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.
- The move came after in-line to slightly firmer-than-expected retail sales data,
- We would suggest that an unwind of existing longs factored in as well, given the recent dovish moves/positioning ahead of this evening’s FOMC decision.
- Markets still price greater-than-even odds of a 50bp cut at today’s FOMC decision, although there is an unusual degree of uncertainty evident, with ~40bp of cuts priced into OIS and ~41bp priced into Fed funds futures.
| 17-Sep-24 | 16-Sep-24 | Daily OI Change |
| Daily OI Change In Packs |
---|---|---|---|---|---|
SFRM4 | 1,138,275 | 1,138,396 | -121 | Whites | +80,541 |
SFRU4 | 1,409,763 | 1,371,710 | +38,053 | Reds | +49,287 |
SFRZ4 | 1,289,525 | 1,250,904 | +38,621 | Greens | +21,487 |
SFRH5 | 1,098,428 | 1,094,440 | +3,988 | Blues | +7,573 |
SFRM5 | 905,215 | 878,684 | +26,531 |
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SFRU5 | 698,313 | 702,540 | -4,227 |
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SFRZ5 | 959,485 | 960,094 | -609 |
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SFRH6 | 726,277 | 698,685 | +27,592 |
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SFRM6 | 616,682 | 607,530 | +9,152 |
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SFRU6 | 540,693 | 538,137 | +2,556 |
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SFRZ6 | 574,804 | 558,403 | +16,401 |
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SFRH7 | 338,547 | 345,169 | -6,622 |
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SFRM7 | 292,675 | 304,349 | -11,674 |
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SFRU7 | 253,047 | 232,899 | +20,148 |
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SFRZ7 | 229,971 | 229,341 | +630 |
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SFRH8 | 172,033 | 173,564 | -1,531 |
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US TSY FUTURES: Mix of Short Setting & Long Cover During Tuesday's Sell Off
OI data points to a mix of short setting and long cover in the wake of yesterday’s retail sales data.
- DV01 equivalent positioning barely moved in curve-wide terms.
17-Sep-24 | 16-Sep-24 | Daily OI Change | OI DV01 Equivalent Change ($) | |
---|---|---|---|---|
TU | 4,314,421 | 4,328,657 | -14,236 | -561,275 |
FV | 6,396,313 | 6,440,537 | -44,224 | -1,968,415 |
TY | 4,898,152 | 4,889,492 | +8,660 | +585,472 |
UXY | 2,112,291 | 2,120,975 | -8,684 | -818,525 |
US | 1,757,111 | 1,749,126 | +7,985 | +1,137,151 |
WN | 1,711,906 | 1,708,870 | +3,036 | +685,979 |
Total | -47,463 | -939,612 |
UK DATA: UK Core Inflation Inches Higher on Services Uptick
- UK headline inflation was 2.2% in August on an annual basis, unchanged from July's year-on-year rearing and in line with financial market expectations, the Office for National Statistics said Wednesday.
- On a monthly basis, CPI rose by 0.3% in August 2024, the same rate as in August 2023. The largest upward contribution to the monthly change in annual rates came from air fares, which rose this year but fell a year ago; the largest offsetting downward contributions came from motor fuels, restaurants and hotels. Core CPI rose by 3.6% in the 12 months to August 2024, up from 3.3% in July; the CPI goods annual rate fell from negative 0.6% to negative 0.9%, while the CPI services annual rate rose from 5.2% to 5.6%.
- The data is largely in line with Bank of England expectations, although probably at the upper end, perhaps sealing the deal for the Monetary Policy Committee to keep rates unchanged at 5.0% for another meeting at least.
MNI BOE PREVIEW - SEPTEMBER 2024: QT and Vote Split in Focus
- This week’s MPC meeting is expected to see Bank Rate left on hold at 5.00% (after the first cut of the cycle in August). However, there will be focus on the vote split, any change in guidance and the QT decision.
- For the vote split we would not be surprised to see a return to either 8-1 or 7-2 for Bank Rate to be left on hold (with Dhingra and potentially Ramsden dissenting in favour of a further immediate cut).
- However, if there was a surprise the other way – a 6-3 vote with an additional internal MPC member or new external member Taylor joining Dhingra and Ramsden in voting for a cut at this meeting, that would be a clear sign that there is a potential for the pace of rate cuts to be ramped up at future meetings.
