MNI US MARKETS ANALYSIS - ISM Eyed Ahead of Early Close

US TSYS SUMMARY: Bull Steepening On Growth Fears

• Cash Tsys have seen a sizeable bull steepening as hike expectations are trimmed on continued growth fears as 10Y yields maintain below 3%. It has been helped overnight by chip giant TSMC experiencing downward adjustments in orders from major clients before downside risks in European manufacturing activity and a miss in Eurozone core CPI inflation.
• 2YY -7bps at 2.884%, 5YY -7.3bps at 2.965%, 10YY -4.4bps at 2.969% and 30YY -1.8bps at 3.165%
• TYU2 sits 7 ticks higher at 118-24 as it clears yesterday’s range with above average volumes. The resumption of the short-term trend has set an intraday high of 118-29+ with resistance eyed at 119-03+ (76.4% retracement of the May 26 – Jun 14 bear leg).
• Data: ISM Manufacturing headlines today’s docket with regional Fed surveys and the MNI Chicago PMI pointing to downside risks to Bloomberg consensus of a fall from 56.1 to 54.5 in June.
• No Fedspeak scheduled and or issuance today, with SIFMA recommending an early cash close today ahead of Monday’s Independence Day Holiday.

STIR FUTURES: Hike Pricing Near Recent Lows With ISM Mfg Later

• Hikes implied by FOMC-dated Fed Funds for July sit within yesterday’s range at 68.5bps and remain near the low end of the post-FOMC range further out with 122bps for Sep and 174bps for Dec.
• The drop is more pronounced further out, with the peak in rates now at 3.41% at the Mar’23 meeting (182bp of hikes), down from a high of 3.66% on Wed.
• Similar relative story for ECB-dated OIS, with 29bps for the Jul 21 meeting and 145bps to year-end. Mixed Eurozone CPI with headline stronger but core softer than expected in the preliminary June release and manufacturing activity confirmed to have slowed in the final PMI with further downside risks implied by Sweden.

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

EGB/GILT SUMMARY: Twist Steepening

• The gilt curve has twist steepened largely on the back of the front-end rallying. The 2s30s spread has widened 6bp.
• The bund curve has similarly twist steepened with the 2s30s spread trading up 8bp.
• OATs have traced out a similar path to bunds with the long end of the curve 8bp steeper.
• The short end of the BTP curve has outperformed core EGBs. The 2-year benchmark yield is down 6bp on the day.
• The ECB's Fabio Panetta earlier stated that surging prices do not reflect excess demand and that stopping fragmentation was in the interests of the entire euro area.
• Supply this morning came from the UK (UKTBs, GBP3bn).
• The final European PMI data for June were broadly in line with the initial estimates.
• Focus now shifts to the US ISM manufacturing data for June, which will be published later today.

EUROPE OPTION FLOW SUMMARY

Eurozone:
ERQ2 99.625c, bought for 3.5 in 9k
ERU2 99.625c, bought for 6 in 9k
ERU2 99.50/99.375/99.25 put fly, sold at 2.25 in 8k
ERU2 99.50/99.375/99.25p fly sold at 2.25 and 2 in 11k

US:
TYQ2 118.75/120.25cs, bought (on Block) for 33 in 5k

2QN2 97.0625/96.375ps, bought for 1.5 in 8k

Eurozone Headline Inflation at Fresh High, To Test ECB Resolve

Eurozone inflation soared to a new high of 8.6% in June, according to a preliminary release from Eurostat, up from 8.1% in May and outpacing market expectations of an 8.5% increase.

• Month-over-month, prices rose an estimated 0.8%.
• The increase was driven in part by higher gas prices, with strong y/y gains seen in Italy and Spain. German harmonised inflation slowed modestly, helped by fuel and travel subsidies, but it wasn't enough to slow the increase across the entire bloc.
• Core inflation, ex-energy, food, alcohol and tobacco slowed moderately in June, dipping to 3.7% from 3.8% in May. Alone, energy inflation stood at 41.9% y/y, up from 39.1% in May.
• The upside surprise will provide further headaches for the ECB ahead of the July 20/21 meeting. The strength of the number will increase the calls of the hawks for a 50 bps hike in July, testing the resolve of President Lagarde who reiterated the intention of a 25 bps hike. It also makes a 50 bps hike in September a near certainty, barring a sudden reversal of price pressures over the summer.

Source: Eurostat

FOREX: Equity Risk-Off Fades as Stocks Bounce

• Equity futures across both the US and Europe traded lower in early European hours, with the EuroStoxx future dropping to new weekly lows and exposing the bear trigger at 3384.00. The price action soon reversed, however, with most futures markets well off the lows headed into the NY crossover.
• Nonetheless, the JPY is still comfortably the best performer Friday, with USD/JPY's retracement putting the pair briefly back below the Y135.00 handle. The pair has bounced alongside equities, but the price action this week underlines that two-way price action has returned to the pair after a lengthy uptrend.
• Eurozone CPI data came in just ahead of expectations at 8.6% Y/Y, however core inflation came in below forecast at 3.7% - making for a broadly market-neutral release. The EUR is in minor negative territory against the USD, with the greenback benefiting from the early equity weakness.
• Focus turns to the June manufacturing ISM release as well as a series of ECB speakers, with ECB's Panetta and de Cos both due to speak.

