MNI US MARKETS ANALYSIS - Treasury Curve Inverts Further Pre-PPI

US TSYS SUMMARY: Continued Inversion Post-CPI, PPI To Come

• A recent small rally on risk-off does little to dent the largely one directional move lower overnight for front end Treasuries as markets continue to adjust to the large CPI beat, helped on their way by hawkish commentary from Mester (’22 voter) late yesterday, with some possible spillover from European sovereign yields sliding. Upcoming US bank earnings both today and tomorrow could also have an impact on sentiment.
• The result has seen 2Y yields sit back at post-CPI highs but with 10Y yields off those levels, pushing 2s10s to new lows for the cycle at -24bps with that segment of the curve remaining the most inverted since 2000. The 3M to 10Y spread meanwhile sits largely unchanged on the day having slumped more than 25bps yesterday to 50bps, with the slide from 130bp at the start of July better capturing the recent deterioration in growth expectations.
• 2YY +4.6bps at 3.201%, 5YY +4.7bps at 3.075%, 10YY +2.4bps at 2.958% and 30YY -0.1bps at 3.117%.
• TYU2 trades 14 ticks lower at 118-15+ despite the trend needle still pointing north. Resistance is seen at 119-06 (Jul 13 high) beyond which lies the bull trigger at 120-16+ (Jul 6 high), whilst
• Data: PPI inflation in focus at 0830ET after the large CPI beat with implications for core PCE.
• Fedspeak: Gov Waller on the economic outlook with text plus Q&A – 1100ET
• Bond issuance: US Tsy $45B 4Y – 1130ET
• Bill issuance: $40B 8W bill auctions – 1130ET

STIR FUTURES: 92.5bp Fed Hike Priced For July, Peak At 3.71% In Dec’22

• Implied hikes have continued to gain through Asia hours after yesterday’s CPI surge.
• 92.5bp prices for July, 167bps for Sep and 212bps for Dec with the peak now being pulled into that meeting at 3.71% before almost 70bps of cuts priced to end-2023.
• Speaking late yesterday: Mester (’22 voter) said the CPI report was uniformly bad. The Fed doesn’t have to make a decision today (in response to when questioned on a 100bp hike potential), tightening has to be very deliberate and intentional, expecting to go well beyond neutral with no choice but to get inflation back under control. Daly (’24 voter) sees a 75bp hike this month as the most likely posture with 100bp in the range of possibilities.
• Only Gov. Waller scheduled today at 1100ET to talk on the economic outlook but plenty of potential for pop-up speakers with the media blackout starting midnight Friday.

Source: Bloomberg

EGB/GILT SUMMARY: Bonds Continue To Slide

European government bonds and equities have sold off while the US dollar has posted broad gains against G10 FX.

• Gilts have sold off with the curve bear flattening. Cash yields are up 4-15bp with 2s10s spread narrowing 10bp.
• Bunds have traced out a similar path with the 2s30s spread narrowing 9bp.
• OATs have underperformed bunds with yields up 6-16bp.
• BTPs have sharply underperformed core EGBs with yields up 24-30bp in the short-end and belly of the curve.
• In a bid to make ground in the Conservative leadership race as momentum has built around Rishi Sunak and Penny Mordaunt, Foreign Secretary Liz Truss has stated that 'business as usual' has failed to deliver economic growth with reference to Boris Johnson's economic policies.
• Supply this morning came from Ireland (IRTB, EUR1.0bn).
• Focus this afternoon shifts to US PPI and initial jobless claims data.

MNI BoC Review: "Very Unusual" Indeed

Please find the full note here: https://marketnews.com/mni-boc-review-jul-22-very-unusual-indeed

UK: Second Round Of Conservative Leadership Contest Today, Result At 1500BST

The second round of the Conservative party leadership contest takes place later today, with MPs voting between 1130BST and 1330BST and the result to be announced at 1500BST (1000ET, 1600CET).

• In yesterday's first round vote two candidates (former Health Secretary Jeremy Hunt and Chancellor Nadhim Zahawi) were eliminated from the contest having fallen below the 30-vote threshold. Their combined 43 votes will go to other candidates in today's vote.
• Six candidates - former Chancellor Rishi Sunak (88 votes), Trade Minister Penny Mordaunt (67), Foreign Secretary Liz Truss (50), former Equalities Minister Kemi Badenoch (40), chair of the Foreign Affairs Select Committee Tom Tugendhat (37), and Attorney General Suella Braverman (31) - will contest the vote today. The threshold of votes remains 30, with any candidate falling below this level eliminated. If all candidates cross this threshold the individual with the fewest votes is eliminated.
• Following some positive polling from party members, Mordaunt remains the favourite to become the next leader according to betting markets. However, her position as joint frontrunner alongside Sunak means she now faces more scrutiny of her political positions and former experience having only held a frontline Cabinet position for a short period (Defence Sec May-July 2019).
• A total of 120 votes would guarantee any candidate a place in the final two. This number is just over one third of Conservative MPs, meaning that once the contest comes down to the final three candidates, anybody with 120 or more will be guaranteed at least second place.
• Should any candidate cross this threshold in the second round they could dispatch any supporters over this number to vote for candidates they would prefer to face in the final round.

