MNI US MARKETS ANALYSIS - Treasuries Underperform EGBs Pre-ISM Services

US TSYS: Underperforming European Rally, ISM Services Headlines

• Cash Tsy yields sit 2.5-3bp lower, mildly bull flattening with 2s10s at -39.5bps, whilst underperforming a larger rally across European FI.
• European data were mixed, with softness led by a large miss for French IP before a sizeable downward revision to the UK service PMI which even then had some less comforting wage and price details within.
• TYM4 has recently touched a session high of 111-00+ (+ 08+) with solid cumulative volumes of 310k. It eyes initial resistance at 111-02 (Mar 1 high), after which lies the 111-06 (50-day EMA) required to signal a possible reversal.
• Data: S&P Global PMI serv/comp Feb final (0945ET), ISM services Feb (1000ET), Factory orders Jan (1000ET)
• Fedspeak: Barr on panel about CRA modernization (1200ET), Barr in roundtable (1415ET). Powell remains more firmly in focus tomorrow.
• Bill issuance: US Tsy $80B 42D CMB auction (1130ET)

STIR: Fed Rate Path Starts Day Lower Ahead Of ISM Services

• Fed Funds implied rates have dipped 0-2bps overnight, pulling back off yesterday’s highs that had come close to recovering to levels seen shortly before Friday’s ISM mfg miss. European data were mixed rather than outright dovish.
• Cumulative cuts: 0.5bp Mar, 5.5bp May, 21bp Jun, 35bp Jul and 86bp Dec.
• The more heavily weighted ISM services index follows today.
• Today’s scheduled Fedspeak is limited to VC Supervision Barr (voter) on financial matters. Potential for surprise appearances like we saw yesterday with Bostic talking on fears of triggering pent-up exuberance, but Powell’s House testimony tomorrow looms large.

US TSYS: OI Points To Short Setting Across Most Of Curve On Monday

The combination of yesterday's move lower in Tsy futures and preliminary OI data points to net short setting across most of the curve on Monday.

• The exception seemed to come via apparent, modest net long cover in TU futures.
• Friday's rally gave fresh shorts some slightly better entry points.
• Comments from Fed's Bostic & $IG issuance seemed to help Tsys lower on the day.

OI Points To Net Short Setting & Long Cover In SOFR Futures On Monday

The combination of yesterday's move lower in SOFR futures and preliminary open interest data points to a mix of net short setting and long cover across the strip.

• The whites and greens were titled more towards net long cover, while the reds and the blues were biased towards net short setting.
• Comments from Bostic ('24 voter) continued to point to two '24 cuts and played down the need for rate cuts at consecutive meetings when the easing cycle gets underway.
• Bostic's '24 cutting view is shallower than both the median dot in the Fed's Dec '23 SEP (75bp of '24 cuts) and market pricing (86bp of '24 cuts, per FOMC-dated OIS).
• This applied some modest pressure to SOFR futures in the NY afternoon, but the strip was already lower on the day.

MNI Budget 2024 Preview - No Rabbits from the Hat

• Chancellor of the Exchequer Jeremy Hunt’s Budget statement on Wednesday comes as the government looks to re-establish a reputation for fiscal responsibility following the market backlash to the Truss-Kwarteng mini-budget of October 2022.
• We look at the potential measures that can be introduced and estimates of the costings.
• We analyze what this means for the remit and the breakdown across different maturities, along with sellside expectations.
• We outline which new gilts / syndications we expect in FY24/25.
• Finally, we analyze the political implications of the Budget.

MNI BOC Preview, Mar'24: A Stepping Stone To April Guidance Shift?

EXECUTIVE SUMMARY

• The BoC is unanimously expected to hold its policy rate at 5% for a fifth meeting running.
• The median analyst recently saw a first cut in June whilst OIS has a cumulative 20bp priced for June with a July move fully priced instead.
• Guidance is expected to be little changed ahead of a potentially more impactful April meeting just five weeks away, and we instead focus on the latest discussion on underlying inflation. Data will no doubt continue to set the tone.
• Plans to discuss slowing the pace of QT are expected to get short thrift at this meeting’s communications, with Dep Gov Gravelle’s speech on March 21 more closely watched.
• A reminder that the new format for BoC decisions sees announcements 15mins earlier at 0945ET with every decision now followed by a press conference at 1030ET. The simultaneous publication of the rate decision and press conference opening statements should again be watched, after January saw the main change to guidance shifted to the latter.

