MNI US MARKETS ANALYSIS - USD Index Contained Below Week's Highs

US TSYS: Treasuries Rally After 2YY Approaching 5% Attracts Demand

• Treasuries have rallied with outright yield levels attracting demand after 2s drifted back towards 5% after hotter than expected UK CPI (they topped out at 5.006% yesterday).
• It sees 2Y yields currently back at 4.956% (-3.1bp) with yields down 1-3.5bps across the curve. The long end lags, perhaps aided by 20Y supply later on and after a strong steepening earlier in the week with 2s10s still at -31bps.
• TYM4 trades at 107-25 (+ 03+) after another overnight session with heavy volumes, summing to 455k at typing.
• Bears remain in the driver’s seat with support at yesterday’s fresh low of 107-13+ after which lies 107-07+ (Fibo projections).
• Data: MBA mortgage data, Apr 12 (0700ET), TIC Flows Feb (1600ET)
• Fedspeak: Beige Book (1400ET), Mester (1730ET), Bowman (1915ET)
• Note/bond issuance: US Tsy $13B 20Y Bond auction re-open (1300ET). Last month's 20Y saw a rare strong auction but Thursday's 30Y saw its first tail in five auctions.
• Bill issuance: US Tsy $60B 17W Bill auction (1130ET)

STIR: Fed Rate Path Dips, Fedspeak Skewed Late On

• Fed Funds implied rates have pulled back from highs sees over the past two sessions, driven by demand at outright levels rather than any new drivers. It sees levels back close to where they were before lifting with Powell yesterday.
• Cumulative cuts from 5.33% effective: 1bp May, 4bp Jun, 12.5bp Jul, 23bp Sep, 30bp Nov and 42bp Dec.
• Today’s Fed commentary sees the Beige Book at 1400ET before late appearances from Mester and Gov. Bowman, both potentially offering post-CPI reactions in moderated discussions.
• 1730ET – Mester (’24 retiring in June) gives an “Update From the Fed” in Q&A. She said Apr 4 (before both payrolls and CPI) that mon pol is in a good place and expects to be in a position to cut rates later this year but needs more evidence that inflation is coming down, wanting a couple more months of data to assess inflation.
• 1915ET – Bowman (voter) in fireside chat at IIF Global Outlook Forum. She said Apr 5 (post payrolls, pre CPI) that “still not yet” time to lower interest rates as inflation progress has stalled and won’t be comfortable cutting until disinflation returns.

TSYS: OI Points To Mix Of Short Setting & Long Cover

Yesterday’s move lower in Tsy futures and preliminary OI data points to a mix of short setting (TU, TY, UXY & WN) and long cover (FV & US), with net curve positioning tilted slightly towards short setting.

• Production data and Fedspeak factored into the sell off, although the space finished off session extremes as 2s failed to sustainably breach 5.00%.

SOFR: SFRZ5 OI The Standout In Futures On Tuesday Amidst Steepener Flow And Elevated Volumes

The combination of yesterday’s sell off in most SOFR futures and preliminary OI data points to a mix of short setting in the whites and reds, along with long cover in the greens and the blues (all in net pack OI terms).

• The standout came via an apparent surge in net shorts in SFRZ5, which was seemingly linked to steepener activity in the SFRZ4/Z5 spread given elevated volume and fresh multi-month highs in that spread.
• A reminder that production data & Fedspeak from senior officials (Powell & Jefferson) factored into yesterday’s extension of the unwind of Fed rate cut premium.

EQUITIES: 

A somewhat quieter earnings schedule out of the US today, with highlights including Abbot Labs (usually 1230BST/0730ET) and Prologis (usually 1300BST/0800ET). Full schedule is here: https://roar-assets-auto.rbl.ms/files/60874/MNIUSE...