- We have argued for some time that we think this is suboptimal and given there are no real market issues currently with active sales, a faster than GBP100bln reduction would be more appropriate (we pencil in GBP110bln).
- See the full preview here.
POLITICAL RISK: Egypt President Warns Against Escalation as IDF Moves Elite Division North
Egyptian President Abdel Fattah al-Sisi has said to US Secretary of State Antony Blinken in a meeting in Cairo that 'Egypt rejects any attempts to escalate the situation in the region', and that 'all parties should act responsibly'. Says that Egypt 'supports Lebanon' following the mass pager blasts that hit Hezbollah figures on 17 Sep. Blinken is in Cairo ostensibly to discuss the (diminishing) prospect of a ceasefire in Gaza, but events have taken over with the risk of a major escalation between Israel and Hezbollah in the wake of the pager explosions.
- Israel's Ynet reporting that the Israeli Defence Forces (IDF) have moved the elite 98th Division north from Gaza to the Northern Command "in preparation for the possibility of an expansion of the war against Hezbollah".
- Hezbollah leader Hassan Nasrallah is set to deliver an address in the wake of the attacks on Thursday 19 Sep at 1700 local time (1000ET, 1500BST).
- Reuters: "Blinken will head from Cairo to Paris on Thursday for a meeting with the foreign ministers of France, Italy and Britain to discuss the Middle East and Ukraine and other issues, a State Department official said. Blinken will also meet French President Emmanuel Macron, the official said. Blinken will not visit Israel on this trip, "
FOREX: Some Disconnect Between FX and Rates Ahead of the Fed
- The dollar is still trading in the red going into the US session ahead of the key event for the day, the Fed, which at minimum will cut by 25bps while a 50bp cut option is still being debated among desks.
- Despite the pullback lower in treasury futures and higher yields, as investors trim long positions in bonds following the in-line retail sales data yesterday, the dollar has not really benefitted from the cross asset price action.
- The Yen was the overnight and the early best performer in G10 during the European session, but has been taken over by the Kiwi, now up 0.53% vs the greenback.
- Higher yields have also not been supportive of USDJPY, as the pair trades closer to the intraday low, just 40 pips off at the time of typing.
- There seems to be some disconnect between FX and rates markets, as Govies and rates futures see more of hawkish price action so far in early trades going into the US session.
- The UK CPI was bang in-line with consensus, but this was still taken on the hawkish side since market participants were most likely looking for a miss.
- Cable is pushing back above 1.3200, and has gained 58 pips since the data. Resistance remains at the US NFP peak of 1.3238, after a failed test yesterday.
EUROPEAN ISSUANCE UPDATE
ESM RfP
- “Today ESM, the European Stability Mechanism has sent a Request for Proposal to a selection of banks from the EFSF/ESM Market Group with regards to an upcoming transaction, subject to market conditions.”
- MNI look for a transaction of E2bln WNG next week (W/C 23 September). We don't have a strong view on the maturity.
Italy specialist tap results
- E1.338bln of the 2.50% Dec-32 BTP. Avg yield 3.219%.
- E532mln of the 0.95% Mar-37 BTP. Avg yield 3.635%.
- E1.13bln of the 4.00% Apr-35 BTP Green. Avg yield 3.467%.
Greece auction results
- E250mln of the 3.375% Jun-34 GGB. Avg yield 3.11% (bid-to-cover 3.70x).
Germany auction results
- E1bln (E814mln allotted) of the 1.80% Aug-53 Bund. Avg yield 2.44% (bid-to-offer 1.66x; bid-to-cover 2.04x).
- E1bln (E820mln allotted) of the 2.50% Aug-54 Bund. Avg yield 2.44% (bid-to-offer 2.23x; bid-to-cover 2.72x).
EQUITIES: E-Mini S&P Retains Firmer Tone After Trading Higher Again Tuesday
- Eurostoxx 50 futures are holding on to their recent gains. Despite the latest recovery, a bear threat remains present. The sell-off between Sep 3 - 10, highlights a potential reversal and note that moving average studies remain in a bear-mode set-up. A resumption of the bear leg would signal scope for weakness towards 4686.53, a Fibonacci retracement point. First resistance is at 4863.45, the 50-day EMA. This EMA has been pierced, a clear break of it would strengthen a bullish condition.
