MNI US MARKETS ANALYSIS - Markets Tread Water Ahead of the Fed

US TSYS SUMMARY: Treasuries Nudge Lower After Last Week's Substantial Gains

• Cash Tsys have seen a solid bear steepening in the European session although the outright moves across the curve pale into insignificance after the rallies seen at the tail end of last week on expectations of softer growth after a string of activity indicators missed (2YY sub 3% having been 3.25% on Thu, 5YY more than 30bps below the Thu peak). The front-end sees only a small change on the day with Fed hike expectations keeping to Friday’s adjustment lower and could stay that way ahead of the FOMC on Wed, although will be eyed ahead of the 2Y auction later today.
• 2YY +1.7bps at 2.987%, 5YY +2.7bps at 2.870%, 10YY +4.4bps at 2.794% and 30YY +6.7bps at 3.039%.
• TYU2 sits just 2 ticks lower at 119-26+ and in doing so keeps close to recent highs, eyeing support at 120-11 (Jul 22 high) with a bull trigger then at 120-16+ (Jul 6 high). Volumes are very much average.
• Data: A relatively light docket today although the Dallas (July) and less so Chicago Fed (June) activity surveys give another steer on latest regional economic developments after the weakness of Friday’s nationwide PMI.
• Bond issuance: US Tsy $45B 2Y Note auction (91282CFA4) – 1300ET
• Bill issuance: US Tsy $54B 13W, $42B 26W bill auctions – 1130ET

STIR FUTURES: Fed Hikes Keep To Friday’s Softer Path

• Fed Funds implied hikes see little impact from the miss in Germany’s Ifo survey, not materially adding to Friday’s notable misses in both the EA and then US PMIs, ECB's Kazaks saying the ECB isn't done with big hikes.
• Hovering at 78bps for Wed before a cumulative 136bp for Sep and 178bp over the four meetings to year-end, back to where they were before the US CPI beat.
• As has been the case recently, that sees an implied terminal rate in Dec’22, currently at 3.36%, before almost 60bps of cuts priced for 2023.

Source: Bloomberg

EGB/GILT SUMMARY: A Weak Start

European government bonds have traded lower at the start of the week, while regional stocks recovered earlier losses and have now pushed above the Friday close.

• The ECB's Mārtiņš Kazāks indicated earlier that large policy rate hikes could still be on the cards (after the ECB last week delivered a larger than expected hike and removed forward guidance on the September policy rate decision). He stated that there needs to be a 'quite significant' hike in September and that it is a problem if the euro is too weak.
• In addition, Ignazio Visco stated that BTP spreads were higher than suggested by fundamentals - a view, which if shared by others on the GC, could pave the way for the ECB to eventually activate the TPI.
• The expectations and business climate components of the German IFO series came in lower than expected for July, following on the heels of the contractionary PMI readings for the same month published last Friday.
• Bunds have sold off and the curve has bear flattened. Cash yields are now 1-5bp higher on the day with the 2s30s spread narrowing 3bp.
• The OAT curve has twist steepened with the 2s30s spread widening 3bp.
• BTPs mirror the move in bunds with yields up 3-5bp and the long-end of the curve 3-4bp flatter.
• Gilts have lacked clear direction so far with yields now 1-2bp above the Friday close.
• Supply this morning came from Germany (Bubills, EUR5.139bn allotted). Later today France will offer EUR5.1-6.3bn of BTFs.

FOREX: Ranges Respected As Markets Gear for Fed

• The JPY is the weakest currency across G10 early Monday, with markets gearing for the Fed rate decision later this week. Nonetheless, price action is generally muted with ranges being respected across DM FX. EUR/USD saw an swift dip on the back of a lower-than-expected IFO survey, but losses were short-lived and the pair sits slightly higher pre-NY crossover.
• Scandi currencies are the early outperformers, with USD/SEK trading just above last week's lows of 10.149. A break through here opens the 50-dma support at 10.129 and the lowest levels since late June.
• A number of ECB speakers have been on the tape this morning, defending last week's rate decision and suggesting further tightening is still to come. ECB's Kazaks noted that big interest rates across the Eurozone may not be over, and the September hike needs to be "quite significant". Meanwhile, Visco touched on the newly unveiled TPI tool, warning that Italian bond yield spreads are much higher than fundamentals can justify.
• Chicago Fed National Activity Index data crosses later today, but the central bank speaker slate remains quiet given the Fed's media blackout ahead of Wednesday's rate decision.

