MNI US MARKETS ANALYSIS - GBP Slides on Nov, Dec Cut Pricing

Highlights:

• Bailey raises risk of back-to-back BoE cuts in Nov, Dec
• Payrolls presents risk of upside unemployment surprise
• Risk of direct confrontation grows as IDF incursion into Lebanon grows

US TSYS: TYZ4 Just Shy Of Joint Support Ahead of Important Data

• Treasuries have pushed lower on the day, mostly confined to yesterday’s range but with 2s pushing to levels just off Monday’s post-Powell lows.
• They lag EGBs where supply is seen weighing but underperform Gilts after a dovish Bailey.  
• Cash yields are 1.9-2.8bps higher with increases led by 7s. 2Y yields at 3.6600% are of note, close to Monday’s 3.6677% after Powell’s push for patience for otherwise highs since Sep 12 (US PPI).  
• 2s10s has lifted slightly to 15bps (+0.5bp) but remains within recent ranges and below ytd highs of 24.1bps.
• TYZ4 has sat on and off session lows of 114-07+ (- 06) for over 90 minutes now, eyeing support at 114-07 (Sep 26 and Oct 2 lows) after which lies 114-00+ (Sep 4 low). Volumes at 330k are slightly above recent averages.
• Data: Challenger job cuts Sep (0730ET), Weekly jobless claims (0830ET), S&P Global US serv/comp PMI Sep final (0945ET), Factory orders Sep (1000ET), Factory orders Aug (1000ET),
• Fedspeak: Schmid welcome remarks (1000ET, no text), Kashkari moderates a discussion with Bostic (1040ET, no text) - see STIR bullet.
• Bill issuance: US Tsy $95B 4W, $90B 8W bill auctions

STIR: 25bp Cut Slightly Preferred To 50bp Ahead Of Claims & ISM Services

• Fed Funds implied rates are unchanged for November but beyond that sit 1-2bps higher overnight. Rates for the Nov and Dec meetings sit just below intraday highs seen after Powell’s NABE speech and Q&A on Monday.
• Cumulative cuts from 4.83% effective: 34.5bp Nov, 70bp Dec, 100bp Jan and 160bp June.
• Fedspeak should be secondary to data today, headlined by weekly jobless claims at 0830ET before ISM services at 1000ET.
• 1000ET – Schmid (’25 voter) gives welcome remarks at a banking conference (no text). He last spoke Aug 22 when he needed to see more data before he could support a rate cut (which he clearly did with only Bowman dissenting to the 50bp cut) and noted potential for demand to pickup if the Fed isn’t careful. However, today's structure and topic should limit discussion.
• 1040ET – Kashkari (non-voter) moderates a discussion with Bostic (’24) on inclusive economy (no text)

MNI: US Payrolls Preview: Risks Of Upside Unemployment Surprise

Executive Summary

• Nonfarm payrolls growth is expected to have firmed marginally to 150k in September although some analysts also look for upward revisions to August.
• There is a strong cluster of estimates around 150k but with a wider than recent range of views beyond that.
• The unemployment rate can again have a major role in the market reaction. Consensus sees 4.2% for a second month and whilst claims have proved resilient, we see a real risk that it tilts the other side of 4.25%.
• Powell has looked to temper expectations of a second 50bp cut but the market still prices 35bp of cuts for the Nov 6-7 FOMC with core PCE inflation recently tracking a little below 2% annualized.
• A scenario with the u/e rate firmly rounding to 4.3% and payrolls growth of circa 100k could be sufficient for a material step towards pricing in 50bp but the elections on Nov 5 remain a key unknown.
• Note that there is no expected strike impact with this month’s data but there could be significant disruption for the October report on Nov 1, just a few days ahead of the Nov FOMC. 

PLEASE FIND THE FULL REPORT HERE:

USNFPOct2024Preview1.pdf

US TSY FUTURES: Long Cover In TY Seen Wednesday

Long cover in TY futures provided the only positioning swing of note on Wednesday.

• More modest rounds of long cover were seen in TU & FV, along with pockets of short setting in UXY, US & WN.
• The long cover in TY outweighed the long setting seen in the contract the day prior.

