MNI US MARKETS ANALYSIS - Yields, USDJPY at New Cycle Highs

US TSYS SUMMARY: Another Day Steeper

• Cash Treasuries have seen a modest bear steepening after bull steepening yesterday amidst holiday-driven very low volumes.
• This has seen 2s10s grind higher to 43bps, the highest since Mar 2 as the front-end is capped by modestly softer Fed hike expectations (compared to extremely lofty previous highs) and long-end yields touch new cycle highs on the prospect of faster QT.
• 2YY +1.1bps at 2.459%, 5YY +2.1bps at 2.810%, 10YY +3.3bps at 2.886% and 30YY +3.6bps at 2.976%.
• TYM2 is down 6+ ticks at 119-14 on average volumes. The downtrend is resumed with initial support at the earlier low of 119-09 after which it opens 119-04+ (low Dec 3, 2018 cont), whilst initial resistance is materially higher at 121-09 (Apr 14 high).
• Fedspeak: Chicago Fed’s Evans -- no text, Q&A with media and potentially audience (1205ET)
• Data: Limited to housing starts/building permits for Mar (0830ET)
• Bill issuance: US Tsy $34B 52W Bill auction (1130ET)

STIR FUTURES: Potential Bullard Boost

• Fed Funds futures imply 49.5bps of hikes for May 4 (unchanged since Thu) and are just off new highs at 97bps for Jun 15.
• Pricing to year-end also firms to 215bps but struggles to regain the >220bps seen prior to last week’s core CPI miss.
• The move has come in European hours, possibly a delayed reaction to Bullard (’22 voter) late yesterday entertaining the idea of 75bp hikes even though that’s not yet his base case on the way to getting to circa 3.5% this year.
• Chicago Fed’s Evans (’23 voter) at 1205ET. A median dot at the March meeting, he was more hawkish on Apr 11 and considered a 50bp hike in May as “perhaps highly likely” on the way to getting to a neutral 2.25-2.5% by year-end.

Cumulative hikes implied by FOMC-dated Fed Funds futuresSource: Bloomberg

EGB/GILT SUMMARY: Sovereign FI & Equities Sell-Off

European government bonds have sold off sharply alongside broad downside for equities reflecting concerns about weaker growth, higher inflation and expectations of sustained monetary policy tightening.

• Gilts sold off sharply through the morning on the first day of trading following the Easter weekend holiday. The most recent pullback has been limited with yields now up 3-9bp on the day and the long-end of the curve underperforming.
• The bund curve has similarly bear steepened with yields up 3-8bp and the 2s30s spread widening 5bp.
• The sell-off in OATs has slightly lagged bunds with yields 1-6bp higher on the day.
• It is a similar story for BTPs where yields have pushed up 3-7bp across most of the curve, albeit with the very short end now close to flat on the day.
• Ukrainian President Volodymyr Zelenskyy has indicated that Russia has scaled up its offensive in the East of the country.
• Supply this morning came from Germany (Bobl, EUR3.284bn allotted), Spain (Letras, EUR1.959bn), the Netherlands (DTCs, EUR2.14bn), Finland (RFGBs, EUR898mn), the ESM (Bills, EUR973mn) and Slovakia (SlovGBs, EUR518n). Later today France will offer EUR4.3-5.5bn of BTFs.

EUROPE ISSUANCE UPDATE:

Germany allots E3.284bln 0% Apr-27 Bobl, Avg yield 0.64% (Prev. 0.21%), Bid-to-cover 1.23x (Prev. 1.06x), Buba cover 1.49x (Prev. 1.28x)

Slovakia sells 5/10/15/30-year SlovGBs:

• E128mln 0.25% May-25 SlovGB, Avg yield 0.806% (Prev. 0.093%), Bid-to-cover 1.30x (Prev. 1.44x)
• E62mln 0.75% Apr-30 SlovGB, Avg yield 1.418% (Prev. -0.078%), Bid-to-cover 1.37x (Prev. 1.62x)
• E130mln 0.375% Apr-36 SlovGB, Avg yield 2.056% (Prev. 1.659%), Bid-to-cover 1.14x (Prev. 1.48x)
• E198mln 1.00% Oct-51 SlovGB, Avg yield 2.327% (Prev. 1.976%), Bid-to-cover 1.16x (Prev. 3.26x)

CHINA: Divergence Accelerates Between Chinese Imports and Commodity Prices

• In the past few months, we have seen that commodity prices have been constantly reaching new highs while global demand has been significantly weakening.
• Part of the weakening in global demand has been attributed to the sharp deceleration in Chinese economic activity amid ‘zero-Covid’ policy (which keeps weighing on growth expectations).
• The chart below shows the strong divergence between China imports (YoY), which have fallen to -0.1% in March (down from over 30% YoY in November last year) and the annual change in commodity prices (BCOM index).
• As China represents over 50% of the total demand for some commodities (i.e. copper), the two times series have historically strongly co-moved together in the past 20 years.
• Two main factors could explain that divergence:
  • Global supply chain disruption (Covid, severe droughts in Latam and more recently the Ukraine war shock).
  • The investment narrative with participants looking for ‘inflation hedges’ as inflation keeps surprising positively (commodities have historically been good ‘inflation hedges).
• The main question now is: can the divergence persist in the medium term?
• Sentiment on commodities is ‘strongly bullish’, global demand is weakening and some investors are speculating that inflation peaked in March.

