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Risk Appetite Improved, Market Discounting Fed Forward Guidance

US TSYS SUMMARY
  • Risk appetite improved in late trade, Treasury futures trading sideways but inching higher after the bell while equity indexes remain strong, SPX at the best levels since April 2022 as markets faded the hawkish forward guidance from Wednesday's FOMC.
  • Tsy showed little reaction to an anticipated 25bp rate hike from the ECB, rallied sharply after another upside weekly jobless claims print (+262k vs. +245k est after last week's +261k), brief selling on stronger than expected retail sales print (+0.3% vs. -0.2% exp) evaporated as core comes out in-line.
  • SOFR futures holding mildly weaker in the lead quarterly as Fed Chair Powell comment that "July is live" yesterday is taken seriously. Chances of a 25bp hike next at the July 26 FOMC is approximately 67% with Fed funds implied at 16.7bp. September cumulative at +20.7bp to 5.288%, November cumulative 19.7bp to 5.277%. while December cumulative recedes to 10.8bp to 5.190%. At the moment, Fed terminal at 5.280% in Oct'23.
  • Treasury technicals, despite today's rally, futures remain in a downtrend and this week’s move lower confirmed a resumption of the trend. Support at 112-29+, May 26 / 30 low has been cleared. This signals scope for the 112-00 handle, the Mar 10 low. Further out, bearish price action suggests scope for a move towards 110-27+, the Mar 2 low and a key support. Gains are considered corrective - for now. Initial firm resistance is at 114-00, Tuesday’s high.
  • Focus turns to Bank of Japan's policy announcement early Friday. Fed exits policy blackout tonight, Barkin, Bullard and Waller on tap tomorrow. Early NY data U. of Mich. Sentiment (59.2, 60.0) at 1000ET.
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