.
• Today’s scheduled Fedspeak is confined to NY Fed’s Williams at 0700ET in a potentially important panel on the drivers of equilibrium interest rates (text + Q&A), although Powell didn’t materially move markets yesterday.
• Williams, typically one of the more dovish members of the FOMC, said on Monday that he’s confident the Fed is on path to achieving 2% inflation whilst his last more detailed commentary on Jun 18 was that he expects rates to fall to more normal levels in the next few years.
• It’s followed by the FOMC minutes – see the MNI Preview here: https://roar-assets-auto.rbl.ms/files/65084/FedMinutesPreview-July2024.pdf

US: Trump Overturns 10-Point Biden Lead In New Hampshire

Saint Anselm College poll has issued Biden a flashing warning light with a post-presidential debate poll showing Trump is now leading in New Hampshire. According to the poll, Trump now holds a two-point lead in the state – a 12-point swing from December when Biden led by 10-points in the same poll.

• For context, a Republican presidential candidate has only won NH once since 1988, George W. Bush in 2000 by a margin of 1.4%. Biden won the state in 2020, 52.7% - 45.4%.
• New Hampshire Institute of Politics Executive Director Neil Levesque summarized the results: “Donald Trump has erased a ten-point polling deficit and now leads President Joe Biden by a narrow 2-point margin. However, with 17 percent of voters having an unfavorable opinion of both candidates, this race is likely to remain volatile all the way to the finish.”
• Saint Anselm College notes: “...Trump is marginally more popular than [Biden]… Trump’s marginal popularity edge translates into a slight ballot lead."
• Notably, according to the poll: “Biden underperforms Democratic registration strength and a Democratic generic ballot advantage. Biden trails by 2 points on the ballot despite the Democratic Party carrying a narrow edge on registration over Republicans (32%-31%), party identification (47%-46%), and on the generic ballot (46%-43%).”

Figure 1: New Hampshire Presidential Preference

Source: New Hampshire Institute of Politics, Saint Anselm College

Figure 2: New Hampshire Recent Presidential Election Voting History

Source: 270towin

OI Suggests Long Setting In Most SOFR Futures After Powell’s Comments

Yesterday’s move higher in most SOFR futures and preliminary OI data points to net long setting in all packs through the blues, albeit with some pockets of net short cover noted.

• Fed Chair Powell’s comments at the ECB’s Sintra forum were deemed slightly dovish by most.
• Firmer-than-expected JOLTS data then provided some counter.
• Dec ’24 FOMC-dated OIS was little changed on the day as a result, showing ~42bp of cuts.

EUROPE ISSUANCE UPDATE: 

German auction results

• E5bln (E4.072bln allotted) of the 2.60% Aug-34 Bund. Avg yield 2.63% (bid-to-offer 1.53x; bid-to-cover 1.87x).

OAT: “Republican Front” Tactics Promote Further Tightening Vs. Bunds

Further OAT/Bund tightening early today, with the spread last trading at ~67bp. Note that a 10-Year Bund benchmark roll is impacting the level of the spread (grey market pricing of the soon to be issued Aug-34 Bund is acting as the BBG benchmark), but OATs still outperform on the day.

• A Le Monde tally shows 221 candidates dropping out of the second round of the French legislative election, as the leftist alliance and Macron’s Ensemble try to limit right-wing RN gains via a “republican front.”
• While this agreement lowers the chances of an RN majority, inherent uncertainty provided by a hung parliament will likely prevent meaningful OAT spread tightening towards early June levels.
• This is also true when it comes to OAT spreads vs. PGBs & Irish bonds, as Portugal and Ireland operate on a stronger fiscal footing than France, providing RV tailwinds to their respective sovereign bonds.
• Several desks have pointed to the ~75-85bp area as a rough fair value level for OAT/Bunds in the medium-term, with opinion polls and comments from the major political parties providing the obvious sources of short-term headline risk.
• Elsewhere, tomorrow’s long end OAT supply will be closely watched.