STIR: Long Cover Dominated In Front End Of SOFR Strip Post-ADP

OI data points to long cover dominating in the very front end of the SOFR strip during Wednesday’s sell off, with a mix of short setting and long cover seen further out.

• A sell off in European rates and firmer-than-expected ADP labour market data pressured SOFR futures on Wednesday, with a little Fed rate cut premium unwound.
• Fed funds futures now price 34.5bp of cuts for November, 70bp of cuts through December, and 160bp of easing through June.

EUROPE ISSUANCE UPDATE:

Spain auction results

• E1.854bln of the 2.50% May-27 Bono. Avg yield 2.277% (bid-to-cover 2.18x).
• E1.5bln of the 1.45% Apr-29 Obli. Avg yield 2.378% (bid-to-cover 2.60x).
• E1.188bln of the 4.70% Jul-41 Obli. Avg yield 3.356% (bid-to-cover 2.17x).
• E512mln of the 2.05% Nov-39 Obli-Ei. Avg yield 1.297% (bid-to-cover 2.38x).

France auction results

• The French LT OAT auction was successful again: The top of the target range was sold (E12.0bln) and all four LT OATs saw a stop price exceed the pre-auction mid-price. OAT futures remain close to intraday lows at typing though, last -34 ticks at 126.91.
• Once again, there was a skew to the on-the-run 10-year 3.00% Nov-34 OAT, but not quite as much as last month’s outing (E6.2bln sold vs almost E7bln in September).
• The bid-to-cover ratio for the 10-year line was 2.15x, just below last-month’s 2.19x.
• The on-the-run 30-year 3.25% May-55 OAT saw a strong 3.41x bid-to-cover-ratio (vs 2.66x prior), with the stop price of 94.44 in excess of the 94.247 pre-auction mid.
• E2.485bln of the 1.25% May-34 OAT. Avg yield 2.86% (bid-to-cover 2.55x).
• E6.165bln of the 3.00% Nov-34 OAT. Avg yield 2.92% (bid-to-cover 2.15x).
• E1.415bln of the 3.25% May-55 OAT. Avg yield 3.55% (bid-to-cover 3.41x).
• E1.917bln of the 3.00% Jun-49 Green OAT. Avg yield 3.42% (bid-to-cover 2.89x).

MIDEAST: Direct Confrontation Escalates As IDF Incursion Into Lebanon Grows

In a statement, Hezbollah has claimed that its fighters have 'confronted an attempt' by Israeli forces to advance into Lebanon at the Fatima Gate, a border crossing point at the northern tip of Israel. The land on the Israeli side of the border has been closed off by the military in preparation for a ground incursion. Amid the ongoing incursion by Israeli troops into southern Lebanon, and Hezbollah's continued rocket and drone attacks on Israel, the region remains in a state of nervous expectation as it awaits Israel's response to Iran's missile barrage unleashed earlier in the week. 

• An Israeli military spox earlier this morning accused Hezbollah of smuggling weapons from Syria through the official border crossing as Masnaa. There have been a number of reports over the past 48hours regarding alleged Israeli air strikes on Syria. On 1 Oct Syrian security sources told Reuters that Israel had struck three anti-aircraft radar stations in southern Syria, then on 2 Oct Syrian state media accused Israel of killing three civilians in an airstrike on Damascus. Earlier today Israel is reported to have hit targets on Syria's Mediterranean coast, targeting weapons depots.
• Following US President Joe Biden's comments on 2 Oct deterring an Israeli strike on Iranian nuclear facilities, focus is on what the Netanyahu gov't could respond with. Striking Iranian oil facilities could pose risks to the Strait of Hormuz, while targeted assassinations could spark another Iranian missile barrage. 

