MNI (LONDON) - Highlights:
- US CPI provides the highlight of the week, with consensus putting core at 0.2% M/M in July
- UK headline inflation edges higher in July, but at a slower pace than expected by both markets and the BoE
- NZD/USD falls over 1% following RBNZ rate cut
US TSYS: Extending Yesterday’s PPI Driven Gains Ahead Of CPI
- Treasuries have nudged through yesterday’s post-PPI highs, aided at the margin by a rolling over in WTI futures, as they push further towards the middle of post-payrolls ranges ahead of today’s CPI report.
- Cash yields are 0.3-0.1bp lower on the day, led by the long end, with all benchmark tenors setting new lows for the week.
- Both 2Y and 10Y yields sit roughly towards the middle of ranges seen since the initial reaction to the weak payrolls reports, comfortably above the following Monday’s global risk-off but also more than 15bps off last week’s post-jobless claims high for the 2Y.
- TYU4 at 113-24(+ 04) has edged past late yesterday’s 113-22, with reasonable cumulative volumes of 265k for a pre-US CPI overnight.
- The trend needle points north with resistance at 114-03 (Aug 6 high) and a bull trigger at 115-03+ (Aug 5 high), whilst support is seen at 112-11 (20-day EMA) in the event of a hawkish CPI surprise
- Data: MBA mortgages Aug 9 (0700ET), CPI Jul (0830ET), Real average earnings Jul (0830ET)
- Bill issuance: US Tsy $60B 17W Bill auction (1130ET)
STIR: 40bp Fed Cut Priced for Sept, More Than 100bp by Year-End
- Fed Fund implied rates have increased modesty overnight (0.5-2bp) but hold most of yesterday’s decline following yesterday’s PPI inflation.
- There was relatively little move in September meeting pricing (the 40bp of cuts currently are just 0.5bp higher than pre-PPI) but declines were increasingly large for subsequent meetings including a shift back to fully pricing 75bp of cuts over the Sept/Nov meetings.
- Cumulative cuts from 5.33% effective: 40bp Sep, 75bp Nov, 108bp Dec, 133bp Jan and building to 194bp June.
- CPI clearly headlines today’s docket. Next Fedspeak is scheduled for tomorrow (a hawkish Musalem, ’25 voter) but there has been a variety of unscheduled appearances since payrolls earlier this month.
- Bostic (’24 voter) sounded more cautious yesterday: Asked whether the Fed is close to lowering interest rates said "Yes, it's coming. I want to see a little more data." “The balance of risks is kind of equilibrating," and "there's still enough momentum in the economy that we can see slowing and not see labor markets deteriorate to a level of considerable concern”. Don’t want to go from a hot to a freezing cold labor market. “I'm hopeful that in the next several months we'll be at a place where we have an economy that's pretty much fully normalized."
US TSY FUTURES: OI Points to Mix of Long Setting & Short Cover on Tuesday
- OI data points to a mix of net short cover and long setting during Tuesday's PPI-driven rally, extending the positioning theme seen over the past couple of sessions.
- Net long setting dominated in curve-wide terms, with the addition of fresh longs in TY futures providing the most notable movement in contract-specific terms.
- Note that net short cover was confined to the long end (US & WN).
| 13-Aug-24 | 12-Aug-24 | Daily OI Change | OI DV01 Equivalent Change ($) | |
| TU | 4,421,213 | 4,411,433 | +9,780 | +361,092 |
| FV | 6,732,383 | 6,706,152 | +26,231 | +1,115,186 |
| TY | 4,961,673 | 4,900,110 | +61,563 | +4,031,117 |
| UXY | 2,165,393 | 2,157,939 | +7,454 | +689,610 |
| US | 1,697,195 | 1,698,197 | -1,002 | -138,620 |
| WN | 1,657,118 | 1,669,190 | -12,072 | -2,772,374 |
| Total | +91,954 | +3,286,011 |
MNI US CPI Preview: Large Miss Needed for Fed to Guide 50bp Cuts
- Consensus sees core CPI at 0.2% M/M in July after the far softer than expected 0.065% M/M in June, with a mild skew towards a “low” 0.2% per MNI’s compilation of sell-side previews.
- The main two dovish takeaways from the June report were from housing and non-housing aspects of core services, although the latter was aided by some non-PCE relevant categories.
- For July, analysts look for only a partial reacceleration in the key housing series to a rate still comparable with pre-pandemic averages.
