MNI US MARKETS ANALYSIS - Treasuries Lower as Fed Commences QT

US TSYS SUMMARY: Modest Sell-Off, Fed To Commence QT

• Cash Tsys have dipped lower through European hours at the front-end, aided by a small uptick in the final Eurozone manufacturing PMIs, after keeping to a narrow range overnight ahead of the Fed commencing QT today.
• It leaves yields slightly up on the day, biased somewhat towards the belly and less so front-end but is does little to change yesterday’s bear steepening of the curve, with 2s10s at 29bps.
• 2YY +1.4bps at 2.571%, 5YY +1.7bps at 2.834%, 10YY +0.9bps at 2.853% and 30YY +0.9bps at 3.054%.
• TYU2 sits 4 ticks lower at 119-10+ with modestly above average volumes. It’s off a session low of 119-03+ as it fleetingly began to test initial support at 119-03 (May 23 low), clearance of which could open a key short-term support at 118-01+ (May 18 low).
• See the Fed Funds STIR bullet for data and Fedspeak detail, along with the Beige Book at 1400ET.
• No bill or bond issuance.

STIR FUTURES: Year-End Hike Expectations Nudge Higher Ahead Of Solid Docket

• FOMC-dated Fed Funds implied hikes see little change overnight for near-term meetings (51bp Jun, 100bp Jul) but have ticked higher further out with 140bps for Sep and 192bp to year-end.
• Bostic ('24 voter) told MarketWatch that his suggestion from last week to take a September "pause" should not be construed as a "Fed put", although those prior comments preceded Waller (voter) arguing for 50bp hikes at ‘several’ meetings.
• Fedspeak: Williams (voter) makes opening remarks with text at 1130ET before Bullard (’22 voter) discusses the economic and policy outlook with text and Q&A incl. media at 1300ET.
• Data: ISM mfg eyed at 1000ET with consensus for 54.5 from 55.4. Regional Fed surveys imply some notable downside risk although the flash PMI, whilst seeing a larger monthly fall held a higher level (with European PMIs since revised slightly higher for what it’s worth). JOLTS openings to unemployed also of note after repeated mention by various FOMC members.

Source: Bloomberg

EGB/GILT SUMMARY: Mixed Trading Following Sell-Off Earlier In The Week

European government bonds have traded mixed this morning following the sell-off earlier in the week. Equity performance has been similarly uneven, G10 FX are broadly lower against the dollar, while oil prices have inched further higher.

• The gilt curve has twist flattened with the 2s30s spread narrowing 6bp.
• Bunds have lacked clear direction and now trade close to flat on the day.
• It is a similar story for OATs, which are also trading near yesterday's close.
• The belly of the BTP curve has slightly outperformed the short- and long-end.
• Moscow has warned that the US decision to supply additional rockets to Ukraine "increases the risk" of direct confrontation.
• UK house prices, recorded by Nationwide, increased further than expected in May (11.2% Y/Y vs 10.5% consensus), adding to the intensifying inflationary picture.
• Supply this morning came from the UK (UKTBs, GBP2bn), Eurozone (Bills, EUR2.496bn) and Greece (GTBs, EUR625mn). In addition, Germany is selling EUR4bn of a 30-year greenbond via syndication with books last seen over EUR15.8bn).

UK: Betting Markets Shift Against PM As No Confidence Letters Pile Up

Political betting markets are now showing an implied probability of 42.4% that Prime Minister Boris Johnson is removed from office in 2022, overtaking the prospect of him remaining in office until 2024 or later, which has an implied probability of 40.0%. There is a growing expectation that as soon as next week the threshold of 54 letters from Conservative MPs calling for a vote of no confidence in Johnson's leadership will be reached as the fallout from 'partygate' continues to hit the PM's standing.

