MNI US MARKETS ANALYSIS - USD/JPY Off Highs, SK Currency Swap Deal in Focus

US TSYS: Off Cheaps Awaiting Data

• Tsys are off session cheaps alongside core European FI markets, but hold lower on the session, after the impact of this morning’s NRW regional CPI print out of Germany & Spanish CPI data moderated from extremes (the totality of the release regional CPI data out of Germany points to a mild upside risk vs. pre-existing consensus).
• The move has been helped a little further by a still relatively dovish Bostic after Powell didn’t offer any surprises at a Bank of Spain event earlier today.
• 2YY +5.2bp at 4.762%, 5YY +5.2bp at 4.019%, 10YY +4.1bp at 3.749% and 30YY +2.4bp at 3.831%. A minor bear flattening on the day helps push 2s10s to -101bps.
• TYM3 trades 10 ticks lower at 112-30 on cumulative volumes of 250k, typical for recent averages but still fairly subdued. The trend needle points south with the bear trigger at 112-12+ (Jun 14 low), whilst resistance is seen at 113-18 (Jun 15 high).
• Data: Q1 GDP/core PCE third release (0830ET), weekly jobless claims (0830ET), Pending home sales May (1000ET)
• Fed: Bostic speech on economic outlook (1500ET)
• Bill issuance: US Tsy $70B 4W, $60B 8W bill auctions (1130ET)

STIR FUTURES: Fed Rates Holding Higher Overnight Although Bostic Helps Take Edge Off

• FOMC-dated OIS rates have firmed overnight, with a helping hand from German regional CPI data pointing to mild upside risk for the national measure. Latest comments from Bostic (’24 voter) in Dublin help take some of the edge off the increase, even though for now consistent with Jun 23 comments that he favors no more rate hikes for the rest of the year.
• Year-end rates are still near the higher end of yesterday’s range though after Powell didn’t rule out consecutive hikes before the move was fully reversed at the time.
• Cumulative moves from 5.07% effective: +20bp Jul (+0.5bp), +25.5bp Sep (+1bp), +31bp Nov (+2bp), +25bp Dec (+1.5bp), +13.5bp Jan (+3.5bp) and out to -37bp for Jun’24 (+2.5bp). The 68bp of cuts from the Nov terminal to Jun’24 tightens just 1bp on the day.
• Earlier today, Powell comments at a Bank of Spain discussion again reiterated that the majority of the FOMC sees 2 or more rate hikes by year-end. Bostic (’24 voter) speaks more in depth on the economic outlook at 1500ET.

STIR FUTURES: BoE-Dated OIS Settles In Familiar Territory

BoE-dated OIS has settled around familiar levels, given the lack of meaningful domestic headline flow and nothing in the way of spill over surrounding lower tier domestic money and credit data. That leaves ~45bp of tightening priced for the August MPC (~90% chance of a follow up 50bp step) along with a terminal BoE policy rate of just below 6.25%.

• A quick reminder that the Bank will only have one further set of inflation and labour market data to go off when it next sets monetary policy, which, when coupled with the relatively non-committal tone surrounding the future trajectory of its policy settings, has market participants heavily favouring another 50bp step in August.

MNI Projects CPI to Rise to +6.38% in Small Upside Surprise

We have now received state data that equates to 89.1% weighting of the national German CPI print (due at 1300 BST / 1400 CET).

• MNI calculations estimate that CPI rose by +0.26% m/m, and by +6.38% y/y in June. This is based on the published index values for available state data. This implies a 0.3pp acceleration on the annualised figure from +6.1% y/y in May. (German headline inflation peaked in October/November peak at +8.8% y/y.)
• For m/m and y/y, our estimate is around 0.1pp above the current Bloomberg consensus forecast.
• Today's state data also points towards a possible half-point uptick in core CPI for Germany. Core CPI data excluding both energy and food is only available for six states which account for 50% of the headline index. These saw core CPI steady, to up to +0.7pp on the headline annualised prints, with a weighted average increase of +0.47pp.
• Note: this is in relation to the national CPI print - not the HICP print (which feeds into the Eurozone HICP print that the ECB targets). The magnitude of surprises to consensus can sometimes be different due to the different methodologies and weights used in national CPI vs HICP - but the direction of the surprise is normally the same.

Economic confidence falls again in June, CPI outlooks ease

MNI: EUROZONE JUN ECO SENTIMENT 95.3; (FCAST 95.7); MAY 96.4

EUROZONE JUN CONSUMER CONF 16.1; (FLASH -16.1); MAY -17.4

• Economic confidence declined again in June to 95.3, with all surveyed categories falling, although the extent of the overall decline (-1.1) moderated from that seen in May (-2.6).
• The decline in June was led by industry and to a lesser extent services and construction.
• Consumer confidence improved by 1.3pp in June, after edging up 0.1pp in May. Consumers expectations for the general economic situation were more upbeat and they were also more positive about their household's financial situation, both over the last year and their expectations for the next 12 months.
• On a positive note for Eurozone inflation expectations, selling price expectations fell again in all surveyed business sectors, with a fifth consecutive monthly fall in services selling price expectations (from 18.7 in May to 16.1 in June).
• Consumers' perceptions of price developments for the next 12 months showed a pronounced decline from 12.1 in May to 6.1 in June. This compares to a record high of 63.7 in March 2022.

Push For 'Security Commitments' For Ukraine Could Face Resistance

There has been a concerted effort, particularly from France, for the European Council to include in its summit conclusions a pledge for "security commitments" for Ukraine. This move could face some resistance from EU member states, both those that are formally neutral and Russia hawks.