FX OPTIONS: USD/JPY upside demand buoys overnight options trade

• Countering a few quiet sessions at the beginning of the week, Wednesday FX hedging activity is more inline with average, with busier JPY, HKD and AUD/NZD markets boosting overall volumes. Vol markets are more subdued, notably in GBP crosses as the smooth transition from a Conservative, to a Labour majority this week is not expected to roil the currency. 
• Demand for upside exposure in USD/JPY has characterized overnight trade, mirroring the run higher in spot and the fresh multi-decade high at 161.94 and resulting in a put/call ratio of ~0.8. ITM calls have traded in size between 159.25 - 160.00, however interest has also been noted as high as Y164.10-164.50. 
• We wrote earlier this week that USD/CNY downside had been a popular theme, however trade overnight has leaned toward calls in the pair - with sizeable structures trading in early Europe/late Asia, potentially consistent with a 7.05/7.15/7.30/7.40 long call ladder targeting a late October expiry. 

FOREX: JPY Weakness Pervades, Despite Mixed USD Performance

• JPY weakness again pervades across G10 currencies, with USD/JPY touching a new high overnight at 161.94, and AUD/JPY's winning streak extending to 108.21. JPY weakness comes as the equity rally resumes. The strong finish on Wall Street yesterday has fed into positive European performance, with the still-fading odds of a right-wing majority also helping contribute to better risk sentiment today.
• The USD is mixed, paring a small part of the gains posted across the first two sessions of this week. The USD Index remains within reach of 106.130 resistance, but a small gap is opening to start off Q3 and the month of July.
• NOK is the best performing currency in the region, firmer on the back of a better crude price and stronger local equities. This has allowed EUR/NOK to roll off the 11.5051 recovery high and snap the eight-session winning streak posted off the June low. Potentially significant is the formation of a death cross (50-dma moving below 200-dma) this week, the first since January this year. 
• US weekly jobless claims data is set to cross later today - brought forward by one day from the usual schedule due to market closures around the July 4th holidays this week. ISM services data is set to follow, at which markets expect a moderation in the headline to 52.6 from 53.8. ECB's Lane, Knot and Lagarde are set to make further appearances at the ECB's Sintra conference, while the FOMC minutes are set for release after the European close. 

Expiries for Jul03 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0675(E1.5bln), $1.0685-00(E2.9bln), $1.0745-55(E1.7bln), $1.0775(E566mln), $1.0800(E1.2bln), $1.0865-85(E1.3bln)
• USD/JPY: Y158.50($2.6bln), Y160.20-25($1.1bln), Y160.85-00($1.1bln), Y161.30-40($783mln), Y162.00($660mln)
• AUD/USD: $0.6645-55(A$745mln)
• USD/CAD: C$1.3660($690mln)
• USD/CNY: Cny7.2400-10($1.1bln), Cny7.2500($722mln)

UK: Downside risks to both gilts and sterling FX from the UK election

• The polls all point to a sizeable Labour majority and anything other than that would be a huge surprise at this point. We think there are downside risks to both sterling FX and gilts from either a small or very large Labour majority - but a 75-130 seat majority is largely priced.
• So a majority of less than 50 would probably see a negative market reaction for both sterling and gilts. Markets hate uncertainty and instability, and a relatively small Labour majority would likely see concerns that Starmer and Reeves could have to compromise their more centrist programme to satisfy more of the harder leftwing MPs.
• Similarly a large majority of 150+ could potentially see an adverse market reaction. A majority this large may be seen as a stronger mandate for a bigger shift towards more socialist policies. Furthermore, Starmer and Reeves have already said they expect to boost growth to fund their spending increases, but it is difficult to boost growth in a non-inflationary way. So the prospects of higher inflation are likely to weigh on gilts in particular. Furthermore, if the growth plan doesn't work out, spending could increase substantially leading to higher debt levels (and higher future issuance). Interestingly, this is exactly what the market was worried about with Truss as PM.
• A majority of around 75-130 is probably the most positive outcome for the market - but is already probably close to being priced in. In this scenario Labour would have a large enough majority to not be held hostage by a small number of hardliner MPs but would also not have such a sizeable majority to encourage Starmer and Reeves to leave the middle ground.