FX OPTIONS: Expiries for Jul01 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0350(E766mln), $1.0450(E807mln), $1.0475-80(E914mln), $1.0540-50(E1.2bln), $1.0575(E2.2bln), $1.0600-15(E2.5bln), $1.0630(E994mln), $1.0700(E1.6bln)
• USD/JPY: Y133.50($1.5bln), Y134.00($1.6bln)
• EUR/JPY: Y145.00(E545mln)
• AUD/USD: $0.6800(A$884mln), $0.6900-05(A$838mln), $0.7050(A$2.0bln)
• NZD/USD: $0.6400(N$1.2bln)
• USD/CNY: Cny6.6500($685mln), Cny6.8000($547mln)

Price Signal Summary - 1.1934 Support In Cable Remains Exposed

• In the equity space, S&P E-Minis traded lower yesterday to extend this week’s bear cycle and pullback from Tuesday’s high of 3950.00. Initial support to watch is at 3735.00, the Jun 23 low. A breach of this level would expose key support at 3639.00, the Jun 17 low and bear trigger. For bulls, a breach of resistance at 3950.00 is required to reinstate a short-term bullish theme. EUROSTOXX 50 futures have traded lower this week following the reversal from Monday’s high of 3584.00. The move lower has exposed the key support and bear trigger at 3384.00, Jun 16 low. A break would resume the primary downtrend. On the upside, clearance of 3584.0 is required to reinstate a short-term bullish theme.
• In FX, EURUSD maintains a bearish theme and a key short-term resistance at 1.0600 is intact. This is the top of a bear channel drawn from the Feb 10 high. Attention is on 1.0350, May 13 low and the bear trigger. A clear break of the 1.0600 resistance is required to signal a reversal. GBPUSD is trading lower today. This reinforces short-term bearish conditions with the focus on the bear trigger at 1.1934, the Jun 14 low. Resistance to watch remains 1.2406, the Jun 16 high. Initial resistance is at 1.0545, the 20-day EMA. USDJPY delivered a fresh cycle high Wednesday, confirming a resumption of the primary uptrend. The retracement from Wednesday’s high is considered corrective and initial support at 134.27, the Jun 23 low, remains intact. A resumption of gains would open 137.30 next, 1.50 projection of the Feb 24 - Mar 28 - 31 price swing.
• On the commodity front, the outlook in Gold is trading lower. This reinforces bearish conditions and attention is on the key support and bear trigger at $1787.00, May 16 low. A breach of this level would resume the downtrend. Key trendline resistance intersects at $1864.2. The trendline is drawn from the Mar 8 high and a break is required to reverse the short-term direction. In the Oil space, WTI futures found resistance this week at Wednesday’s high of $114.05. A break of this hurdle is required to confirm a resumption of the recent recovery and open $116.58, the Jun 17 high. For bears, an extension lower would signal the end of the recent climb and open key support at $101.53, the Jun 22 low.
• In the FI space, Bund futures have resumed their short-term uptrend and corrective cycle - the contract has traded above resistance at 149.00, Jun 24 high to signal potential for a climb towards 150.06, a Fibonacci retracement. Key short-term support has been defined at 144.72, a break would highlight a bearish reversal. Gilts have defined resistance at 114.55, Jun 24 high where a break would highlight potential for a stronger short-term recovery and open 115.55, the Jun 6 high. Initial firm support is at 111.72, the Jun 29 low.

EQUITIES: US Futures Starting 2nd Half Lower

• Asian markets closed sharply lower: Japan's NIKKEI closed down 457.42 pts or -1.73% at 25935.62 and the TOPIX ended 25.78 pts lower or -1.38% at 1845.04. China's SHANGHAI closed down 10.979 pts or -0.32% at 3387.637.
• European futures are up slightly (though cyclical stocks continue to weaken, with tech lagging): the German Dax up 44.03 pts or +0.34% at 12783.77, FTSE 100 up 14.36 pts or +0.2% at 7169.28, CAC 40 up 25.77 pts or +0.44% at 5922.86 and Euro Stoxx 50 up 7.15 pts or +0.21% at 3454.86.
• U.S. futures are a little lower to start the month/half, with the Dow Jones mini down 70 pts or -0.23% at 30712, S&P 500 mini down 7.75 pts or -0.2% at 3782, NASDAQ mini down 23 pts or -0.2% at 11506.5.

COMMODITIES: U.S. NatGas Bounces After Big Prior Day Drop, But Copper Sinks

• WTI Crude up $1.48 or +1.4% at $107.03
• Natural Gas up $0.25 or +4.63% at $5.94
• Gold spot down $12.09 or -0.67% at $1812.23
• Copper down $12.9 or -3.48% at $370.95
• Silver down $0.43 or -2.12% at $20.4529
• Platinum down $8.21 or -0.92% at $905.33