MNI ASIA MARKETS ANALYSIS: OAT-Bund Spread Widest Since 2012

MNI (LONDON) - HIGHLIGHTS:

• Treasuries have pared earlier losses with help from the FOMC minutes not matching some of the more hawkish recent Fedspeak
• The 10Y OAT-Bund spread closed at its highest since 2012, French PM Barnier then spoke after the close
• CAD and especially MXN have come under pressure today following President-elect Trump's 25% tariff threats
• Crude futures fell further on the formal approval of the Israel-Hezbollah ceasefire
• US stock indices extended gains as broad increases offset losses for those more closely tied to Canadian manufacturing

US TSYS: FOMC Minutes Help Front-End To Belly Pare Losses

• Treasuries have extended the intraday bull steepening seen since the FOMC minutes, with 2s leading a paring of losses with yields 3.3bps lower post-minutes for only +0.6bp on the day.
• 5Y yields have also declined 2.9bps since the minutes for +1.6bp on the day.
• The lack of a more overtly hawkish message to the minutes potentially allowing bullish plays that were held back after a reasonable 5Y auction earlier, and another step slower for WTI futures on Israel’s security cabinet ceasefire approval geopolitical factors will also help.
• 2s10s has lifted to 5bps (+4.2bps) after Monday’s dip back into inversion for the first time in over a month following the Bessent pick as Treasury Secretary.
• TYZ4 has lifted to 110-11 (-06) for back towards the middle of the day’s relatively narrow range, off an earlier low of 110-05+.
• Yesterday’s high of 110-18 is deemed corrective with the technical trend bearish. Support is seen at 109-14+ (Nov 20/21 high).
• Tomorrow sees a particularly heavy docket including GDP revisions for Q3, monthly PCE for October and initial jobless claims, all broad forward ahead of Thanksgiving, before 7Y supply.

US TSYS/SUPPLY: 5Y Auction Review - Domestic Bidders Return Strongly

Treasuries were little changed after the 5Y auction stopped through by 0.2bp, with 5Y yields 0.5bp lower since the bidding deadline for +3.0bp on the day. The bid-to-cover and primary dealer stats point to a stronger auction after the weak October showing, whilst the non-dealer split points to domestic bidders surging back to a fill a hole left by foreign institutions. 

• Treasury sold $70bn of the 2Y at a high yield of 4.197% vs WI 4.199%.
• The 0.2bp stop through is the first stop through since June.
• The bid-to-cover was 2.43x vs 2.39x in both Oct and the five-auction average.
• Primary dealer take: 11.30% vs 14.17% in Oct (highest since May) and a five-auction average of 13.2%.
• Some further unusual swings in differences between indirect and direct takes:
• Indirects take 64.12% vs 76.35% in Oct and a five-auction average of 70.67%. That’s the lowest since February after what was the highest in our tracking back to 2011.
• Directs take: 24.58% after a very low 9.47% in Oct and a five-auction average of 16.09%. That’s the highest since Jul 2014.

BONDS: EGBs-GILTS CASH CLOSE: Highest OAT/Bund Spread Since 2012

Today’s EGB focus came later in the session with a sharp widening in the 10-year OAT/Bund spread, rising 5bps to 86bps for its highest since 2012 according to Bloomberg. 