Takeaways from US bank earnings:

Markets:

• Goldman Sachs: Global banking and markets driven by strong IB fees, FICC and equities
• Bank of America: FICC revenue down 6%, driven by weaker trading in macro products, partially offset by improved mortgages
• Wells Fargo: Markets revenue up 2%, driven by structured products, credit products and FX, while rates and commodities were lower.
• JP Morgan: Fixed income markets down 7% Y/Y on lower activity in rates and commodities
• Citigroup: Fixed income decline driven by rates & currencies, reflecting lower volatility

• Bank of America: Expects losses on office property to move lower in Q2, and expected consumer net charge-offs to level off next quarter. Consumer net charge-offs rose over 10% from Q4, driven by higher credit card losses. Credit card delinquency rates have increased further off historic lows, rising to 2.48% for 30+ days past due – the highest post-pandemic, with 90+ days and 60-89 days a new cycle high.
• Citigroup: Cautiously optimistic on rebound in the IPO market, chances of soft landing increasingly likely, labour market and consumer spending holding up
• JP Morgan: Consumer remains healthy on resilient labour market. Global geopolitics more important than the economy, extra money “about done” for lower 50% of consumers

• Bank of America: Residential mortgage originations in Q1’24 $3.4bln, down from $3.9bln last quarter, and $3.9bln from last year
• Wells Fargo: Q1’24 mortgage originations $3.5bln, down from $5.6bln a year prior, down from $4.5bln last quarter
• Citigroup: Mortgage originations up 11% Q/Q, down 6% Y/Y

EUROPE ISSUANCE UPDATE: 

• The auction for the 7-year 4.00% Oct-31 gilt saw a tighter tail to its launch auction from February and a similar bid-to-cover despite a slightly smaller auction size (GBP3.75bln today, GBP4.00bln in February). However, in absolute terms the 1.4bp tail was still relatively wide.
• Prior to these two auctions, there hadn't been a 7-year gilt auction since April last year. However, the lowest accepted price of 98.510 was notably lower than the secondary market price of 98.567 as the auction closed and saw the price of the gilt fall back close to this price on the publication of the results.
• GBP3.75bln of the 4.00% Oct-31 Gilt. Avg yield 4.218% (bid-to-cover 2.97x, tail 1.4bp).

• E1.496bln of the 3.85% Dec-29 BTP. Avg yield 3.47%
• E1.504bln of the 3.35% Mar-35 BTP. Avg yield 3.95%.

• E789mln of the 0% Oct-24 CCTeu at 100.615
• E439mln of the 1.85% Jan-25 CCTeu at 101.420
• E427mln of the 0.35% Feb-25 BTP at 97.530
• E327mln of the 3.40% Mar-25 BTP Short Term at 99.840
• E276mln of the 1.85% Jul-25 BTP at 98.122

• E200mln of the 1.875% Feb-35 GGB. Avg yield 3.61% (bid-to-cover 3.57x).

• E1bln (E805mln allotted) of the 0% Aug-50 Bund. Avg yield 2.58% (bid-to-offer 1.98x; bid-to-cover 2.46x)
• E1bln (E803mln allotted) of the 2.50% Aug-54 Bund. Avg yield 2.62% (bid-to-offer 2.55x; bid-to-cover 3.17x).

FOREX: Greenback Rally Stalls, UK CPI Provides GBP Relief

• The greenback rally has hit pause early Wednesday, allowing the rest of G10 to shake off a very small part of recent losses and stabilise above lows. This has kept the USD Index just below the cycle high printed yesterday at 106.517, but still comfortably firmer on the week (and month-to-date).
• GBP trades positively in response to higher-than-expected UK inflation data. Headline Y/Y CPI came in at 3.2% vs. Exp. 3.1%, with the whole series generally topping forecast by ~0.1ppts. This prompted a further backtrack in BoE rate cut expectations across the course of 2024, with markets now pricing around 40bps of cuts by year-end, a new series low. Salient options rolling off at the cut today include £1.1bln rolling off at 1.2390-00 and £586mln at 1.2450, while 0.8525-35 sees €585mln notional expiring in EUR/GBP.
• NZD is among the session's best performers, however the broader outlook remains soft. NZD/USD printed a new pullback and YTD low this week at 0.5861, but today's bounce has helped relieve AUD/NZD further off the April high, meeting first support at 1.0866, the 23.6% retracement for the February - April upleg.
• Focus for the duration of the Wednesday session remains on central bank rhetoric, with BoE's Bailey, Greene and Haskel due as well as ECB's Cipollone, de Cos, Schnabel and Lagarde. Fedspeak is thinner, with only Mester appearing after the close, with no scheduled text.