Map of Israeli-Lebanese Border

FOREX: Slipping Sterling Puts Cable on Course for 50-dma

• A dovish appearance from BoE's Bailey in this morning Guardian newspaper helped trigger a phase of dovish Bank of England re-pricing. OIS markets now price close to 45bps of easing for the rest of 2024, up from 37bps as of yesterday's close after Bailey stated that rates could be cut more aggressively if inflation stayed subdued. As a result, GBP/USD corrected lower to take out recent lows of 1.3237, taking out support to touch new pullback lows of 1.3106. This puts the pair on course for a test of the 50-dma at 1.3070 in the near-term, with a 300 pip gap now opened with the September high.
• The comment raise the focus on the September CPI print due on  Oct 16th - a soft read should prompt markets to more aggressively price back-to-back 25bps rate cuts for the remainder of this year - keeping the BOE on course with the Fed and ECB, and leaving less risk of yawning rate differentials.
• While GBP is the weakest currency in G10, the greenback is the firmest, as this week's weakness in the EUR boosts the USD Index back toward the 102.00 handle - and through the 101.859 50-dma. This puts the currency at the highest level since early September. Strong jobs data today and tomorrow would extend the short-term streak of higher highs and higher lows.
• Weekly jobless claims data crosses today, alongside the ISM services index for September - both of which provide the last look at inflation ahead of Friday's payrolls print. Fed's Kashkari, Bostic and Schmid are also set to make appearances. 

OPTIONS: Expiries for Oct03 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0900(E1.3bln), $1.1000(E1.2bln), $1.1050-60(E2.6bln), $1.1070-80(E2.2bln), $1.1100(E2.6bln), $1.1150(E652mln), $1.1195-05(E1.1bln)
• USD/JPY: Y144.25-40($3.0bln)
• GBP/USD: $1.3130-40(Gbp600mln)
• AUD/USD: $0.6890-00(A$963mln)
• NZD/USD: $0.6310(A$1.4bln)
• AUD/NZD: N$1.0950-65(A$524mln), N$1.1000(A$530mln)
• USD/CAD: C$1.3550-55($1.2bln)

EQUITIES: Stocks Remain Within Range of Recent Highs

• A bull cycle in S&P E-Minis remains intact and the latest shallow pullback is considered corrective. Recent gains reinforce a bullish theme and note that moving average studies are in a bull-mode setup, highlighting a dominant uptrend.
• Eurostoxx 50 futures traded sharply higher last week resulting in a clear break of  5024.00, the Sep 3 high. This confirms a resumption of the bull leg that started Aug 5 and cancels a recent bearish theme.

COMMODITIES: WTI Futures Falter at Test on 50-dma

• Gold is unchanged and bulls remain in the driver’s seat. Recent gains confirm a resumption of the primary uptrend and maintain the bullish price sequence of higher highs and higher lows.
• WTI futures traded in a volatile manner Tuesday and the contract has recovered from its recent lows. Resistance at the 50-day EMA, at $71.63, has been pierced. A clear breach of this EMA is required to highlight a stronger reversal that would open $76.40, the Aug 26 high.

Date	GMT/Local	Impact	Country	Event
03/10/2024	1230/0830	***	US	Jobless Claims
03/10/2024	1230/0830	**	US	WASDE Weekly Import/Export
03/10/2024	1400/1000	***	US	ISM Non-Manufacturing Index
03/10/2024	1400/1000	**	US	Factory New Orders
03/10/2024	1430/1030	**	US	Natural Gas Stocks
03/10/2024	1440/1040		US	Fed's Raphael Bostic, Neel Kashkari
03/10/2024	1530/1130	**	US	US Bill 04 Week Treasury Auction Result
03/10/2024	1530/1130	*	US	US Bill 08 Week Treasury Auction Result
04/10/2024	0130/1130	**	AU	Lending Finance Details
04/10/2024	0545/0745	**	CH	Unemployment
04/10/2024	0645/0845	*	FR	Industrial Production
04/10/2024	0700/0900	**	ES	Industrial Production
04/10/2024	0730/0930	**	EU	S&P Global Final Eurozone Construction PMI
04/10/2024	0755/0855		GB	BOE's Pill Speech at Chartered Accounts conference
04/10/2024	0830/0930	**	GB	S&P Global/CIPS Construction PMI
04/10/2024	0900/1100	*	IT	Retail Sales
04/10/2024	1000/1200		EU	ECB's De Guindos remarks at Radio Intereconomia anniversary
04/10/2024	1230/0830	***	US	Employment Report
04/10/2024	1300/0900		US	New York Fed's John Williams
04/10/2024	1310/1510		EU	ECB's Elderson Speech at Change in Leadership event
04/10/2024	1400/1000	*	CA	Ivey PMI