MNI US MARKETS ANALYSIS - ECB Rates, Spread Tool in Focus

US TSYS SUMMARY: ECB Eyed, Timely Data and 10Y TIPS

• Cash Tsys ultimately sit with a small bear steepening on the day after fluctuating overnight with the resumption of Nord Stream 1 gas flows back to pre-maintenance levels but still with fears over their reliability. Having moved past the BoJ decision overnight, attention is on the expected first ECB rate hike of the cycle with markets debating a 25/50bp move.
• 2YY +0.2bps at 3.230%, 5YY +1.0bps at 3.174%, 10YY +1.3bps at 3.040% and 30YY +0.8bps at 3.167% with curves broadly keeping to the week’s ranges with 2s5s at -5bps at 2s10s at -19bps.
• TYU2 sits 1+ tick lower at 117-23+, off a session low of 117-18 that matched initial support at the Jul 8 low. Further support sits close at 117-12 (50% of Jun 14- Jul 6 rally), beyond which lies key support at 116-11 (Jun 28 low) required to signal scope for a deeper retracement from what is currently viewed as a corrective pullback.
• Data: Philly Fed mfg for July (0830ET), initial jobless claims for payrolls reference week (0830ET) and leading index for June (1000ET)
• Bond issuance: US Tsy $17B 10Y TIPS auction re-open (91282CEZ0) – 1300ET
• Bill issuance: US Tsy $55B 4W, $50B 8W bill auctions – 1130ET

STIR FUTURES: Fed Hike Pricing Still Waiting For ECB

• Another overnight with little change in Fed Funds implied hikes, with 81bp for next week and 143bp for Sep both up 1bp but within this week’s narrow range.
• Hikes to year-end are also little changed having slowly drifted higher this back to 197bps at levels before last week’s U.Mich surprise dip in long-term inflation expectations.
• The limited change is unsurprising ahead of today’s expected first ECB rate hike at the new time of 0815ET/presser 0845ET (34bp hike priced), whilst the less significant in comparison but still of note Philly Fed mfg survey and weekly jobless claims hit in the middle.

Source: Bloomberg

EGB/GILT SUMMARY: ECB Poised To Raise Rates While Italian Political Crisis Roars

European government bonds have sold off this morning ahead of the ECB meeting, with Italian BTPs further fueled by the unfolding domestic political crisis. Equities are mixed across the region, as is G10 FX performance.

• Focus on today is the ECB with some speculation in recent days that a 50bp policy rate hike may be in the offing, rather than the 25bp move that the GC had been stipulating. Markets will also be looking for further clarity and specificity on future policy rate adjustments (although we would be surprised if the ECB were to pre-commit again at this stage to specific hikes), and details on a new anti-fragmentation tool.
• Bunds sold off through to mid-morning and then reclaimed losses to now trade just marginally below yesterday's close.
• OATs have slightly underperformed OATs, particularly at the shorter end with the yields up to 2bp higher on the day.
• Italian Prime Minister Mario Draghi has resigned after three of the coalition parties (Five Star Movement, League and Forza Italia) refused to participate in a vote of confidence. Draghi's decision now paves the way for a dissolution of parliament and snap elections, suggesting a protracted period of political instability and economic uncertainty.
• BTPs have sold off sharply with the curve bear flattening. Cash yields are up 2-15bp.
• The shortlist of candidates to succeed UK Prime Minister Boris Johnson has now been whittled down to Rishi Sunak and Foreign Secretary Liz Truss, with the latter drawing on her Thatcherite roots to criticise the high-level of Covid-related spending spearheaded by the former Chancellor of the Exchequer.
• The gilt curve has twist flattened with the 2s30s spread narrowing 3bp.
• Supply this morning came from the UK (Gilt, GBP3.50bn), France (OATs, EUR10.496bn & linkers, EUR1.493bn), Spain (Bonos/Obli, EUR5.061bn)

EUROPE ISSUANCE UPDATE

Gilt auction result

• GBP3.5bln of the 0.25% Jan-25 Gilt. Avg yield 2.231% (bid-to-cover 2.53x, tail 0.5bp).

