MNI US MARKETS ANALYSIS - USD/JPY Tops Y121 For First Time Since 2016

US TSYS SUMMARY: A Slower Paced Sell-Off After Yesterday’s Rout

• Cash Tsys have sold off further today after yesterday’s sell-off that had started early on before kicking on with a hawkish Powell.
• 2s10s sit largely unchanged from late yesterday levels at an extremely flat 17bps after a slight steepening intraday from earlier lows of just 13.5bps.
• 2YY +5.5bps at 2.170% (new highs since May-2019), 5YY +4.8bps at 2.369%, 10YY +5.3bps at 2.342% and 30YY +4.4bps at 2.562%.
• TYM2 sits 7+ ticks lower at 122-30 on above average volumes after very low volumes for much of yesterday’s session until Powell spoke. It sits close to support at 122-29+, 76.4% of the Oct’18-Mar’20 upleg.
• FOMCspeak: Williams (permanent voter) on BIS panel discussion at 1035ET, Daly (2024) at 1400ET and Mester (2022) on economic outlook and mon pol with prepared text and Q&A at 1700ET.
• Other Fedspeak: NY Fed Wuerffell Sr VP on post-LIBOR world, ISDA webinar, Q&A (0910ET).
• Bill issuance: US Tsy $34B 52W bill auctions (1130ET).

STIR FUTURES: Fed Back-To-Back 50bp Hikes 60% Priced

• Pricing of Fed hikes has ratcheted higher overnight, with Fed Funds showing 192bp of hikes for the remainder of this year (174bp prior to Powell yesterday and 160bp after last week’s FOMC).
• Immediate pricing has 42bps for May and 81.5bps for June, the latter implying a 61% chance of 100bp of hikes over the two meetings.
• GS overnight changed their Fed call to back-to-back 50bp hikes in May and June (from 25bp previously) whilst still starting balance sheet reduction in May, leaning on the shifting in wording from moving “steadily” to “expeditiously”.
• They see this followed by 25bp hikes at the four remaining meetings plus three quarterly hikes in 1Q-3Q23, leaving their terminal rate unchanged at 3-3.25%.

Fed Funds FOMC-dated implied rateSource: Bloomberg

EUROPE ISSUANCE UPDATE:

Germany allots E3.325bln 0% Apr-27 Bobl, Avg yield 0.21% (Prev. 0.04%), Bid-to-cover 1.06x (Prev. 1.03x), Buba cover 1.28x (Prev. 1.27x)

Netherlands sells E2.5bln 0.75% Jul-28 DSL, Avg yield 0.42% (Prev. -0.479%)

Final terms of EU syndication: E10bln 10Y NGEU (July 6, 2032)

• Note size increased from E8bln
• Final spread set earlier at MS-15bp (guidance was MS-13bp area)~
• Books above E63bln (including JLM interest)

• Final spread set earlier at MS-8bp (guidance was MS-6bp)
• Books above E31bln (including JLM interest)

EUROPE OPTION FLOW SUMMARY:

Eurozone:
RXK2 155.5/154.5/153.5p fly, bought for 5 in 3k

OEJ2 130.00/129.75 ps, bought for 13.5 in 12.35k

ERZ2 100.12/100.25c ladder, bought for 1.5 in 1k

IKJ2 138/136 ps, bought for 32 in 4.5k (ref 138.75)

UK:
SFIK2 98.55/98.65/98.70/98.80c condor, bought 2.75 in 10k

FOREX: JPY Extends Downleg on Hawkish Fed

• The JPY is comfortably the poorest performer in G10 again Tuesday, with the USD/JPY uptrend accelerating on the break of the top of the bull channel, drawn from the Jun 1 2021 high. More importantly though, the USD has also cleared the psychological 120.00 handle. This confirms a resumption of the uptrend and strengthens bullish conditions for the pair.
• The move, initially triggered by Powell's particularly hawkish appearance at the NABE yesterday, looks to have legs, with options markets continuing to price out the likelihood of a meaningful move lower in USD/JPY that had been baked in during the early weeks of the Ukraine crisis. Reflecting this, USD/JPY risk reversals have risen for 11 of the past 12 sessions.
• European equities are picking up this morning, shrugging off the negative Wall Street close, and helping boost growth proxy currencies. AUD, NZD and SEK are among the stronger performers, while a pullback in the oil price works against NOK and CAD.
• Data releases take a backseat Tuesday, with little on the docket to divert attention away from the stacked central bank speaker schedule. There are four ECB speeches to digest, with the highlight being Lagarde at 1315GMT / 0915ET as well as Fed's Williams, Daly and Mester. BoE's Cunliffe also crosses.

