MNI US MARKETS ANALYSIS - USD Index Uptrend Firms Further

US TSYS: Off Highs But Still Bull Flatter With Durable Goods and 5Y Supply Ahead

• Cash Tsys are parring earlier gains but still trade 1-3.5bp richer across the curve. The bull flattening comes with European-focused headlines whilst block flow in Asia-Pac hours helped the direction of travel with 4x FV/US flattener blocks (circa $1.4mn DV01).
• 2s10s trades at -55bps off overnight highs of -52.7bps although prior session comparisons are distorted by a new 2Y taking the benchmark.
• TYZ3 at 108-13+ sits at the upper end of yesterday’s range which included a lifting of lows of 108-00+ that stopped fractionally shy of testing the round support. Resistance is seen at 109-03 (Sep 13 low) although the bear-trend remains intact. As opposed to yesterday’s heavy volumes overnight, cumulative volumes sit at a far more meagre 210k at typing.
• Today’s data interest comes from preliminary durable goods for Aug and weekly MBA mortgage applications, whilst Kashkari is unlikely to have much impact after recent appearances.
• Tsy supply is headlined by the $49B 5Y note although there is also the newly upsized $52B 17-week plus a $24B 2Y FRN auction.

A New Post-2000 High For 30Y Mortgage Rate

• MBA composite mortgage applications fell -1.3% in the week to Sep 22 (purchases -2%, refis -1%) to chip away at the 5.4% increase the prior week (although that was led by refis +13% with purchases +2%).
• It came as the 30Y contract rate increased 10bps to 7.41% for a fresh high since 2000.
• It shouldn’t have been too surprising with spreads to 10Y Treasury yields still hovering around the 300bps mark (where it’s averaged for the past six months), suggesting some possible further pain to come with the 10YY currently at 4.51% and 30Y at 4.64%.
• The level of purchase applications remains just marginally off cycle lows at levels last seen in the mid-1990s.

MBA 30Y contract rate (white), 10Y Tsy yield (pink), spread (red) and level of purchase applications (green)Source: Bloomberg

US: Senate Moves On CR, McCarthy Frames Govt Shutdown Around Border Policy

Two dynamics emerged yesterday in the race to prevent a government shutdown on Sunday. The Senate voted to advance a Continuing Resolution to fund the government through mid-November and House Speaker Kevin McCarthy (R-CA) indicated he plans to frame the debate around border security and deflect from internal GOP battles over spending.

• The Senate CR includes USD$6b for Ukraine but no additional funds for border security. Senator Rand Paul’s (R-KY) blanket opposition to Ukraine aid means the Senate CR is unlikely to come up for a vote before government funding expires.
• Punchbowl News writes, “right now, it seems exceedingly likely that the federal government is going to shut down this weekend. Full stop.”
• Beyond framing the debate around border security, McCarthy attempted to draw the White House into negotiations: "All the president has to do is call us up. Let's go sit down and get this done before the end of the week.”
• Biden is highly unlikely to negotiate again with McCarthy over spending. He said earlier in this week: “We made a [debt limit spending] deal. We shook hands… Now they're reneging on the deal.”

FOREX: Buoyant Brent Keeps Oil-Tied FX Pointed Higher

• NOK is the firmest performer in G10, gaining against all others as oil prices remain buoyant and provide a base for oil-tied currencies. WTI and Brent crude futures sit higher by ~1% at typing, well within range of last week's cycle highs posted on September 19th.
• EUR/NOK has subsequently broken lower, showing below the 50-dma to expose 11.3229, the 200-dma for direction. This level provided firm support for the cross in late July/early August, meaning markets could pay further attention to the level on any test.
• Equity markets are generally slightly firmer, with US futures pointing to a minor positive open. The USD is stable, sitting broadly mid-table, although the USD Index uptrend remains firmly intact for now, with the outlook firming on the break above the early March highs.
• AUD is the poorest performer so far, keeping AUD/USD within range of support at 0.6357, the early September low.
• Focus for the session ahead turns to preliminary durable goods orders data as well as appearances from ECB's Vujcic and Fed's Kashkari. The possibility of a government shutdown remains a hang over for market sentiment, with markets looking to gauge the potential economic impacts as well as market ramifications.
• The prior full government shutdown in 2013 provided an initial drag on GDP, but this subsequent reversal and gains for equities across that period kept any drop for risk sentiment in check.

