MNI US MARKETS ANALYSIS - EGB Spreads Extend Tightening Move

US TSYS: Narrower Trading Ranges Ahead Of Ind Prod And Powell

Friday has begun with relative calm in US rate markets in contrast to the preceding session, with fairly narrow trading ranges and modest bear flattening in the curve.

• Initial weakness mostly reversed in Asia-Pac hours as the BoJ retained its dovish stance, boosting JGBs and global FI alike.
• The 2-Yr yield is up 5.2bps at 3.1449%, 5-Yr is up 2.2bps at 3.3067%, 10-Yr is up 2.5bps at 3.22%, and 30-Yr is up 3.8bps at 3.2855%.
• A fairly quiet data/events schedule lies ahead. Fed Chair Powell makes opening remarks at 0845ET at a Fed event on the international role of the dollar (text expected); May industrial production arrives at 0915ET.
• We'll also likely get an explanation today from KC Fed Pres George for her dovish dissent at this week's FOMC.

EGB/GILT SUMMARY: Lagarde Drives Spreads Tighter

• Another volatile start for Govies and Rate markets.
• Bund trades in a 224 ticks range, and nearly reached level where it was trading yesterday on the cash open, at circa 145.01, printed a 144.80 high.
• Bund fell all the way back down to 142.67, and now at 144.50 at the time of typing.
• Most notable flows is in peripheral spread, driven by ECB Lagarde's comment last night, telling Ministers that the ECB expects to put limits on Bond spreads.
• In turn, Greece and Italy trade 21.8 and 13.4bps tighter respectively versus the German 10yr, with BTP falling all the way down to 188.4bps.
• Gilt initially outperformed and pushed the Gilt/Bund spread to its tightest level since September 2020.
• But the pull back higher in Bund led by BTP, has brought back the Gilt/Bund spread 2.4bps wider now.
• It was a decent overnight session for Treasuries, with Tnotes trading 220k lots pre European cash open, and now over 400k lots traded. Treasuries are also in Green territory taken their cues from Europe, and some of the divergence has brought back the Tnote/Bund spread wider, by 8.4bps, after the spread tested the tightest level since December 2020 yesterday.
• Looking ahead, there are tier data for the session, focus will be on Equity expiry, expect some volatility at 14.30BST/09.30ET.
• Remaining speakers are Fed Powell making welcoming remarks at Dollar Conference, and BoE Pill at a BoE workshop on household finance and housing.

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXU2 146/150/154 c fly, bought for 75 in 10k

OEQ2 121.00p, sold from 100 to 87 in 12.5k (profit taking)
OEQ2 118.5/124.5^^, sold from 83 to 65 in 12.5k

MNI Fed Review - June 2022: Has The Fed Lost Control?

We've just published our June FOMC meeting review, emailed to subscribers and available on our website:

• Chair Powell acknowledged that the path to a “soft landing” has become more difficult, and potentially out of the Fed’s control.
• This makes for a more unpredictable rate outlook if economic growth deteriorates and inflation doesn’t abate.
• While ongoing hikes are still the base case going into 2023, the meeting materials suggest that cuts are already on the FOMC’s radar.

BOE Analyst Views:

• Out of 22 analyst reviews that we have read, 15 have changed their base case BOE call following yesterday’s meeting.
• All analysts continue to expect a hike in August, but 6 have increased the magnitude of that hike to 50bp (prior to the June meeting, there was a unanimous view across these analysts that the base case for August was a 25bp hike).
• Bank Rate at end 2022 (out of 22 analysts): The median is 2.00% while the majority of analysts expect Bank Rate to end 2022 in a 2.00%-2.25% range.
• Bank Rate at end 2023 (out of 19 analysts): The median looks for 2.00% with most analysts in the 2.00-2.50% range. Only 3 analysts still see cuts in their base case.

SNB Review: Endorses CHF as Tightening Tool

Executive Summary:

• Unexpectedly raised rates by 50bps to -0.25%, and indicated that further rate rises could come
• Bank drop their language concerning CHF valuation, introducing more two-way risk to the currency
• Inflation forecast above target throughout 2022, before dipping back below 2.0% in 2023

MNISNBRevJun22.pdf

Jordan and the board took markets by surprise on Thursday, raising rates by 50bps – the first policy tightening in Switzerland for 15 years. On top of the unexpected rate rise, the SNB pledged further tightening would come if required, and dropped their valuation view on the CHF, suggesting the bank will allow for more CHF strength in the medium-term.