Chart 1. Betting Market Implied Probability of Year PM Johnson Leaves Office, %

Source: Smarkets

• While the calliing of a confidence vote seems likely - 41 Conservatives have questioned Johnson's leadership with 28 directly calling for him to go (up one on Tuesday) - it remains unclear whether anti-Johnson Conservatives will be able to muster the 180 votes required to remove the PM in an eventual confidence vote.
• Betting markets show that there is no clear frontrunner for the position, following the collapse in Chancellor Rishi Sunak's fortunes following revelations about his wife's non-dom tax status and him holding for a time a US green card while he was in office.
• Former Foreign Secretary Jeremy Hunt, who went up against Johnson in the 2019 leadership contest and is seen as a leading centrist 'One Nation Tory' in the party, is the narrow favourite in betting markets. He has an implied probability of 16.3% of becoming the next leader. In second place is incumbent Foreign Secretary Liz Truss on 12.8%. The low levels of implied probability of victory for the frontrunners shows how open a contest could be, but also how divisive for the party given many factions could come into open warfare during the lengthy process.

Source: Smarkets

GERMAN DATA: Retail Sales Slump to 14-Month Low

GERMAN APR RETAIL SALES -5.4% M/M, -0.4% Y/Y (REAL, SA)

• April retail turnover contracted by 5.4% m/m in Germany, slumping substantially further than the forecasted -0.5% m/m. Real retail sales saw a further 0.4% contraction compared to April 2021.
• This implied real turnover sinking to the lowest since February 2021, as German consumer demand wavers due to soaring inflation recorded jumping 0.5pp to +7.9% y/y in the flash print for May.
• Stagnating growth outlooks in the region and minimal evidence of wage growth continue to underline the ECB's dovish policy, seen holding off on hikes in the June meeting.

GERMAN DATA: German Supply Chain Issues Could Add to ECB Woes

• Supply chain delays are accelerating again for German retailers, with over 80% seeing some empty shelves as ordered goods are stuck in transit in Covid lockdown-hit Chinese ports, an Ifo report published Wednesday says.
• The latest report sees 80.1% of respondents seeing a delay in orders, up sharply from April's 67% and only just shy of the December peak at 81.6%. The outcome is in line with the latest MNI Chicago Business Barometer, that also pointed to a resurgence of supply chain issues in the U.S.
• Two-thirds of retailers said the situation in China in particular had further exacerbated existing supply problems. Shanghai’s COVID lockdown was (mostly) lifted today, although a recent BBG report highlighted that Chinese authorities are continuing to invest in networks of testing infrastructure, suggesting the likelihood of the country’s COVID Zero strategy remaining in place for the long run.
• Supply chain issues are a source of concern for central banks as they eye rampant inflation levels.

EUROPE OPTION FLOW SUMMARY

Eurozone:
RXN2 152.50/154.00/155.50/157.00c condor, bought for 37 in 15k

ERQ2 99.375/99.25ps, bought for 1.5 in 1.5k

FOREX: USD/JPY Nearing Y130.00

• JPY is slipping in early Wednesday trade, with USD/JPY inching closer to the Y129.50 and the Y130.00 handle. The move higher hasn't coincided with strength across global equities, although most futures markets are in minor positive territory.
• The greenback is stronger, with the USD Index bouncing further off the 50-dma support at 101.52, although stronger-than-expected manufacturing PMI releases from Spain, France and the Eurozone have stalled the greenback's rally somewhat.
• The BoC rate decision takes focus going forward, with markets expecting a 50bps rate hike to 1.50%. There will be no press conference, only a statement released alongside the decision. The statement is likely to maintain its hawkish tone to keep inflation expectations from deanchoring but offer little in the way of new guidance.
• Hawkish surprises could come from language around moving further into excess demand or inflation being increasingly persistent and broad-based, but the market is likely more sensitive to dovish commentary concerning the global growth backdrop and/or moderation in Canadian housing activity.
• Data highlights Wednesday include May ISM Manufacturing and April's JOLTs data. Any outlier will be watched carefully ahead of Friday's Nonfarm Payrolls release.
• A number of central bank speakers are due, with ECB's de Cos, Panetta & Lane due as well as Fed's Williams & Bullard.

