STIR: Holding Dovish Shift Ahead Of A Solid US Docket
Sep-04 10:25
- Fed Funds implied rates are holding yesterday’s dovish shift after a soft JOLTS report ahead of multiple labor releases between 0730-0830ET (prior to NFPs tomorrow) plus ISM services at 1000ET.
- There’s also various Fedspeak appearances plus possible headlines from the Cook case, to be discussed in a following bullet.
- Cumulative cuts from 4.33% effective: 24.5bp Sep, 38.5bp Oct, 58.5bp Dec, 71bp Jan and 85bp Mar.
- SOFR futures are broadly at session and yesterday’s highs, up to 2 ticks higher out to end-2027 contracts.
- The SOFR implied terminal yield of 2.945% (SFRH7, -1.5bp) is back probing last week’s lowest closes since late April and before that Oct 2024. It eyes close to 140bp of cuts from current levels.
Yesterday saw mostly patient Fedspeak before a Beige Book with a marked weakening in labor discussions.
- Musalem (’25 voter, hawk) thinks rates are currently at the right level given economic conditions. While he seems prepared to ease policy at some point in the future, and he recognizes that the balance of risks is tilting a little more toward missing on the employment mandate, he is comfortable with keeping policy "modestly restrictive" for now.
- Kashkari (’26 voter) said inflation is still too high and he is not yet in the camp that tariff-driven inflation will be a short-term phenomenon.
- Bostic (non-voter) still sees a single 25bp rate cut this year, with the September meeting in play. Rising inflation presents a greater risk to the dual mandate than a deteriorating labor market even as hiring has slowed.
- The Beige Book pointed to a slightly improved assessment of current economic activity in August versus the prior edition in July, with selling price pressures remaining modestly/ moderately to the upside. However, expectations were for future price increases (in part due to tariffs), and the latest edition suggests that labor market conditions have weakened. After a solid July Beige Book for labor, this was the weakest Beige Book report in terms of employment dynamics in at least the last year.
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LOOK AHEAD: Tuesday Data Calendar: Import/Export, PMIs, ISM Services, 3Y Sale
Aug-05 10:25
- US Data/Speaker Calendar (prior, estimate)
- 08/05 0830 Trade Balance (-$71.5B, -$61.0B)
- 08/05 0830 Exports MoM (-4.0%, --), Imports MoM (-0.10%, --)
- 08/05 0945 S&P Global US Services PMI (55.2, 55.2)
- 08/05 0945 S&P Global US Composite PMI (54.6, 54.6)
- 08/05 1000 ISM Services Index (50.8, 51.5)
- 08/05 1000 ISM Services Prices Paid (67.5, 66.5)
- 08/05 1000 ISM Services New Orders (51.3, --)
- 08/05 1000 ISM Services Employment (47.2, --)
- 08/05 1130 US Tsy $85B 6W & $50B 52W bill auctions
- 08/05 1300 US Tsy $58B 3Y Note auction (91282CNU1)
- Source: Bloomberg Finance L.P. / MNI
STIR: September Fed Cut Close To Fully Priced, ISM Services Headlines
Aug-05 10:25
- Fed Funds implied rates are 1.5-3bp higher on the day for nearer-term meetings having lifted off lows seen after a more dovish take from SF Fed’s Daly (non-voter) late yesterday to Reuters vs Friday’s more patient tone of Bostic and Hammack.
- They still hold all of Friday’s large dovish shift on the weak payrolls report and the helping hand from soft ISM mfg, with a cut close to being fully priced for the next meeting in September.
- Cumulative cuts from 4.33% effective: 23.5bp Sep (vs 12bp pre-NFP), 40bp Oct, 60bp Dec (vs 35bp), 72bp Jan and 85bp Mar.
- The SOFR implied terminal yield of 3.035% (SFRH7) is 2.5bp higher from yesterday’s lowest close since late April, still eyeing more than five cuts from current levels.
- Today sees main macro focus on ISM services plus any indication of potential contenders in for Fed Governor Kugler’s position and the new BLS commissioner.
- Daly said “I was willing to wait another cycle, but I can’t wait forever” [on rate cut prospects]. She still sees the two rate cuts pencilled in for this year as “an appropriate amount of recalibration”. “We of course could do fewer than two (rate cuts) if inflation picks up and spills over or if the labor market springs back”. However, “I think the more likely thing is that we might have to do more than two...we also should be prepared in my judgment to do more if the labor market looks to be entering that period of weakness and we still haven’t seen spillovers to inflation”
HONG KONG: Interbank Liquidity More Than Halved, But No Relief for HKD
Aug-05 10:22
- USD/HKD underwent a now-usual phase of sales at the local open in price action reminiscent of HKMA HKD buying (unlike other phases of USD/HKD downside e.g. On Jul28, which did not match the pattern of intervention).
- As such, a further step lower of ~HKD 6.5bln in the HKMA Aggregate Balance is expected this week, pressing interbank liquidity down to HKD72.5bln and closer to the pre-HKD rout levels of early May (circa HKD 45bln). This leaves interbank liquidity at less than half the prevailing level in May - however there has been minimal relief in USD/HKD spot which, again, is pressuring 7.85.
- Persistent HKD pressure comes as the carry trade dynamics remain highly favourable: overnight and one-week HKD swap rates remain heavily supressed (0.35% and 0.31$ respectively) which is limiting the advance in HIBOR (1m has failed to rise materially above 1%) and, in turn, keeping long USD/HKD a favourable carry trade.
- This leaves a material lag between falling interbank liquidity, the side effect of higher local rates, and a stronger spot HKD. Low demand for HK securities and still-low levels of corporate activity are largely responsible here - meaning narrowing US-HK rate spreads via Fed easing will likely be required to pull USD/HKD lower barring a material improvement in the HK IPO pipeline.
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