This month’s decision shows the SNB are shifting from a passive, to a much more active approach to policy. This puts markets on watch for further action from the board this year – evident in the acceleration of market pricing that now sees a further 50bps hike (bringing rates out of negative territory) at September’s quarterly meeting.

FOREX: JPY Backtracks as BoJ Commit to Policy Stance

• Following the BoJ rate decision overnight, JPY is the weakest currency in G10 as the BoJ doubled down on their easy policy stance, effectively allowing markets to resume the selling pressure on the JPY.
  
• Risk sentiment remains shaky despite the bounce off the lows for global equity futures - as a result AUD continues to slide, putting AUD/USD either side of the $0.7000 handle.
• The greenback trades more favourably, with the USD Index partly reversing the dollar downtick seen Thursday - but the week's best levels are still a way away for markets at these levels.
• Focus turns to the US industrial production release for May as well as an appearance from Fed chair Powell after this week's tumultuous rate decision. He gives welcoming remarks at a dollar conference so may not directly reference policy. Following yesterday's rate decision, BoE's Pill also speaks at a workshop on household finance.

FX OPTIONS: Expiries for Jun17 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0425(E561mln), $1.0490-00(E1.7bln), $1.0650(E764mln), $1.0700(E650mln)
• USD/JPY: Y133.00($681mln), Y133.85-00($564mln)GBP/USD: $1.2110(Gbp1.3bln)
• EUR/GBP: Gbp0.8630-50(E1.9bln)
• AUD/USD: $0.7000-05(A$638mln)
• USD/CAD: C$1.2885($585mln)
• USD/CNY: Cny6.7000($1.5bln), Cny6.75($2.7bln)

Price Signal Summary - Bonds And Equities Remain Vulnerable

• In the equity space, S&P E-Minis remain vulnerable and yesterday’s resumption of weakness reinforces bearish conditions. The focus is on a move to 3600.00 next. EUROSTOXX 50 futures remain vulnerable and the contract traded lower Thursday. The focus is on weakness towards 3400.00 and more importantly towards 3309.00, the Mar 7 low and a key bear trigger.
• In FX, EURUSD is trading above this week’s low. Short-term gains are considered corrective and a bearish theme remains intact. The focus is on 1.0350, the May 13 low and bear trigger. Initial firm resistance is at 1.0601, Thursday’s high. GBPUSD recovered on Thursday and the pair is trading above this week’s low. Short-term gains are likely a correction - the trend remains bearish. A resumption of weakness would refocus attention on 1.1934, Jun 14 low and the bear trigger. Resistance is at 1.2405, the 20-day EMA. USDJPY is firmer today as the pair extends the strong bounce from yesterday’s low of 131.50. The bull trigger is 135.59, Jun 15 high. A break would confirm a resumption of the uptrend and open 136.04, 1.382 projection of the Feb 24 - Mar 28 - 31 price swing. 131.50 marks key short-term support.
• On the commodity front, Gold remains vulnerable following the sharp sell-off on Jun 13. The focus is on a move lower towards $1787.0, May 16 low. A break would resume the downtrend. Key trendline resistance is at $1889.1. The trendline is drawn from the Mar 8 high. In the Oil space, WTI futures remain in an uptrend. Yesterday’s move below the 20-day EMA was short-lived and the contract has rebounded from the day low of 112.31. This marks a key S/T support. Conditions remain bullish and attention is on $123.68, the Jun 14 high.
• In the FI space, Bund futures traded in a volatile manner Thursday. The primary direction is down and the focus is on the 140.00 psychological handle. Gilts remain bearish despite the bounce from yesterday’s low. A return lower would refocus attention 109.89, Thursday’s low and the bear trigger.

EQUITIES: Focus on Equity expiry today

• Option expiry today for Index futures and single stocks.
• Some good size and should provide some Volatility at 14.30BST/09.30ET.

Looking at some of the largest companies in SPX:

• Apple (AAPL): Some decent open interest, with the largest seen at 130p (61.5k).
• Microsoft (MSFT): largest OI is at 240p with 16k.
• Amazon (AMZN); largest OI is the 103c with 12k OI.
• Tesla (TSLA): Largest are 640p (12.5k), and 650p (14.5k)

Looking at ESM2 option, largest OI is 3700p with 18.3k