MNI US MARKETS ANALYSIS - On Watch For Any Hawkish ECB Turn

US TSYS SUMMARY: Treasuries Muted Ahead Of ECB, Retail Sales & Fedspeak

• Ahead of a holiday-shortened session, cash Treasuries by and large consolidate the yesterday’s slower steepening in the curve which saw 2s10s grind higher to 35bps, an abrupt increase over the past two weeks from lows of -10bps.
• There appears some support from renewed geopolitical caution whilst there was relatively little impact from Fed Governor Waller yesterday (front-loaded hikes but market took to mean marginally lower rates by end-22, largely offsetting moves for front-end Tsys).
• 2YY -1.2bps at 2.336%, 5YY -2.0bps at 2.632%, 10YY -0.7bps at 2.692%, 30YY +0.2bps at 2.813%.
• TYM2 is up three ticks at 120-28+ towards the top end of yesterday’s range on average volumes. Initial resistance at yesterday’s high of 121-07 whilst support is Tuesday’s low of 119-10+.
• Data: Retail sales for March (0830ET) and preliminary April U.Mich consumer sentiment including long-term inflation expectations (1000ET) likely the key data today.
• Fedspeak: NY Fed’s Williams (voter) in an interview at 0845ET before late appearances from Mester (’22 voter) and Harker (’23) after an early close.
• No issuance today after yesterday’s 30Y followed in the footsteps of Tuesday’s 10Y and tailed.

STIR FUTURES: Fed Hike Front-Loading Helped By Waller

• 49.5bp for May (new high), 94.5bps for June (close to highs) but softer beyond with 129bp for July and 205bp to year-end in FOMC-dated Fed Funds.
• Helped by Waller (voter) late yesterday: “I prefer a front-loading approach. So a 50 basis-point hike in May would be consistent with that and possibly more in June and July.”
• Plenty of potential triggers today with the ECB decision plus retail sales and U.Mich likely the pick of data. NY Fed’s Williams (voter) at 0845ET before late appearances from Mester (’22 voter) and Harker (’23) after an early close.

EGB/GILT SUMMARY: Potential For ECB Hawkish Surprise

European government bonds have traded weaker ahead of today's ECB meeting with equities broadly higher on the day.

• While consensus seems to expect no material policy changes from the ECB today, we warn that there is still potential for a hawkish surprise, particularly in relation to the current asset purchase taper and a decision on Q3 net purchases. Refer to our ECB preview for further details.
• Gilts have traded weaker through the morning with the curve bear steepening. Cash yields are up 2-6bp with the 2s30s spread widening 3bp.
• The long end of the bund curve has similarly underperformed with the 2s30s spread trading up 4bp.
• OATs have traded lower with the curve only slightly steeper. Cash yields are 3-4bp higher on the day.
• BTPs trade broadly in line with core EGBs with yields now up 3-6bp.
• Supply this morning came from the UK (UKTBs, GBP3.0bn).

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXK2 150p, bought for 3 in 1k
RXK2 158.50/160.50cs 1x2, bought for 6.5 in 5k
RXM2 150/145ps 1x2, bought for 19 in 1,635

ERZ2 99.75/99.875/100.00c fly, bought for 1.75 in 2.5k
ERZ2 99.25/98.75ps 1x1.75, bought for 5 in 10k

SX5E (17th June) 3500/3450/3350p fly, bought for -6.5 in 15k

Euro Still Facing Several Challenges In The Near Term

• Even though the Euro weakness in recent months has been mainly driven by the Russia/Ukraine conflict and the divergence in both yield differential and economic surprises indexes between US and Europe, the sharp contraction in Chinese ‘liquidity’ in 2021 has also been pricing in a ‘cheaper’ Euro against the USD.
• A fall in Chinese liquidity has generally been associated with a rise in risk aversion with investors seeking for 'safe' assets such as the USD.
• The chart shows how strongly China ‘liquidity’ has led EURUSD exchange rate by 6 months in recent years.
• EURUSD found support at 1.08 yesterday after consolidating sharply lower this month amid renewed geopolitical tensions with Europe preparing to impose more sanctions against Russia.
• While a ‘hawkish tone’ from the ECB today could extend the upward retracement in the short run, the Euro still faces several challenges ahead to experience a sharp MT rebound.
• Political uncertainty ahead of French elections on April 24 could also slightly weigh on the single currency in the near term.
• ST resistance to watch on the topside stands at 1.0954, followed by 1.10. On the downside, a break below 1.08 would open the door for a move down to 1.0767 (May 2020 low).

Source: Bloomberg/MNI

FOREX: Markets Tread Water Ahead of ECB

• Currency markets are more muted early Thursday, with traders sitting on the sidelines ahead of both the ECB rate decision as well as a deluge of US economic data ahead of the extended weekend.
• Scandi currencies have been a highlight, with SEK outperforming all others in G10 after CPI for March came in well ahead of expectations, prompting a series of sell-side outfits to bring forward their expectations for Riksbank tightening. Many banks now see rate hikes as soon as June, from prior consensus forecast of September.
• The greenback trades mixed-to-lower, while EUR, JPY make furtive gains. Recent ranges have been respected, keeping EUR/USD within range of first resistance at the Monday high of 1.0954.
• The ECB rate decision takes focus going forward, with markets on watch for any hawkish signals from the bank after CPI data came in over three times the bank's price target. US retail sales and import price indices also cross alongside the regular weekly jobless claims data. Central bank speakers include Fed's Williams, and then Harker and Mester follow after the early US close.

EQUITIES: Energy Lags, Cyclicals Lead In Europe

• Asian markets closed stronger: Japan's NIKKEI closed up 328.51 pts or +1.22% at 27172 and the TOPIX ended 17.99 pts higher or +0.95% at 1908.05. China's SHANGHAI closed up 38.817 pts or +1.22% at 3225.641 and the HANG SENG ended 143.71 pts higher or +0.67% at 21518.08
• European equities are mixed, with the German Dax up 16.17 pts or +0.11% at 14099.8, FTSE 100 down 17.74 pts or -0.23% at 7561.18, CAC 40 up 15.91 pts or +0.24% at 6564.22 and Euro Stoxx 50 up 7.95 pts or +0.21% at 3838.52.
• U.S. futures are flat, with the Dow Jones mini down 6 pts or -0.02% at 34476, S&P 500 mini down 2.5 pts or -0.06% at 4439.75, NASDAQ mini up 10 pts or +0.07% at 14231.

COMMODITIES: Oil Slipping After 2 Positive Sessions

• WTI Crude down $0.7 or -0.67% at $103.49
• Natural Gas up $0.03 or +0.46% at $7.038
• Gold spot down $8.19 or -0.41% at $1972.1
• Copper up $1.15 or +0.24% at $474.2
• Silver down $0.11 or -0.44% at $25.6618
• Platinum down $7.24 or -0.73% at $984.37