FX OPTION EXPIRY

Of note:

GBPUSD 1.41bn at 1.2200 (thu).

• EURUSD: 1.0510 (952mln), 1.0515 (430mln), 1.0550 (366mln), 1.0575 (680mln), 1.0600 (383mln), 1.0630 (471mln), 1.0640 (528mln).
• EURGBP: 0.8700 (345mln).
• USDJPY: 150.00 (394mln).
• USDCAD: 1.3500 (604mln).
• AUDUSD: 0.6400 (213mln), 0.6420 (325mln), 0.6430 (411mln), 0.6445 (275mln).
• NZDUSD: 0.5945 (312mln).

BONDS: Flattening Bias Seen Early Wednesday

The early rounds of Wednesday trade have seen yields in core EGBs and UK gilts tick away from recent multi-year highs, with equities stabilising and little in the way of fresh, meaningful news flow to digest.

• Eurozone money supply data saw a slightly larger than expected fall in Y/Y terms, as the impact of the ECB’s tightening cycle continue to bite.
• Bunds sit +20, just shy of best levels, sticking within yesterday’s range. German cash benchmarks show 0.5-2.0bp richer, with a light flattening impulse seen.
• Core EGBs are little changed to a touch tighter in spread terms vs. Bunds.
• Peripherals are mostly tighter, with BTPs outperforming after yesterday’s notable widening, aided by the stabilisation in broader FI and equities (spread 2.5bp narrower today).
• €IG issuance has continued to build at the corporate/semi level, while an RFP from the EFSF has been seen. Note that Germany will come to market with E4URbn of the 10-year 2.60% Aug-33 Bund shortly.
• Gilts also flatten, with cash benchmarks showing 1.5-6.5bp richer. Futures show +40, sticking within yesterday’s range. There was a smooth tender result for the 50-year 1.125% Oct-73 gilt, with a tight tail and decent premium to the prevailing market price.
• French & Italian fiscal optics are eyed today, with worry about deterioration in the Italian fiscal outlook a key driver of the recent BTP widening.

EQUITIES: Bear Cycle in E-Mini S&P Remains in Play

• Eurostoxx 50 futures maintain a softer tone following last week’s move lower and this week’s extension reinforces current conditions. Key support at 4210.00, the Sep 8 low, has been breached. The clear break confirms a resumption of the downtrend that started late July and paves the way for a move towards 4109.90, a Fibonacci projection. Key short-term resistance has been defined at 4359.00, the Sep 15 high. A break would be bullish.
• A bear cycle in S&P E-minis remains in play and the contract traded lower Tuesday, extending the current downleg. Last Thursday’s sell-off resulted in a break of support at 4397.75, the Aug 18 low. This breach reinforced bearish conditions and signals scope for a continuation lower. Sights are on 4300.62, a Fibonacci retracement point. Initial firm resistance is 4485.10, the 50-day EMA. Short-term gains would be considered corrective.

COMMODITIES: Recovery in WTI Futures Early Indication of Resumption of Uptrend

• The uptrend in WTI futures remains intact. The contract has recovered from yesterday’s low and this appears to be an early indication of a resumption of the uptrend. Support at the 20-day EMA, at $87.47, remains intact. A break of this average is required to signal scope for a deeper corrective pullback. On the upside, clearance of $92.43, the Sep 19 high, would confirm a resumption of the uptrend and open $93.31, a Fibonacci projection.
• Gold is trading lower again today as the yellow metal extends the latest bear cycle that started off the Sep 20 high of $1947.5. Support at $1901.1, the Sep 14 low, has been breached and this signals scope for an extension towards the next key support at $1884.9, the Aug 21 low. On the upside, initial firm resistance is seen at $1926.3, the 50-day EMA. A clear break of this average would highlight a possible reversal.