Spain auction results

• E1.131bln of the 0% May-25 Bono. Avg yield 1.416% (bid-to-cover 1.92x)
• E1.535bln of the 0% Jan-27 Bono. Avg yield 1.754% (bid-to-cover 1.75x)
• E2.395bln of the 2.55% Oct-32 Obli. Avg yield 2.535% (bid-to-cover 1.58x)

France auction results

• E3.285bln of the 0% Feb-25 OAT. Avg yield 1% (bid-to-cover 2.3x)
• E3.51bln of the 0.75% Feb-28 OAT. Avg yield 1.47% (bid-to-cover 2.69x)
• E3.701bln of the 0.75% May-28 OAT. Avg yield 1.42% (bid-to-cover 1.83x)
• E415mln of the 0.10% Mar-28 OATi. Avg yield -0.98% (bid-to-cover 2.94x)
• E768mln of the 0.10% Jul-31 OATei. Avg yield -0.52% (bid-to-cover 2.13x)
• E310mln of the 0.10% Jul-53 OATei. Avg yield 0.07% (bid-to-cover 2.48x).

FOREX: EUR Treads Water Below Week's Highs Ahead of ECB

• Focus turns to the upcoming ECB rate decision, with markets still split as to whether the bank raise rates by 25 or 50bps at today's meeting. Outside of headline rates, markets will also be looking for clarity surrounding the so-called Transmission Protection Mechanism - a mechanic the bank plan to use to combat unwarranted widening spreads in Eurozone government bond markets.
• The conditions surrounding the TPM will be a particular focus today as the Italian 10yr yield surges higher on the resignation of the Italian PM Draghi, who failed to corral sufficient support for his broad coalition. The Italian/German 10y yield spread has blown wider by over 10bps today, with the Italian 10y yield now higher than it's Greek counterpart.
• The Italian news has done little to hinder the EUR's progress, however, with the single currency off the session's best levels but avoiding any test of the late Wednesday lows.
• Equity futures are generally lower early Thursday, indicating a softer open on Wall Street later today. Nonetheless, the risk backdrop remains favourable, with the e-mini S&P printing a new monthly high this week and piercing key resistance at the 55-day EMA.
• Outside of the ECB decision, weekly US jobless claims data is due as well as the July Philadelphia Fed. Outside of G10, both the South African and Turkish central banks also decide on policy.

FX OPTIONS: Expiries for Jul21 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0000(E1.2bln), $1.0200-10(E1.8bln)
• NZD/USD: $0.6300(N$500mln)
• USD/CAD: C$1.2900($885mln)

EQUITIES: A Little Softer Pre-ECB

• Asian markets closed mixed: Japan's NIKKEI closed up 122.74 pts or +0.44% at 27803 and the TOPIX ended 4.15 pts higher or +0.21% at 1950.59. China's SHANGHAI closed down 32.723 pts or -0.99% at 3272.001 and the HANG SENG ended 315.59 pts lower or -1.51% at 20574.63.
• European stocks are weaker pre-ECB, with tech leading and energy dragging (and Italy underperforming amid political uncertainty): German Dax down 89.03 pts or -0.67% at 13317.24, FTSE 100 down 21.31 pts or -0.29% at 7320.4, CAC 40 down 9.51 pts or -0.15% at 6216.02 and Euro Stoxx 50 down 10.69 pts or -0.3% at 3584.12.
• U.S. futures are a little softer, with the Dow Jones mini down 88 pts or -0.28% at 31765, S&P 500 mini down 9.25 pts or -0.23% at 3953.25, NASDAQ mini down 22.75 pts or -0.18% at 12442.5.

COMMODITIES: Dollar Rebound, Risk-Off Move Weighs

• WTI Crude down $3.44 or -3.44% at $103.5
• Natural Gas down $0.28 or -3.45% at $7.421
• Gold spot down $14.06 or -0.83% at $1707.94
• Copper down $5.9 or -1.77% at $333.05
• Silver down $0.36 or -1.95% at $18.8555
• Platinum down $7.82 or -0.91% at $866.03