- They also look for a more pronounced bounce in non-housing core services (aka “supercore”) to a still not-troubling 0.2% M/M. The market impact here will depend on specific drivers though, especially with PPI inflation unusually released before CPI this week.
- Market rate cut expectations have surged since the surprisingly weak July payrolls report, especially after the subsequent slide in global equity indices.
- There has since been some calm restored although there is still circa 40bp of cuts priced to start the easing cycle with the September.
- We feel that it will take further downside surprises to move away from a base case of the Fed cutting in 25bp clips. With August reports still to be seen for both payrolls and CPI before the Sept 18 FOMC decision, it will likely take a particularly dovish report this week for Chair Powell to have confidence to guide towards a 50bp cut at the upcoming Jackson Hole Symposium on Aug 22-24.
UK DATA: Volatile Components Drive CPI Surprise; Underlying Print Not That Soft
- UK headline inflation edged higher in July, but at a slower pace than expected by both financial markets and the Bank of England. Prices rose 2.2% y/y, up from 2.0% in June but below an expected 2.3%. Core inflation fell to 3.3%, the lowest since September 2021, while services inflation, closely watched by the Bank, fell to 5.2% - a two year low.
- Air fares also a drag here - that had been expected particularly if we had an early survey date. This year survey date was 9 July - further ahead of the school holidays than the 18 July used last year. Contributed -0.04ppt to headline (again around double that for services).
- Food, alcohol and tobacco prices surprised to the upside, while core goods prices were also a bit stronger than expected. Energy was broadly in line with expectations.
- Overall, we think that the larger reversal in accommodation prices was the source of almost all of the downside surprise here, offset partially by higher food and core goods prices.
- GBPUSD initially fell 60 pips to an intraday low of 1.2820 but had reversed around 15 pips of this move at writing,
- For the BOE, today's print doesn't really change the narrative too much at first glance. We will look at some of the "core" services prints later, but at first glance today's print if anything doesn't look that soft when you strip out the volatile components.
MNI RBNZ WATCH: MPC Discussed 50bp Cut, Slashes Rate Outlook
- The Reserve Bank of New Zealand will take a gradual, smooth path to a lower rate environment following Wednesday's decision to cut the official cash rate 25 basis points to 5.25%, though the Monetary Policy Committee discussed a 50bp cut at its meeting at which it slashed its rate outlook, Governor Adrian Orr told reporters on Wednesday.
- “Our projection says we are going back into a period of stable inflation subject to any other external shock and that means you will see lower nominal interest rates coming back into the economy," Orr said, adding the neutral rate is about 3%. The MPC had decided unanimously on the more cautious 25bp cut, he said.
- The RBNZ’s move, and updated Monetary Policy Statement forecasts, represented an about-face from its higher-for-longer narrative pushed since it last hiked the OCR to 5.5% in May 2023.
- The market had attached a 58% chance of a cut at today’s meeting. The move led RBNZ’s overnight index swaps market to fall 10-18bp across meetings, with 77bp of cumulative cuts expected by the November meeting.
- Orr added economic data will drive further cuts. “It is a reasonably safe first step of monetary easing," he continued. "We're in a strong position to move calmly."
EUROPE ISSUANCE UPDATE
Germany auction results:
FOREX: US CPI at the Forefront
- The Kiwi is still the early worst performer, following the RBNZ Dovish cut, even discussing 50bps.
- NZDUSD has fallen over 1% overnight and remains offered throughout the early European session going into the US session, now down 1.04%, but the 0.6000 figure still holds, printed 0.6003 low today.
- The early focus on the European Cash Govie open was on the UK CPI, which missed consensus, and provided a quick 40 pips sell off in Cable, and broader selling of the Pound.
- Cable continues to recover at the time of typing, now some 33 pips of the low.
- Overall the Dollar is still fairly mixed against G10s, SEK, NOK, EUR and CHF are all leading, while the CAD and AUD are closer to flat.
- The most traded Global pair, EURUSD has extended to its highest level since January, and eye next resistance situated at 1.1046 High Jan 2.
- Looking ahead, ALL EYES are now of course on the US CPI, especially given the US PPI falling below estimates Yesterday.
EQUITIES: E-Mini S&P Continues to Trade Just Ahead of 50-Day EMA
- A bear threat in Eurostoxx 50 futures remains present and the latest climb appears to be a correction - for now. The sell-off between Aug 1 - 5, reinforced the bearish condition. A key support at 4846.00, the Apr 19 low, has been cleared. This highlights a stronger reversal and opens 4478.81 next, a Fibonacci projection. Firm resistance is 4873.36, the 50-day EMA. First resistance is 4777.62, the 20-day EMA.