- S&P E-Minis traded higher again Tuesday, and the contract maintains a firmer tone. Last week’s gains highlight a bullish reversal and the end of the Sep 3 - 6 corrective cycle. The contract is trading above the 20- and 50-day EMAs and resistance at 5730.50, the Sep 3 high, remains exposed. This level has been pierced, a clear break of it would open 5785.00, the Jul 16 high and a bull trigger. First support is 5592.07, the 50-day EMA.
COMMODITIES: Gold Holding Onto Bulk of Recent Gains, Bullish Structure Intact
- WTI futures are holding on to their latest gains. The move higher since Sep 9, appears - for now - to be a correction. Recent weakness reinforced a bearish condition and note that moving average studies are in a bear-mode set-up, highlighting a dominant downtrend. A resumption of the downtrend would open $63.93 next, a Fibonacci projection point. The 20-day EMA, at $70.99, has been pierced. A clear break of it would open $73.51, the 50-day EMA.
- A bullish structure in Gold remains intact and the metal traded, once again, to a fresh all-time high, Monday. Last week’s gains confirmed a resumption of the primary uptrend and marked the end of the recent period of consolidation - a pause in the uptrend. Moving average studies are in a bull-mode set-up, highlighting a clear uptrend and positive market sentiment. The focus is on $2600.0 next. Firm support lies at $2520.6, the 20-day EMA.
MNI (LONDON)
Date | GMT/Local | Impact | Country | Event |
18/09/2024 | 1230/0830 | * | CA | International Canadian Transaction in Securities |
18/09/2024 | 1230/0830 | *** | US | Housing Starts |
18/09/2024 | 1300/1500 | EU | MNI Connect Video Conference on Euro Area Macro Projections | |
18/09/2024 | 1430/1030 | ** | US | DOE Weekly Crude Oil Stocks |
18/09/2024 | 1730/1330 | CA | BOC Minutes (Summary of Deliberations) | |
18/09/2024 | 1800/1400 | *** | US | FOMC Statement |
18/09/2024 | 2000/1600 | ** | US | TICS |
19/09/2024 | 2245/1045 | *** | NZ | GDP |
19/09/2024 | - | NO | NorgesBank Meeting | |
19/09/2024 | - | JP | Bank of Japan Meeting | |
19/09/2024 | 0130/1130 | *** | AU | Labor Force Survey |
19/09/2024 | 0800/1000 | ** | EU | EZ Current Account |
19/09/2024 | 0800/1000 | *** | NO | Norges Bank Rate Decision |
19/09/2024 | 0900/1100 | EU | ECB's Schnabel participates on Monetary Policy discussion | |
19/09/2024 | 1100/1200 | *** | GB | Bank Of England Interest Rate |
19/09/2024 | 1100/0700 | *** | TR | Turkey Benchmark Rate |
19/09/2024 | 1100/1200 | GB | BOE's Monetary Policy Summary and minutes | |
19/09/2024 | 1100/1200 | *** | GB | Bank Of England Interest Rate |
19/09/2024 | 1200/0800 | CA | BOC Deputy Vincent speech. | |
19/09/2024 | 1230/0830 | *** | US | Jobless Claims |
19/09/2024 | 1230/0830 | ** | US | WASDE Weekly Import/Export |
19/09/2024 | 1230/0830 | * | US | Current Account Balance |
19/09/2024 | 1230/0830 | ** | US | Philadelphia Fed Manufacturing Index |
19/09/2024 | 1400/1000 | *** | US | NAR existing home sales |
19/09/2024 | 1430/1030 | ** | US | Natural Gas Stocks |
19/09/2024 | 1440/1640 | EU | ECB's Schnabel chairs Jean Monnet Lecture at ECB Conference | |
19/09/2024 | 1530/1130 | ** | US | US Bill 04 Week Treasury Auction Result |
19/09/2024 | 1530/1130 | * | US | US Bill 08 Week Treasury Auction Result |
19/09/2024 | 1700/1300 | ** | US | US Treasury Auction Result for TIPS 10 Year Note |