• Much of the OAT underperformance started from ~15:30GMT, along with a notable pick up in OAT future volumes vs below average Bund future volumes.
• Earlier today, the EC approved France’s 2025 draft budgetary plan, as had been reported by Bloomberg last week. The EC did however note that “the risks to achieving the fiscal objectives for 2025 set out in the Draft Budgetary Plan are tilted to the downside, and mainly relate to the favourable macroeconomic assumptions underpinning the budgetary targets set in the Draft Budgetary Plan”.
• Further, some desks noted the potential impact of this story from Le Parisien "The government will fall": Macron expects Barnier to fall. On the sidelines of the decoration ceremony for Élisabeth Borne this Monday at the Élysée, the president made a few confidences. If in front of the camera, he has always refused to comment on the government's choices, in private, he predicts the censorship of the Prime Minister by Marine Le Pen."
• PM Barnier has since appeared on local TV, reiterating on TF1 at 8pm CET the aim to cut the budget deficit to about 5% GDP whilst seeing a financial market ‘storm’ if the budget isn’t passed per Bloomberg headlines from the appearance.
• The 10-year BTP/Bund spread also widened ~3.5bps in the afternoon to leave it 1.5bps wider on the day at 127.6bps for its highest since Nov 13.
• Gilts weren’t immune from the widening, with the 10-year spread to Bund widening 3.3bps to 216.4bps.

FOREX: USDMXN Rises Over 2.5% to Fresh Post-Election Highs, USDCAD Stabilises

• There has been a mixed performance across G10 currencies on Tuesday, as tariff related headlines and geopolitical risks continue to dominate broader market sentiment. The USD index stands 0.25% higher on the session, with higher beta currencies such as AUD and CAD underperforming, while the Japanese Yen has notably firmed.
• USDJPY built downside momentum below the weekly lows around 1.5355 and briefly printed 152.99. It is also worth noting we have broken below the 20-day exponential moving average which had helped to underpin the price action in recent weeks. A daily close below the average could signal scope for a deeper correction towards both the 50-day EMA and the November lows, situated between 151.35/55.
• AUDJPY and CADJPY have both declined more than 1.2% on the session, signalling a sense of waning risk sentiment, despite US equity markets remaining buoyant and US yields being higher on the session across the curve.
• USDCAD (+0.66%), which has an outsized move during the APAC session rising to a cycle high of 1.4178, has since moderated and trades roughly 100 pips from those highs at typing.
• However, USDMXN (+2.35%) has continued to grind higher, eclipsing the post-election high at 20.8072 in the process, a multi-year high for the pair. Clearance of this level resumes the primary uptrend that's dictated price action across H2 this year, and above here, 21.0233 marks the 50% retracement of the post-COVID range.
• EURUSD briefly rose to a recovery high of 1.0545, but has since resumed its weakening bias to trade at 1.0465 ahead of the FOMC minutes. On Wednesday, Australian CPI and the RBNZ decision are highlights on the docket ahead of the US Thanksgiving holiday.

OPTIONS: Expiries for Nov27 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0410(E2.6bln), $1.0450-65(E1.5bln), $1.0475-90(E2.3bln), $1.0500(E3.1bln), $1.0550(E732mln), $1.0570(E1.1bln), $1.0600-10(E4.0bln);
• USD/JPY: Y153.00($2.7bln), Y153.50-60($690mln) Y155.95-00($1.2bln)
• EUR/JPY: Y167.30(E1.1bln)
• AUD/USD: $0.6482-90(A$591mln)
• NZD/USD: $0.5750(N$1.0bln), $0.5865(N$630mln)
• USD/CNY: Cny7.2000($1.5bln), Cny7.2480-00($1.1bln), Cny7.3000($1.1bln)

US STOCKS: ESA Close To Recent Highs As Broader Gains Offset Tariff Disruption

• E-mini S&P 500 at 6034.5 (+0.45%) sits just below session highs, with limited net reaction to the FOMC minutes. It’s close to recent highs of 6040.00 from yesterday and the bull trigger at 6053.25 (Nov 11 high).
• The technical trend needle points north although there is some way lower until support at 5934.75 (20-day EMA).
• It’s the fourth consecutive daily increase and leaves the index up 2.3% since Nov 15.
• Gains are led by utilities (+1.2%) followed by communication services (+0.85%, with Google +1.1% and Meta +1.2%) and consumer discretionary (+0.7%, with Amazon +2.7%).
• There are clear tariffs impact from Trump’s proposed 25% on Canada and Mexico plus an additional 10% on China: materials lag (-0.7%) whilst industrials (+0.1%) hides -1.1% for transportation. For single names, GM one of the largest losers at -8.1% with exposure to Canada trade disruption.
• The S&P 500 outperforms today, with Nasdaq 100 (+0.3%), Dow Jones (+0.2%) and a reversal of yesterday’s outperformance for the Russell 2000 at -0.7%.