FOREX: USD/JPY Uptrend Accelerates as Greenback Resumes March Higher

• USD/JPY has broken to fresh cycle highs early Thursday, with the price action not only breaking through yesterday's high, but accelerating the rally to open next resistance at 139.48 (the 1.00 proj of the Jun 16 - 22 - 23) ahead of the psychological 140.00 level.
• The resumption of risk-off trade in global equity markets has fueled appetite for the greenback, particularly in light of Wednesday's CPI release which has made the prospect of a 100bps hike from the Fed a tangible option going forward. Both Mester and Bostic have spoken since the inflation release, with each member issuing concern over hot CPI and stating that all options - including a 100bps rate move - are on the table.
• This puts the greenback above all others in G10 ahead of the NY crossover, putting the USD Index at new multi-decade highs.
• Outside of the USD and JPY, CAD and NZD also trade poorly despite the Bank of Canada's larger than expected rate hike yesterday. Commodity-tied currencies are trading soft inline with base metals and energy products, as broader concerns about a global recession swirl further as we head through the first few weeks of H2.
• Focus turns to US PPI data later today, to confirm whether pipeline inflation is as hot as the price pressures facing the consumer. Weekly jobless claims are also on the docket alongside a speech from Fed's Waller.

FX OPTIONS: Expiries for Jul14 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0095-10(E851mln), $1.0150(E682mln), $1.0190-00(E1.0bln)
• GBP/USD: $1.1820(Gbp616mln), $1.2000(Gbp548mln)
• USD/JPY: Y135.70($1.2bln), Y136.00($976mln), Y139.00($1.5bln)
• NZD/USD: $0.6090-00(N$1.0bln), $0.6120(N$1.3bln)
• USD/CAD: C$1.2925-45($ 710mln)

Price Signal Summary - USDJPY Rally Resumes

• In the equity space, S&P E-Minis are trading lower. The contract however remains above recent lows. Trend conditions are bearish and a deeper pullback would open 3735.00, the Jun 23 low. Clearance of this level would expose key support at 3639.00, the Jun 17 low and bear trigger. A break of 3950.00, Jun 28 high, is still required to signal potential for a stronger bullish reversal. EUROSTOXX 50 futures continue to trade above last week’s 3343.00 low on Jul 5. The trend outlook is bearish. The breach on Jul 5 of support at 3384.00, Jun 16 low, reinforces current conditions and confirmed a resumption of the broader downtrend. The focus is on 3321.30, 50.0% of the major 2020 - 2021 upleg. Key short-term resistance is unchanged at 3584.00, Jun 27 high. Initial resistance to watch is 3504.00, the Jul 8 high.
• In FX, EURUSD continues to challenge parity and this level remains a key psychological level. Note that the base of the bear channel, drawn from the Feb 10 high intersects at 0.9982 today. A clear breach of this support zone would open 0.9944, 1.618 projection of the Jun 9 - 15 - 27 price swing. GBPUSD remains vulnerable and the pair traded to a fresh trend low on Tuesday. The focus is on 1.1795, 0.764 projection of the Mar 23 - May 13 - 27 price swing. USDJPY is on the move again and has traded above 139.00. This confirms a resumption of the uptrend and opens 139.48, 1.00 projection of the Jun 16 - 22 - 23 price swing and the 140.00 psychological handle.
• On the commodity front, Gold remains vulnerable following the recent break of $1787.00, May 16 low. This has opened $1706.3 next, 1.618 projection of the Mar 8 - 29 - Apr 18 price swing. This week’s extension has also reinforced current bearish conditions. In the Oil space, WTI futures traded sharply lower Tuesday highlighting a bearish threat. The contract is softer again today and has arrived at $93.45, the Apr 25 low. A break would open $90.13, the 1.236 projection of the Jun 14 - 22 - 29 price swing
• In the FI space, a short-term bull cycle in Bund futures remains in play and Tuesday’s gains confirmed a resumption of the uptrend. Today’s move lower is considered corrective. A resumption of strength would open the 154.00 handle next. Trend conditions in Gilts remain bullish and scope is seen for a climb to 117.48, 1.236 projection of the Jun 16 - 24 - 29 price swing. Initial firm support to watch lies at 114.08, the Jul 8 low.

JP Morgan Slips Pre-Market on Lower-Than-Forecast Earnings, Suspension of Buybacks

JP Morgan report EPS of $2.76, lower than expected, while adjusted revenue of $31.63bln is lower than $31.97bln forecast.

Highlights from JPM report:

• Generated strong Markets revenue, up 15% as we helped clients navigate volatile market conditions
• Global IB fees were down 54% compared to a record last year, in a challenging macro environment
• Cites geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity
• Adds the macro backdrop, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.
• On suspension of share buybacks, they cite the need to quickly meet the higher requirements following recent stress tests and the already scheduled G-SIB increase