• Bruno Waterfield at The Times: "[The security commitments ] alarmed Ireland, Austria and Malta who have a policy of neutrality and Nato hawks, Poland and Baltic States who see it as the Alliance’s job to defend against and deter Russia. French language (my emphasis): “The European Union and Member States stand ready to contribute, TOGETHER WITH PARTNERS, to future security commitments to Ukraine, which will help Ukraine defend itself in the long term, deter acts of aggression and resist destabilisation efforts."
• "The reference to “partners” has set alarm bells ringing as the EU does not work with the US, or anyone else, including internally on mutual defence or deterrence which is Nato’s domain. The neutrals insisted that a clause was added noting “full respect of the security and defence policy [and] interests of all member states” “It is a serious step to take without fully understanding what would be involved,” Kallas, Estonian PM will tell other EU leaders that it is Nato’s job not the EU’s. Macron will be asked to explain himself."

FOREX: JPY Off Bottom as South Korean Currency Swap Deal Confirmed

• JPY markets have been volatile, with USD/JPY sitting in minor negative territory having dragged off the session highs on heavy volumes. A notable volume spike in futures helped drag the pair off 144.70 cycle highs, with close to $500mln trading in futures markets inside 60 seconds. The move preceded confirmation of a new currency swap deal worth $10bln signed between Japan and South Korea - a sign of thawing relations between the countries in light of more fraught tensions with North Korea and China.
• As a result, JPY is among the strongest performers in G10, with AUD trading similarly well. AUD/USD appears to have found a bottom at the overnight lows of 0.6596 and trades more constructively headed through the NY crossover.
• Eurozone inflation data remains a focus, with Spanish CPI coming in ahead of expectations. Meanwhile, regional German CPIs are showing, on a weighted basis, national CPI tracking +0.3% M/M (around 0.26% M/M unrounded) and 6.4% Y/Y (around 6.38% unrounded), a little above the 0.2% M/M /6.3% Y/Y estimates coming into today.
• Weekly jobless claims and tertiary US GDP for Q1 are the data highlights ahead, with pending home sales to follow. The preliminary German CPI release for June also crosses, with markets expecting CPI to rise 0.2% on the month, and 6.3% on a Y/Y basis.

FX OPTIONS: Expiries for Jun29 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0700-05(E2.8bln), $1.0800(E2.6bln), $1.0825(E628mln), $1.0900(E1.4bln), $1.0950(E555mln), $1.1000(E1.4bln)
• USD/JPY: Y142.00($579mln), Y143.00($536mln), Y143.50($558mln), Y144.00($1.4bln), Y144.30-50($1.6bln)
• GBP/USD: $1.2665-67(Gbp542mln), $1.2700(Gbp544mln)
• EUR/GBP: Gbp0.8600(E919mln)
• AUD/NZD: N$1.0850(A$756mln), N$1.0955(A$716mln)
• USD/CAD: C$1.3150($1.1bln), C$1.3200($644mln), C$1.3225-30($500mln), C$1.3350($710mln)
• USD/CNY: Cny7.2300($1.2bln), Cny7.2500($2.2bln), Cny7.2600($1.3bln)

BONDS: Continued Inflation Pressures Yields Higher

• Core fixed income has been under pressure this morning with Spanish inflation (particularly core inflation) coming in higher than expected and German state inflation data also pointing to upside risks to the national print which is due out this afternoon. Powell also spoke this morning but said nothing new.
• Despite the inflation surprise coming in the euro area, 10-year Bunds, gilts and UST yields have all moved a similar 4.0-4.5bp higher today, with 2-year yields seeing the biggest moves in gilts. There has been some modest flattening of curves.
• Looking ahead, other than the national German inflation print (which will also include HICP), we will receive the third print of US GDP as well as weekly claims data.

EQUITIES: Eurostoxx 50 Futures Continue Recovery From Monday Low

• The Eurostoxx 50 futures uptrend remains intact and the pair has recovered from Monday’s low. A bearish cycle since Jun 16 resulted in a correction. The contract breached support at 4301.00, the Jun 8 low. This level represented a key short-term support and an extension lower would expose 4241.00, the May 31 low and an important medium-term support point. Key resistance and the bull trigger has been defined at 4438.00, the Jun 16 high.
• A bull theme in S&P E-minis remains intact and the recent pullback still appears to be a correction. The latest move lower has allowed an overbought trend condition to unwind. Attention is on initial key support at the 20-day EMA, which intersects at 4370.75. A break of this average would strengthen a short-term bearish theme and signal scope for a deeper pullback. On the upside, the bull trigger is 4493.75, the Jun 16 high.

COMMODITIES: Gold Trades at 3-Month Low; $1885.8 Mar 15 Low Marks Next Support

• WTI futures remain in a bear mode condition and short-term gains are considered corrective. Attention is on support at $67.21, the May 31 low, that has recently been pierced. A clear break would open $64.41, the May 4 low. Moving average studies are in a bear mode position highlighting a downtrend. The contract is trading below resistance at $75.70, the Jun 5 high. A break of this level would signal a reversal.
• Trend conditions in Gold remain bearish and the yellow metal is trading at this week’s lows. Fresh trend lows reinforce current bearish conditions, confirming a resumption of the downtrend and extending the price sequence of lower lows and lower highs. The focus is on $1885.8, the Mar 15 low. Key resistance is $1985.3, the May 24 high. Initial resistance is $1939.8, the 20-day EMA.