COMMODITIES: Crude Falls on Ceasefire Approval

• WTI is heading for close trading lower after Israel Prime Minister Netanyahu announced his approval of a ceasefire deal to end fighting with Hezbollah in Lebanon.
• WTI Jan 25 is down by 0.5% at $68.6/bbl.
• A bearish theme in WTI futures remains intact, with attention on $65.74, the Oct 1 low, and $63.90, the Sep 10 low and key support.
• Initial firm resistance to watch is unchanged at $72.41, the Nov 7 high.
• Meanwhile, spot gold is little changed today, with the yellow metal just 0.1% higher at $2,627/oz, despite a brief spike higher earlier in the session on headlines of a possible further escalation in tensions between Russia and Kyiv.
• From a technical perspective, yesterday’s sharp pullback is considered corrective, for now, and the long-term trend condition remains bullish.
• Resistance to watch is $2,721.4, yesterday’s high. Clearance of this level would be a bullish development. Key support is $2,536.9, the Nov 14 low.
• Silver is outperforming slightly, up 0.6% on the day at $30.5/oz, with the gold-silver ratio at 86.2, around 1% below yesterday’s 2½-month high.
• Medium-term bullish conditions in silver remain intact, although the corrective cycle that started on Oct 23 is still in play, exposing $28.446, a Fibonacci retracement. Initial firm resistance to watch is $31.287, the 50-day EMA.

FIXES AND PRIOR SESSION REFERENCE RATES

SOFR FIX - 26/11/24

SOFR FIX - Source BBG/CME

• 1M 4.57258 -0.01299
• 3M 4.51391 -0.00717
• 6M 4.43287 -0.01212
• 12M 4.30411 -0.02166

SOFR Steady

REPO REFERENCE RATES (rate, change from prev. day, volume):

• Secured Overnight Financing Rate (SOFR): 4.57%, no change, $2188B
• Broad General Collateral Rate (BGCR): 4.56%, no change, $802B
• Tri-Party General Collateral Rate (TGCR): 4.56%, no change, $773B

SOFR on Friday held onto Thursday’s increase (an increase that was largely attributable to unusually large bill settlements), with secured rates roughly expected to remain around current levels or slightly higher through most of the rest of the month. 

Effective Fed Funds Rate Unchanged

New York Fed EFFR for prior session (rate, chg from prev day):

• Daily Effective Fed Funds Rate: 4.58%, no change, volume: $103B
• Daily Overnight Bank Funding Rate: 4.58%, no change, volume: $283B

US TSYS/OVERNIGHT REPO: ON RRP Usage Close To Recent Lows

• Take-up of the Fed's overnight reverse repo facility fell more notably today, down $38bn to $149bn for close to new recent lows of $144bn from Nov 5.
• The number of counterparties fell from 57 to 51 for lows since Nov 15.
• ON RRP take-up is expected to pick up at end-month.