FX OPTIONS: Hawkish Jobs, Inflation Data Fail to Stir Demand for GBP Upside Via Options

• The USD's modest fade off highs, twinned with the UK CPI print this morning has helped stimulate currency activity across both options and future markets so far Wednesday, with cumulative activity sitting ahead of average for this time off day.
• GBP/USD hedging markets are of particular interest, with the somewhat hawkish jobs market and inflation prints this week failing to support renewed demand for GBP upside. Instead, the put/call ratio has skewed toward downside cover over the past two sessions - over $5 in puts have traded for every $3 in calls - thanks to demand for 1.2350, 1.2300 and 1.2210 put strikes.
• Some of the more salient trades over the past 48 hours include a series of sizeable volatility hedges rolling off just ahead of the BoE's June 20th policy meeting (at which a 25bps rate cut is currently ~20% priced). The trades are consistent with 1.1945 and 1.2210 2-month straddles, capturing the May9 BoE decision and next round of jobs / inflation data on May14, May22 respectively.

FX OPTIONS: Expiries for Apr17 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0540-50(E561mln), $1.0600-10(E946mln), $1.0630-35(E1.2bln), $1.0700(E1.8bln), $1.0750(E712mln)
• USD/JPY: Y153.50($681mln)
• GBP/USD: $1.2745-60(Gbp1.0bln)
• AUD/USD: $0.6470(A$1.1bln)
• NZD/USD: $0.5900-05(N$1.2bln)
• USD/CAD: C$1.3800($1.3bln)
• USD/CNY: Cny7.2200($748mln), Cny7.2500($1.2bln), Cny7.3000($2.1bln)

EQUITIES: Eurostoxx 50 Futures Continue Trading Close to Recent Lows

• Eurostoxx 50 futures are trading at their recent lows. A bearish corrective cycle remains in play and the move down this month has allowed an overbought trend condition to unwind. The contract has tested support at 4856.70, the 50-day EMA and a key pivot price point. A clear break of the average would signal scope for a deeper retracement and open 4826.00, the Mar 5 low. Initial resistance to watch is 4990.00, the Apr 15 high.
• The short-term trend condition in S&P E-Minis is unchanged and remains bearish. This week’s move lower reinforces the current condition - the contract has traded through support at the 50-day EMA, signalling scope for a continuation lower near-term. Sights are on 5070.36 next, a Fibonacci retracement. Clearance of this level would open 5018.00, the Feb 21 low. Firm resistance is seen at 5209.2, the 20-day EMA.

COMMODITIES: Bull Theme in WTI Futures Intact Despite Recent Correction Lower

• A bull theme in WTI futures remains intact and the latest move lower is considered corrective - for now. Recent gains reinforced current bullish conditions and confirmed a resumption of the uptrend. The contract has breached $84.87, the Sep 15 ‘23 high, paving the way for a climb towards the $90.00 handle further out. The next objective is $89.08, a Fibonacci projection. Initial firm support to watch lies at $84.01, the 20-day EMA.
• The trend condition in Gold is unchanged and remains bullish plus the yellow metal is trading closer to its recent highs. The latest rally maintains the price sequence of higher highs and higher lows and note that moving average studies are in a bull-mode condition, reflecting positive market sentiment. The next objective is $2452.5, a Fibonacci projection. Initial firm support is at $2286.3, the 20-day EMA.