MNI US MARKETS ANALYSIS - Yield Spreads Weigh on USD Pre-Fed

Highlights:

• FOMC-dated OIS maintains its recent spread, implying close to 38-38.5bps of cuts for today’s meeting.
• The USD index reapproaches its weekly lows ahead of the decision, with the greenback the worst performer in the G10 space.
• Although UK CPI was in-line with analyst consensus, the lack of downside surprise resulted in hawkish adjustments in UK rates markets. 

MNI FED PREVIEW - SEPTEMBER 2024: “Close Call” Tilts to 50bp Cut

• Fed leadership has made it abundantly clear that the FOMC will initiate a rate cutting cycle at the September meeting, with pre-blackout developments pointing toward a 25bp reduction as opposed to an outsized 50bp.
• But subsequent media reports that it’s a “close call” have pushed market pricing to imply a split decision vs a 50bp cut, and to MNI’s Markets Team, it suddenly looks more likely than not that Chair Powell will persuade the FOMC to opt for a slightly more front-loaded cutting cycle.
• The apparent last-minute indecision underlines uncertainty over how the Committee currently sees the likely extent and pace of cuts, beyond “data dependent”, as it assesses what it sees as a shifting balance of risks between rising unemployment and above-target inflation.
• The new Dot Plot is likely to reflect uncertainty over the path forward, starting with anywhere from 75bp to 125bp of cuts signalled in the 2024 Fed funds median, depending on what the FOMC opts for on Wednesday.
• The end-2025 rate is likely to show an even wider dispersion, reflecting the uncertainty over the path ahead, but a general consensus that the FOMC would like to return policy to neutral levels fairly quickly.
• Click hereto see the full preview.

US TSYS: 2Y Yields Touch Post-WSJ/FT Highs on Light Volumes Pre-Fed

• Treasuries have seen some modest downward pressure after a hawkish reaction in UK rates following a mostly inline CPI report ruling out any downside surprises.
• Cash yields are mostly~1.5bp higher across the curve, with 2Y yields earlier touching 3.621% for highs since Thursday's dovish Fed "close call" WSJ/FT articles.
• 2s10s is within recent ranges and remains in positive territory at 4.7bps - Monday’s high of 10.4bps remains the highest since mid-2022.
• TYZ4 at 115-07 (- 05) is close to the day’s low of 115-05+ albeit on light cumulative volumes of 225k ahead of the Fed. It’s a step closer to support at 114-31+ (Sep 12 low) but the trend needle points north with resistance at 115-23+ (Sep 11 high) and 115-31 (1.618 proj of Aug 8 – 21 – Sep 3 swing).
• Data: MBA mortgage application Sep 13 (0700ET), Housing starts/building permits Aug (0830ET), TIC flows Jul (1600ET)
• Fed: FOMC decision and SEP (1400ET), Chair Powell press conference (1430ET)
• Bill issuance: US Tsy $60B 17W bill auction (1130ET)

STIR: Holding Yesterday’s Trimming of Cut Expectations Ahead of Fed

• Fed Funds implied rates are fractionally lower on the day for the next two FOMC meetings but beyond that 0.5-1bp higher, having drifted more notably higher yesterday to lift away from post-WFJ/FT lows with help from a retail sales beat.
• Cumulative cuts from 5.33% effective: 41bp for today, 78bp Nov, 115bp Dec, 152bp Jan and 225bp June.
• FOMC-dated OIS maintains its recent spread, implying close to 38-38.5bp of cuts for today’s meeting. Either way, we're heading to the meeting with highly unusual uncertainty around its decision.

STIR: Short Setting Dominated in SOFR Futures Following Retail Sales

OI data points to short setting in most SOFR futures during yesterday’s modest sell off.