FX OPTIONS: Expiries for Mar22 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0990-10(E1.4bln), $1.1050-55(E756mln), $1.1075(E677mln), $1.1150(E572mln)
• EUR/JPY: Y129.00(E1.2bln)
• AUD/USD: $0.7250(A$1.3bln)
• NZD/USD: $0.7050(N$572mln)

Price Signal Summary - USDJPY Clears 120.00 And The Bond Market Bear Cycle Extends

• In the equity space, S&P E-Minis are trading at recent highs. The contract remains above the 50-day EMA that intersects at 4402.23 today. The break of this average has improved the short-term bullish condition and opens 4578.50, the Feb 9 high. A strong reversal from current levels would instead be seen as a bearish warning signal. Initial support is seen at 4336.06, the 20-day EMA. EUROSTOXX 50 futures are consolidating. The contract traded higher last week and price remains at its recent highs. These recent gains have exposed the 50-day EMA, at 3878.10 - a key short-term resistance.
• In FX, EURUSD has pulled away from last week’s high of 1.1137. Recent price action challenged resistance at 1.1121, the Jan 28 low. The failure to confirm a clear break though reinforces bearish conditions - the trend remains down. Further weakness would open 1.0890, the Mar 9 low and 1.0806, the Mar 7 low and bear trigger. GBPUSD remains in a downtrend and recent gains are considered corrective. A resumption of weakness would open 1.2954, the 1.764 projection of the Jan 13 - 27 - Feb 10 price swing. The bear trigger is 1.3000, the Mar 15 low. Resistance is seen at 1.3228, 20-day EMA where a break would alter the short-term picture. USDJPY has resumed its push higher today. Price has cleared the top of the bull channel, drawn from the Jun 1 2021 high. More importantly though, the USD has also breached the psychological 120.00 handle. This confirms a resumption of the uptrend and the focus shifts to 121.04 next, the Feb 2 2016 high.
• On the commodity front, Gold is consolidating. Short-term conditions remain bearish though following the recent pullback from $2070.4, Mar 8 high. Attention is on $1894.3, the 50-day EMA. The broader trend condition is bullish though and the recent pullback is considered corrective. Initial resistance to watch is at $1954.7, the Mar 15 high. A break of the 50-day EMA would suggest scope for a deeper pullback. Oil markets have recovered from recent lows and traded higher once again today. WTI sights are on $116.38, 61.8% of the Mar 7 - 15 downleg.
• In the FI space, yields continue to climb. Bund futures have cleared the 160.00 handle, confirming a resumption of the downtrend. This opens 158.84 next, the Oct 22 2018 low (cont). Gilts have breached key support at 121.10, Feb 16 low. This opens 120.00 next and confirms a resumption of the broader downtrend. The downtrend in Treasuries reumed once again yesterday. The focus is on 122-20, 176.4% retracement of the Feb 10 - Mar 7 climb and 122-00 further out.

EQUITIES: S&P Futures Test Monday's High

• Asian markets closed higher: Japan's NIKKEI closed up 396.68 pts or +1.48% at 27224.11 and the TOPIX ended 24.47 pts higher or +1.28% at 1933.74. China's SHANGHAI closed up 6.176 pts or +0.19% at 3259.862 and the HANG SENG ended 667.94 pts higher or +3.15% at 21889.28.
• European equities are heading higher, with financials leading: the German Dax up 143.12 pts or +1% at 14470.9, FTSE 100 up 38.03 pts or +0.51% at 7480.69, CAC 40 up 36.65 pts or +0.56% at 6619.44 and Euro Stoxx 50 up 35.85 pts or +0.92% at 3917.87.
• U.S. futures are a little higher, with S&P eminis testing Monday's high (4473): Dow Jones mini up 155 pts or +0.45% at 34591, S&P 500 mini up 18.75 pts or +0.42% at 4471, NASDAQ mini up 68 pts or +0.47% at 14438.

COMMODITIES: Oil Gives Back Overnight Gains

• WTI Crude down $0.82 or -0.73% at $111.3
• Natural Gas flat at $4.9
• Gold spot down $11.87 or -0.61% at $1924.34
• Copper down $1.15 or -0.24% at $469.85
• Silver down $0.15 or -0.58% at $25.0709
• Platinum down $11.11 or -1.07% at $1029.84