FX OPTIONS: Expiries for Jun01 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0565(E657mln), $1.0640(E529mln), $1.0740-60(E1.5bln)
• USD/JPY: Y127.50-55($1.3bln), Y129.82-00($612mln)
• AUD/USD: $0.7171(A$1.1bln)
• NZD/USD $0.6620(N$725mln)
• USD/CAD: C$1.2465($600mln), C$1.2700($751mln)
• USD/CNY: Cny6.64($850mln), Cny6.70($2.3bln), Cny6.78($1.5bln), Cny6.80($2.0bln)

Price Signal Summary - USDJPY Bulls Return

• In the equity space, S&P E-Minis remain firm following recent gains. The contract on Tuesday briefly traded above the 50-day EMA, currently at 4188.24. A clear break of this average would strengthen current bullish conditions and open key resistance at 4303.50, the Apr 26/28 high. Gains are still considered corrective and the primary trend direction is down. A reversal lower would refocus attention on the bear trigger at 3807.50, May 20 low. EUROSTOXX 50 futures maintain a firmer short-term tone following recent gains and the break above the 50-day EMA. The move higher is still considered corrective. However, attention is on resistance at 3883.00, Apr 21 high and, the key resistance at 3944.00, the Mar 29 high. A break of the latter would strengthen current bullish conditions. Short-term support has been defined at 3576.00, May 19 low.
• In FX, EURUSD continues to trade near the top of its bear channel. The channel is drawn from the Feb 10 high and intersects at 1.0795 today. It marks a key short-term resistance where a break would strengthen bullish conditions and highlight a stronger short-term outlook. A reversal lower would reinforce the broader bearish theme. This would open 1.0533 initially, the May 20 low. GBPUSD maintains a firmer short-term tone and the current corrective bull cycle is still in play. Attention is on the 50-day EMA at 1.2719. Initial firm support lies at 1.2472, May 24 low. USDJPY has recovered from its recent lows and support at the 50-day EMA remains intact. The move higher signals the end of the recent corrective pullback. This reinforces bullish conditions and signals scope for a climb towards the bull trigger at 131.35, May 9 high. Key short-term support has been defined at 126.36, May 24 low.
• On the commodity front, Gold has found resistance recently at $1869.7, the May 24 high. This represents a key short-term resistance and means that for now, resistance at the 50-day EMA, at $1878.2, remains intact. An extension lower would refocus attention on the key support and bear trigger at $1787.0, the May 16 low. Gains above $1869.7 are required to reinstate the recent bull theme. In the Oil space, WTI futures yesterday breached resistance at $116.43, the Mar 7 high and the former contract high. This confirms a resumption of the underlying uptrend and opens the $120.00 handle, and potentially beyond. Initial firm support is seen at $108.86, the 20-day EMA.
• In the FI space, resistance in Bund futures traded lower Tuesday and breached initial support at 151.89, May 18 low. The primary trend direction is down. A continuation lower would open 150.49, the bear trigger and May 9 low. Firm trend resistance is unchanged at 155.33, the May 12 high. Gilts traded sharply lower Tuesday to extend the pullback from its recent highs in May. The contract has tested key support at 115.70, May 9 low and the bear trigger. A break of 115.70 would confirm a resumption of the bear leg and open 115.54, 1.50 projection of the May 19 - 24 - 26 price swing.

COMMODITIES LEVELS UPDATE: WTI higher but still some way off yesterday's highs

• WTI Crude up $1.78 or +1.55% at $116.4
• Natural Gas (NYM) up $0.23 or +2.84% at $8.373
• Natural Gas (ICE Dutch TTF) down $5.28 or -5.62% at $88.725
• Gold spot down $8.16 or -0.44% at $1829.09
• Copper down $2.1 or -0.49% at $427.5
• Silver down $0.07 or -0.32% at $21.4778
• Platinum up $2.48 or +0.26% at $971.21

EQUITIES LEVELS UPDATE: Mixed performances today

• Japan's NIKKEI up 178.09 pts or +0.65% at 27457.89 and the TOPIX up 25.97 pts or +1.36% at 1938.64.
• China's SHANGHAI closed down 4.271 pts or -0.13% at 3182.156 and the HANG SENG ended 120.26 pts lower or -0.56% at 21294.94.
• German Dax up 40.1 pts or +0.28% at 14428.87, FTSE 100 down 13.27 pts or -0.17% at 7593.93, CAC 40 up 7.31 pts or +0.11% at 6477.88 and Euro Stoxx 50 up 6.86 pts or +0.18% at 3794.94.
• Dow Jones mini up 128 pts or +0.39% at 33084, S&P 500 mini up 5.75 pts or +0.14% at 4136.75, NASDAQ mini down 10 pts or -0.08% at 12635.75.