FED: Barr, Kugler Oppose SLR Reform As It Stands, But Swap Spreads Widen (1/2)
Jun-25 18:28
Ahead of the Federal Reserve Board's open meeting at 2pm ET on "Proposed revisions to the Board’s supplementary leverage ratio [SLR] standards", two of the seven Board members - Governors Kugler and Barr - have expressed opposition to the proposed changes to the SLR rule. Swap spreads have moved only modestly wider (-55.7bp to -55.0bp) in Treasuries' favor on the release however. While unanimity on the Fed board is not required to move forward with the reform, overall the released proposal appears to be in line with details (see the next note) that were previously flagged (Bloomberg sources).
- Gov Kugler: "the enhanced supplementary leverage ratio (eSLR) for global systemically important bank (G-SIB) holding companies may be over-calibrated in a manner that disincentivizes firms from participating in lower-risk, lower-return activities like Treasury market intermediation. In light of these and other concerns discussed in the proposal, I would have been inclined to support this proposal for comment if it was limited to changing the calculation for the eSLR for G-SIB holding companies. Unfortunately, however, I cannot support today’s proposal because of its other elements."
- Gov Barr: "I cannot support today’s proposal to weaken the enhanced supplementary leverage ratio (eSLR). Enhancing the resilience of the U.S. Treasury market is an important objective that I share with my colleagues, but this proposal unnecessarily and significantly reduces bank-level capital by $210 billion for global systemically important banking organizations (GSIBs) and weakens the eSLR as a backstop. I am skeptical that it will achieve the stated objective of improving the resiliency of the Treasury market. Despite my reservations, I could support a much more modest adjustment to the eSLR were it to be accompanied by prompt, full, and effective implementation of the Basel III Endgame reforms to risk-based capital."
- Note that Barr and Gov Waller wrote in opposition of the complete exclusion of Treasuries from the calculation of the SLR’s denominator. It had been seen as a somewhat lingering question as to whether they would be excluded in the new rule though this response suggests a fair amount of opposition on the Board. (Barr: "While there may be some superficial appeal to completely excluding exposures to the United States government because of its riskfree status, such a change would be ill-advised.")
- All of the materials related to the Fed's proposed changes to regulatory capital rules are at this link.
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COMMODITIES: Crude Steady As Reversal Signals Remain In Play, Gold Edges Lower
May-26 17:41
- Crude erased earlier gains to be little changed on the day, as more optimism towards US-Iran negotiations and an expected OPEC+ supply hike from July offset support from a delay in US tariffs on EU imports.
- WTI Jul 25 is broadly unchanged at $61.6/bbl.
- OPEC+’s seemingly hard-line approach to punishing its overproducing members risks plunging crude into a full-blown price war, Bloomberg said.
- For WTI futures, the recovery since Apr 9 appears corrective. The medium-term bearish technical theme remains intact, with key support and the bear trigger at that Apr 9 low, at $54.33.
- For bulls, key resistance to watch is $62.66, the 50-day EMA, a clear break of which would open $65.82, the Apr 4 high.
- Meanwhile, spot gold has fallen by 0.5% to $3,342/oz, leaving the yellow metal just below Friday’s two-week high of $3,365.9.
- Amid some signs of progress in US trade negotiations, Bloomberg reports that physically backed gold ETF’s have seen five straight weeks of outflows since peaking at the highest in more than a year in mid-April.
- Medium-term trend signals for gold remain bullish, however, with moving average studies in a bull-mode position, highlighting a dominant uptrend.
- A continuation higher would open $3,435.6 next, the May 7 high. Key support and the bear trigger has been defined at $3,121.0, the May 15 low.
FOREX: USD Set To Finish Off Of Worst Levels
May-26 15:04
The USD has underperformed many of its G10 FX peers for much of the day, with ongoing policy uncertainty continuing to provide headwinds for the greenback after President Trump delayed the timeline for the imposition of 50% tariffs on the EU following a conversation with EC President Von Der Leyen.
- The BBDXY registered a fresh ’25 low, piercing the Dec ’23 low in the process. Bears will look to force a break of the ’23 closing low (1,200.41) next.
- A reminder that liquidity was thinned by the U.S. & UK public holidays.
- EUR/USD extended the recent bullish move, trading as high as 1.1419 before fading back to 1.1380. Next resistance of note seen at the 76.4% retracement of the Apr 21 - May 12 bear leg (1.1453).
- GBP/USD topped out at 1.3593 before a pullback to 1.3560. The 1.382 projection of the Feb 28 - Apr 3 - 7 price swing (1.3605) presents the next upside area of note.
- USD/JPY has recovered from the lowest levels registered in May (142.23 printed in Tokyo trade), with the wider risk reaction to the delay of the tariffs on the EU providing some counter. Spot last deals at 142.80 after reaching 143.08, with bears remaining in technical control. A move through today’s lows would expose the 76.4% retracement of the Apr 22 - May 12 bull leg (141.96). Bulls need to retake the 20-day EMA (144.66) to start turning the tide in their favour.
- Risk proxy FX (AUD, NZD, NOK & SEK) outperformed for much of the session on the U.S.-EU tariff relief but also faded from best levels against the USD.
- Note that AUD/USD cleared next resistance at 0.6515 before fading back to 0.6500.
- U.S. consumer confidence & durable goods data headlines on Tuesday, complimented by Fedspeak from Kashkari & Barkin and ECB speak from Villeroy & Nagel.
US TSYS: TY Closes Opening Gap Lower
May-26 14:51
Tsy futures have closed the gap lower seen at the Asia open, with the contract last flat at 110-02+.
- This comes with e-minis and crude oil futures moving away from session highs, helping counter the sell off that was driven by Trump delaying the imposition of the 50% tariff on the EU.
- The contract’s technical bear cycle that started in early May remains intact.
- Initial support and resistance located at 109-13 & 110-21+, respectively.
- A reminder that activity ahs been limited by the presence of the Memorial Day holiday in the U.S., with cash Tsys closed and futures set to close early (13:00 NY/18:00 London).
- Roll activity has synthetically boosted volumes, latest completion estimates provided below:
- TU: 56.2%
- FV: 54.5%
- TY: 56.2%
- UXY: 44.3%
- US: 57.9%
- WN: 59.9%
- Minneapolis Fed President Kashkari underscored the need for the central bank to remain on hold for “a while” over the weekend, given the macro uncertainty evident at present.
- Fed Funds futures show ~46.5bp of cuts through December vs. ~48bp late on Friday.
- Durable goods and consumer confidence data headline the U.S. calendar on Tuesday, with comments from Fed’s Kashkari & Barkin also slated. Elsewhere, the Treasury will sell 2-Year paper.