COMMODITIES: Short-Term Bearish Theme in Gold Remains in Play

• A bull cycle in WTI futures remains in play and the contract traded higher Tuesday, before giving back some gains. The recent breach of $80.11, the May 29 high and a key resistance, strengthened a bullish theme. Note too that $82.24, 76.4% of the Apr 12 - Jun 4 bear leg, has been cleared. This opens $85.27, the Apr 12 high and a bull trigger. Initial firm support to watch is $79.19, the 50-day EMA.
• Gold is unchanged and is trading in consolidation mode. A bear threat remains present and the sell-off on Jun 7 reinforced a short-term bearish theme. Price has pierced the 50-day EMA, at 2319.3. A clear break of this EMA would confirm a resumption of the reversal from May 20 and open $2277.4, the May 3 low. Clearance of this price point would also strengthen a bearish theme. Initial firm resistance is $2387.8, the Jun 7 high.

EQUITIES: E-Mini S&P Holds Onto Tuesday's Gains, Conditions Bullish

• Eurostoxx 50 futures are in consolidation mode. The trend condition remains bullish and the recovery from the Jun 14 low appears to be an early reversal of the May 16 - Jun 14 correction. Attention is on 5039.84, a Fibonacci retracement. Clearance of this level would be a positive development. A reversal lower would instead signal a resumption of the bearish corrective cycle that started May 16 and open 4846.00, Apr 19 low and a key support.
• The trend condition in S&P E-Minis is unchanged and signals remain bullish. Resistance at 5430.75, the May 23 high and bull trigger, has recently been cleared. This break confirmed a resumption of the primary uptrend. Note that the recent pause in the trend still appears to be flag formation - a bullish continuation signal that reinforces current conditions. Sights are on 5594.66, a Fibonacci projection. Support to watch is 5496.53, the 20-day EMA.     

Date	GMT/Local	Impact	Country	Event
03/07/2024	1100/0700	**	US	MBA Weekly Applications Index
03/07/2024	1100/0700		US	New York Fed's John Williams
03/07/2024	1230/0830	**	US	Trade Balance
03/07/2024	1230/0830	**	CA	International Merchandise Trade (Trade Balance)
03/07/2024	1230/0830	***	US	Jobless Claims
03/07/2024	1330/1530		EU	ECB's Lagarde closing remarks at ECB Forum
03/07/2024	1400/1000	***	US	ISM Non-Manufacturing Index
03/07/2024	1400/1000	**	US	Factory New Orders
03/07/2024	1400/1000	**	US	US Bill 04 Week Treasury Auction Result
03/07/2024	1400/1000	*	US	US Bill 08 Week Treasury Auction Result
03/07/2024	1430/1030	**	US	DOE Weekly Crude Oil Stocks
03/07/2024	1600/1200	**	US	Natural Gas Stocks
03/07/2024	1800/1400	***	US	FOMC Minutes
04/07/2024	0130/1130	**	AU	Trade Balance
04/07/2024	0545/0745	**	CH	Unemployment
04/07/2024	0600/0800	**	DE	Manufacturing Orders
04/07/2024	0630/0830	***	CH	CPI
04/07/2024	0730/0930	**	EU	S&P Global Final Eurozone Construction PMI
04/07/2024	0830/0930	**	GB	S&P Global/CIPS Construction PMI
04/07/2024	0830/0930		GB	Decision Making Panel Data
04/07/2024	0900/1100		EU	ECB's Lane Lecture at University of Naples
04/07/2024	-		GB	General Election
04/07/2024	1415/1615		EU	ECB's Cipollone speech at 15th edition of National Statistics conference