- Short-term gains in S&P E-Minis are - for now - considered corrective. However, yesterday’s strong rally delivered a print above the 50-day EMA, at 5453.80. A clear break of this average would undermine the recent bearish theme and instead signal scope for a stronger recovery. This would open 5579.35, a Fibonacci retracement. A reversal lower would refocus attention on the bear trigger at 5120.00, the Aug 5 low.
COMMODITIES: Gold Holds Onto Recent Gains, Trend Structure Remains Bullish
- WTI futures rallied sharply higher Monday. The move undermines a recent bearish theme and price has traded through both the 20- and 50-day EMAs. A continuation higher would signal scope for a climb towards $80.77, a Fibonacci retracement. Clearance of this level would open $83.58, the Jul 5 high. On the downside, a return to bearish price action would expose key support at $71.67, the Aug 5 low.
- Gold is holding on to its latest gains. Recent weakness appears to be corrective and the trend structure remains bullish. Note that the yellow metal has recently pierced support at the 50-day EMA - currently at $2386.6. A clear break of it would signal scope for a deeper retracement towards $2277.4, May 3 low and a key support. Attention is on $2483.7, the Jul 17 high and a bull trigger. Clearance of this hurdle would resume the uptrend.
| Date | GMT/Local | Impact | Country | Event |
| 14/08/2024 | 1230/0830 | *** |  US | CPI |
| 14/08/2024 | 1430/1030 | ** | US | DOE Weekly Crude Oil Stocks |
| 15/08/2024 | 2350/0850 | *** |  JP | Japan GDP 1st Estimate |
| 15/08/2024 | 0130/1130 | *** |  AU | Labor Force Survey |
| 15/08/2024 | 0200/1000 | *** |  CN | Fixed-Asset Investment |
| 15/08/2024 | 0200/1000 | *** | CN | Retail Sales |
| 15/08/2024 | 0200/1000 | *** | CN | Industrial Output |
| 15/08/2024 | 0200/1000 | ** | CN | Surveyed Unemployment Rate M/M |
| 15/08/2024 | 0430/1330 | ** | JP | Industrial Production |
| 15/08/2024 | 0600/0700 | ** |  GB | UK Monthly GDP |
| 15/08/2024 | 0600/0700 | ** | GB | Trade Balance |
| 15/08/2024 | 0600/0700 | *** | GB | GDP First Estimate |
| 15/08/2024 | 0600/0700 | ** | GB | Index of Services |
| 15/08/2024 | 0600/0700 | *** | GB | Index of Production |
| 15/08/2024 | 0600/0700 | ** | GB | Output in the Construction Industry |
| 15/08/2024 | 0800/1000 | *** |  NO | Norges Bank Rate Decision |
| 15/08/2024 | 1230/0830 | *** | US | Jobless Claims |
| 15/08/2024 | 1230/0830 | ** | US | WASDE Weekly Import/Export |
| 15/08/2024 | 1230/0830 | ** | US | Import/Export Price Index |
| 15/08/2024 | 1230/0830 | ** |  CA | Wholesale Trade |
| 15/08/2024 | 1230/0830 | *** | US | Retail Sales |
| 15/08/2024 | 1230/0830 | ** | US | Empire State Manufacturing Survey |
| 15/08/2024 | 1230/0830 | ** | US | Philadelphia Fed Manufacturing Index |
| 15/08/2024 | 1300/0900 | * | CA | CREA Existing Home Sales |
| 15/08/2024 | 1310/0910 | US | St. Louis Fed's Alberto Musalem | |
| 15/08/2024 | 1315/0915 | *** | US | Industrial Production |
| 15/08/2024 | 1400/1000 | * | US | Business Inventories |
| 15/08/2024 | 1400/1000 | ** | US | NAHB Home Builder Index |
| 15/08/2024 | 1430/1030 | ** | US | Natural Gas Stocks |
| 15/08/2024 | 1530/1130 | ** | US | US Bill 04 Week Treasury Auction Result |
| 15/08/2024 | 1530/1130 | * | US | US Bill 08 Week Treasury Auction Result |
| 15/08/2024 | 1710/1310 | US | Philly Fed's Pat Harker | |
| 15/08/2024 | 2000/1600 | ** | US | TICS |
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