US DATA: Core PCE Seen On Track To Overshoot Median FOMC Forecast

• Released on Wednesday at the unusual time of 1000ET, Bloomberg consensus sees core PCE inflation at 0.3% M/M in October after the 0.25% M/M in September.
• We see unrounded estimates looking for a slightly ‘low’ 0.3%, with a median of 0.28% in the below table.
• From some of the more detailed estimates, Nomura expect small downward revisions of only 1bp to both Aug and Sept readings, whilst TD Securities see their estimate of 0.27% M/M for core PCE including a 0.39% M/M increase for supercore.
• Powell on Nov 14: “Estimates based on the consumer price index and other data released this week indicate that total PCE prices rose 2.3 percent over the 12 months ending in October and that, excluding the volatile food and energy categories, core PCE prices rose 2.8 percent.”
• Revisions do indeed look like they’re expected to be small then, seeing as a 0.28% M/M increase without any revisions would translate to 2.80% Y/Y after the 2.65% in September.
• We'll have a crude idea of revisions in the Q3 release that follows shortly beforehand at 0830ET as part of the second Q2 national accounts release.
• Importantly, whilst these upward base effects into year-end were already known, recent run rates would have continued to firm. A 0.28% M/M (again, assuming no revisions for a basic illustration) would see a three-month run rate of 2.8% after 2.3% in Sept and recent lows of 1.9% in Jul-Aug. Alternatively, and smoothing some recent noise, the six-month would inch a tenth higher to 2.4%.  
• The latest trends are also, notably, leaving core PCE inflation on track to overshoot the median FOMC forecast of 2.6% for Q4 from the Sept SEP, revised down from June’s 2.8%. For a purely indicative exercise, a 0.28% M/M increase in Oct followed by two 0.20% readings would see 2.9% Y/Y in Q4, in line with the (presumably) most hawkish members considering the FOMC range of 2.4-2.9% for Q4. 

CANADA: Trudeau Helps USD/CAD Off Highs, But Options Hedge for Further Vol

• Having traded to a new multi-year high on the Trump tariff headlines, USD/CAD has faded, but remains higher by over 0.8% on yesterday's close [the pair continued to fade after writing to +0.5% higher at point of sending]. After printing a 1.4178 high, the pair has faded, aided lower by NYT sources reporting that Trudeau had reached out to Trump directly to address border security and US-Canada trade - which may add to recent speculation that Canada would bypass Mexico in seeking to strike a trade deal with Trump's White House.
• CAD's reactiveness to last night's headlines suggests that markets had been expecting a much more gradual approach to trade restrictions following Bessent's Tsy Sec nomination - and leaves the potential for further sensitivity to headlines into January's inauguration.
• As such, USD/CAD bulls look to 1.4196 as first resistance, but those looking for a reversal lower will need to wait for prices to show through 1.3942 (20-day EMA) for any counter-trend signals.
• Vol hedges have unsurprisingly taken focus in overnight CAD options trade, as well as upside exposure into the inauguration on Jan 20th next year - as evidenced by the sizeable shorter-dated 1.3865/1.4455 strangle and the Jan17 expiry $139mln 1.31 vanilla call that traded at the European open, for which the buyer paid a premium of over $1.3mln.

CANADA: Canadian Trade Particularly Dependent On US As Tariff Talk Starts

• The Canadian dollar touched four-year lows against the US dollar overnight as President-elect Trump wasted no time proposing 25% tariffs on all imports from Canada and Mexico plus an additional 10% tariff on China.
• The snap higher for USDCAD easily more than reversed a small decline seen after Bessent’s pick as Treasury Secretary with hope of a more gradual approach to tariffs.
• Trump’s logic was that he would hit Canada & Mexico with a 25% tariff on "ALL products," until such time as they stop drugs in particular "fentanyl" and "all Illegal Aliens" from entering the US.
• As noted above, USDCAD then moved off highs after NYT sources reported Trudeau reaching out to Trump directly to address border security and US-Canada trade. This has scope for some success, especially on immigration, considering far lower levels of US border encounters with Canada than Mexico: US northern land border encounters summed to 200k in the twelve months to October vs 2.0m for southern land border encounters.
• Adjustments in trade are likely more painful however, considering we’re entering the second Trump presidency with a Canadian goods trade surplus to the US worth about twice it was at the start of the first Trump presidency (3.6% GDP in the twelve months to September vs 1.7% GDP in 2015).
• The first Trump presidency saw the Canada-US trade surplus fall to its lowest in many years, at ~1.5% GDP in 2H16 when the overall Canadian trade balance was tracking a deficit of circa 1.5% GDP.
• The historically large recent trade surpluses with the US (compared to the post-GFC period) masks a heavy merchandise trade deficit with the rest of the world to the tune of 3.7% GDP. 