Source: Bloomberg/MNI

FOREX: USD/JPY Extends Winning Streak to 13 Sessions

• The weakness in JPY markets extended early Tuesday, with USD/JPY breaking comfortably back above the Y128.00 handle as the uptrend extends. This pushes the winning streak in the pair to 13 consecutive sessions, and narrows the gap with Y130 - a level last crossed in 2002.
• The run higher in the pair follows an appearance from Fed's Bullard - a notable hawk in Fed policy-making - who mentioned the possibility of a 75bps rate hike if required. His preference is for rates to reach 3.50% this year, but rate rises above 50bps at each interval are not his base case for the time being.
• A run-up in US yields has followed this morning, putting the US 10y yield at the highest levels since December 2018, but this has not been accompanied by dollar strength, with the currency among the poorest performers of the day.
• AUD is faring better, with AUD/USD erasing Monday's modest decline, with the pair circling just below $0.7400 resistance.
• Focus turns to US housing starts and building permits data as well as an appearance from Fed's Evans, who speaks at the Economic Club of New York. Earnings season continues, with Johnson & Johnson, Netflix and IBM all on the docket.

FX OPTION EXPIRY

• EURUSD: 1.0750 (262mln), 1.0780 (260mln), 1.0800 (1.26bn), 1.0850 (378mln)
• USDJPY: 128.00 (700mln)
• GBPUSD: 1.3000 (471mln)
• USDCAD: 1.2580 (250mln), 1.2590 (743mln), 1.2600 (391mln), 1.2615 (220mln), 1.2625 (645mln).
• AUDUSD: 0.7350 (354mln), 0.7400 (650mln)

Price Signal Summary - USDJPY Continues To Defy Gravity

• In the equity space, S&P E-Minis maintain a bearish tone following recent weakness that resulted in a break of the 50-day EMA. The average intersects at 4446.83 today and represents initial resistance. The focus is on 4321.07, 61.8% retracement of the Mar 15 - Mar 29 rally. EUROSTOXX 50 futures continue to consolidate inside the current range. Price remains below the 20- and 50-day EMAs and the short-term outlook is bearish. The focus is on 3626.50, 50.0% of the Mar 7 - 29 rally.
• In FX, EURUSD remains in a downtrend and last week’s low print of 1.0758 confirmed a resumption of the trend. Support at 1.0806, Mar 7 low, and 1.0767, May 7 2020 low, have also been breached. Attention is on 1.0727 next, the Apr 24 2020 low and bear trigger. GBPUSD remains below 1.3147, the Apr 14 high. The pullback from this high means the pair has failed to remain above the 20-day EMA - a bearish development. The primary trend is down and a break of 1.2974, Apr 13 low, would confirm a resumption of the downtrend. This would open 1.2933, the Nov 5 2020 low. USDJPY continues to defy gravity and extend its uptrend, trading to a fresh cycle high above 128.00. The break higher reinforces underlying bullish conditions and signals potential for a continuation of the bull cycle towards 129.44 next, 0.764 projection of the Feb 24 - Mar 28 - 31 price swing. The pair is also closing in on the psychological 130.00 handle.
• On the commodity front, Gold traded higher last week and breached resistance at $1966.1, Mar 24 high. This highlights a range breakout and opens $2001.6 initially, 61.8% retracement of the Mar 8 - 29 downleg. In the Oil space, WTI futures are holding onto the bulk of recent gains, following the recovery from $92.93, Apr 11 low. The contract has also recently found support at levels near the 50-day EMA, which intersects at $98.67 today. A resumption of strength would open $116.64, the Mar 24 high and a key near-term resistance. Initial support lies at the 20-day EMA, at $102.62.
• Trend conditions in the FI space remain bearish. Bund futures have today resumed the downtrend breaking below last week’s lows and delivering a fresh cycle low. This also maintains the bearish price sequence of lower lows and lower highs. The focus is on 153.48, 0.50 projection of the Mar 7 - 29 - Apr 4 price swing. Gilts have also resumed their downtrend and have traded through the 118.00 handle. The focus is on 117.04, 0.764 projection of the Mar 1 - 28 - Apr 4 price swing.

EQUITIES: Stocks Lower as Yields Run to New Cycle Highs

• Japan's NIKKEI 225 closed higher by 185.38 pts or +0.69% at 26985.09 and the TOPIX up 15.62 pts or +0.83% at 1895.7. China's SHANGHAI closed down 1.495 pts or -0.05% at 3194.029 while the HANG SENG ended 490.32 pts lower or -2.28% at 21027.76.
• The German Dax trades lower by 140.81 pts or -0.99% at 14032.88, FTSE 100 down 33.32 pts or -0.44% at 7584.66, CAC 40 down 73.66 pts or -1.12% at 6521.47 and Euro Stoxx 50 down 37.23 pts or -0.97% at 3810.4.
• Dow Jones mini down 30 pts or -0.09% at 34297, S&P 500 mini down 7.25 pts or -0.17% at 4381.5, NASDAQ mini down 46 pts or -0.33% at 13869.

COMMODITIES: Crude Retraces Sizeable Monday Gains

• WTI Crude down $1.57 or -1.45% at $106.54
• Natural Gas down $0.24 or -3.06% at $7.58
• Gold spot down $0.42 or -0.02% at $1979.2
• Copper down $1.85 or -0.38% at $480.4
• Silver up $0 or +0% at $25.8715
• Platinum up $3.13 or +0.31% at $1018.88