FX OPTIONS: Expiries for Jul25 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0200(E641mln), $1.0250(E1.8bln)
• USD/JPY: Y134.20($550mln)
• AUD/USD: $0.6750(A$1.1bln), $0.6950-55(A$910mln), $0.7000(A$1.1bln)
• NZD/USD: $0.6100(N$651mln)
• USD/CAD: C$1.3010($700mln), C$1.3100($530mln)
• USD/CNY: Cny6.7500($2.2bln)

Price Signal Summary - USDJPY Approaches Key Short-Term Support

• In the equity space, S&P E-Minis are holding on to the bulk of recent gains. Last week’s bullish extension confirmed a break above the 50-day EMA. This reinforces short-term bullish conditions and suggests scope for a climb towards 4145.75 next, the Jun 9 high. On the downside, the 50-day EMA, at 3890.70, is the first support to watch. EUROSTOXX 50 futures touched a new high Friday at 3620.00, but the price has moved back into its recent range and the contract continues to consolidate. This pause in the bull cycle appears to be a bull flag. If correct, it reinforces current bullish conditions and suggests scope for a stronger recovery towards 3689.00, the Jun 10 high. The key support and bear trigger is unchanged at 3343.00, Jul 5 low. Initial support is at 3467.00, Jul 18 low.
• In FX, EURUSD remains in a S/T bull cycle following the recent recovery from the base of a bear channel drawn from the Feb 10 high. The current consolidation appears to be a bull flag formation and this reinforces bullish conditions. The focus is on 1.0359 next, the Jun 15 low. GBPUSD is consolidating and holding onto its recent gains. An extension would signal potential for a climb towards 1.2227, the 50-day EMA. The recent move lower in USDJPY is still considered corrective and attention is on two key support levels; 134.90, the base of a bull channel drawn from the Mar 4 low, and 134.27, the Jun 23 low. A break of this support zone would signal scope for stronger reversal. The primary uptrend remains intact, 139.39 is the bull trigger, Jul 14 high.
• On the commodity front, Gold is consolidating. The yellow metal remains in a downtrend and the latest recovery is considered corrective. The bear trigger is $1681.0, the Jul 21 low and key short-term resistance is at $1747.7, the 20-day EMA. In the Oil space, WTI futures trend conditions remain bearish. The contract continues to trade below the 50-day EMA that intersects at $101.62. A continuation lower would open $88.23, the Jul 14 low and bear trigger. A break of the 50-day EMA would signal a strong bullish reversal.
• In the FI space, a short-term bull cycle in Bund futures remains in play. Friday’s gains confirmed a resumption of the uptrend. The focus is on 155.27 next, the May 26 high. The trend condition in Gilts remains bullish and Friday’s rally reinforced this theme. The focus is on 118.16, 1.382 projection of the Jun 16 - 24- 29 price swing.

COMMODITIES: European natgas 5% higher

• WTI Crude down $0.11 or -0.12% at $94.59
• Natural Gas (NYM) up $0.07 or +0.84% at $8.369
• Natural Gas (ICE Dutch TTF) up $8.07 or +5.05% at $167.935
• Gold spot up $0.97 or +0.06% at $1728.57
• Copper up $2.25 or +0.67% at $337.2
• Silver up $0.1 or +0.51% at $18.6953
• Platinum down $1.36 or -0.16% at $875.53

EQUITIES: European/US futures flat after Asian stocks moved lower

• Japan's NIKKEI down 215.41 pts or -0.77% at 27699.25 and the TOPIX down 12.76 pts or -0.65% at 1943.21.
• China's SHANGHAI closed down 19.586 pts or -0.6% at 3250.388 and the HANG SENG ended 46.2 pts lower or -0.22% at 20562.94.
• German Dax down 5.43 pts or -0.04% at 13244.07, FTSE 100 up 1.79 pts or +0.02% at 7276.23, CAC 40 up 2.68 pts or +0.04% at 6217.5 and Euro Stoxx 50 up 1.72 pts or +0.05% at 3596.88.
• Dow Jones mini up 56 pts or +0.18% at 31929, S&P 500 mini up 8.25 pts or +0.21% at 3972.25, NASDAQ mini up 34.25 pts or +0.28% at 12454.75.