CANADA: Analysts On Potential Tariff Implications

• BMO: “For the BoC, a softer growth profile could set policy on a more dovish path, but a weaker currency and some potential inflation impact would likely keep it from deviating much from our current call. That said, if there is a tit-for-tat response on the Canadian side, we get into more of a classic supply shock, which would become more inflationary and peg interest rates higher than the current baseline. As of now, our call sees BoC policy rates falling to 2.5% by September 2025, which is more dovish than current consensus and market expectations. Set against the net risk on the tariff front, we’re comfortable with that call until further action/details emerge.”
• CIBC: “Perhaps it's wishful thinking on our part, but our expectation is that this particular trade threat will ultimately go away. […] That said, even if this 25% punitive tariff doesn't happen, this won't be the last set of negotiations over trade and tariffs with the new White House team. Trump's willingness to brandish the tariff weapon so quickly, before even getting to his desk in the Oval Office, portends a long road ahead for both Canada and Mexico to preserve what they negotiated during Trump's first term. The uncertainties over future trade access to the US market could represent a significant drag on capital spending in Canada's export industries over the next couple of years, even if Canada and Mexico are able to ward off this immediate tariff threat by taking actions along the border.”
• Desjardins: “With 2-year [GoC] rates sitting at 3.23%, there’s ample room to decline even in a more optimistic scenario where Canada avoids such punitive tariffs. The BoC won’t incorporate tariff threats until a policy is actually enacted. So we don’t believe this will have much bearing on the upcoming decision, where we continue to expect the central bank will downshift back to a 25 basis point reduction. However, we do have more conviction in our dovish view on the terminal policy rate for Canada now. These aggressive threats will at the least weigh on business investment in Canada as companies grapple with uncertainty about access to the US market. Combined with the upcoming mortgage renewal wall and the slowdown in population growth, we see a 2.00% overnight rate as likely in just over a year’s time.”

Date	GMT/Local	Impact	Country	Event
27/11/2024	-		NZ	Reserve Bank of New Zealand Meeting
27/11/2024	0030/1130	***	AU	Quarterly construction work done
27/11/2024	0030/1130	***	AU	CPI Inflation Monthly
27/11/2024	0100/1400	***	NZ	RBNZ official cash rate decision
27/11/2024	0700/1500	**	CN	MNI China Money Market Index (MMI)
27/11/2024	0745/0845	**	FR	Consumer Sentiment
27/11/2024	0930/1030	*	DE	GFK Consumer Climate
27/11/2024	1200/0700	**	US	MBA Weekly Applications Index
27/11/2024	1330/0830	***	US	GDP
27/11/2024	1330/0830	***	US	Jobless Claims
27/11/2024	1330/0830	**	US	Durable Goods New Orders
27/11/2024	1330/0830	**	US	Advance Trade, Advance Business Inventories
27/11/2024	1445/0945	***	US	MNI Chicago PMI
27/11/2024	1500/1000	***	US	Personal Income and Consumption
27/11/2024	1500/1000	**	US	NAR Pending Home Sales
27/11/2024	1500/1000	**	US	US Bill 04 Week Treasury Auction Result
27/11/2024	1500/1000	*	US	US Bill 08 Week Treasury Auction Result
27/11/2024	1530/1030	**	US	DOE Weekly Crude Oil Stocks
27/11/2024	1630/1130	**	US	US Treasury Auction Result for 7 Year Note
27/11/2024	1700/1200	**	US	Natural Gas Stocks
27/11/2024	1800/1900		EU	ECB's Lane dinner remarks at conference on "Macroeconomic modelling frontiers for research and policy"