PLEASE FIND THE FULL REPORT HERE:

BOCPreviewMar2024.pdf

EUROPE ISSUANCE UPDATE:

UK Gilt auction results:

• Decent gilt auction - results very much in line with the previous 3.75% Mar-27 gilt auction with another bid-to-cover in excess of 3x. However in contrast to previously the lowest accepted price was a bit higher than the market price (although not to the extent the above table implies due to a concession priced into the market a couple of minutes before the auction. The LAP of 98.400 was more in line with the prevailing average price between 2-7 minutes ahead of the auction with the average price higher than any price traded in the last 10 minutes of the auction window.
• GBP3.75bln of the 3.75% Mar-27 Gilt. Avg yield 4.314% (bid-to-cover 3.01x, tail 0.5bp).

• E1.006bln (E875mln allotted) of the 3.45% Oct-30 RAGB. Avg yield 2.732% (bid-to-cover 2.28x; bid-to-issue 1.99x)
• E1.006bln (E875mln allotted) of the 2.90% Feb-34 RAGB. Avg yield 2.844% (bid-to-cover 2.35x; bid-to-issue 2.05x)

• E4bln (E3.316bln allotted) of the 2.10% Apr-29 Bobl. Avg yield 2.4% (bid-to-offer 2.08x; bid-to-cover 2.51x).

30-year Bund Tap:

• E4.5bln of the 2.50% Aug-54 Bund. Books closed in excess of E46bln spread set at 1.80% Aug-53 Bund MS+0.75bp (guidance was +1.75bp area)

Croatia syndication:

• E1.5bln of a 10-year benchmark. Books at above EU7.5b, guidance at MS+90.

FOREX: Commodity-tied Currencies Slip as NPC Outline China's GDP Targets

• JPY sits firmer against most others in G10, with USD/JPY again failing to make convincing headway above Y150.50 and re-correcting back below. Y150.89 remains the bull trigger in the pair, marking the Feb 13 high. Market vol remains a key factor, with front-end implied remaining under pressure Tuesday, and focus on any pick-up into the tail-end of the week.
• European PMI numbers were mixed-to-poorer, with the revision lower for UK PMI numbers doing little to shake the currency. Reports that UK Chancellor Hunt is set to cut National Insurance by 2ppts also proved non-market moving, with weekend press widely speculating that either income tax, or the rate of national insurance, will be clipped to support consumers ahead of an expected general election this year. GBP/USD remains inside a range and below the late December high. A bear threat is present and a reversal lower would refocus attention on the bear trigger at 1.2519, Feb 5 low. Clearance of this level would strengthen a bear threat and open 1.2500
• Commodity-tied currencies are the poorest performing currencies in G10 following China's NPC detailing the GDP targets for this year at "around 5%" - with broadening expectations of further China stimulus doing little to support risk appetite headed into NY hours.
• Focus for the remainder of Tuesday trade rests on the final February US PMIs as well as the final January durable goods orders data. ISM services index then follows, where markets expect the headline to moderate to 53.0 from 53.4 previously.

FX OPTIONS: Hedging activity remains subdued, may pick up from Wednesday

• Front-end G10 FX Vols remain subdued, with 1m vols across AUD, GBP, EUR and others seeing little interest despite a data and news-heavy second half of the week. Options volumes are mirroring the quieter markets, with DTCC volumes below average so far Tuesday - the market cleared ~$70bln notional yesterday vs. YTD average ~$90bln.
• One-week vols have started to steady above lows, with USD/JPY implied either side of 7 points as the contract captures Powell / NFP event risk. Despite this being ~2 points above last week's cycle lows, this remains considerably below both the YTD and rolling 12m average.
• One of the few exceptions is the busier EUR/GBP market, which sees better activity thanks to trades consistent with a sizeable vol hedge crossing in early Europe; 0.8490/0.8650 strangle rolling off on April 18th - thereby capturing the March 21st BoE decision as well as the next two CPI releases (March 20th, April 17th). The strikes effectively capture the three month range, hedging against a breakout in spot over the next ~six weeks.

Expiries for Mar05 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0760-70(E1.4bln), $1.0840-50(E2.2bln), $1.0860-65(E843mln), $1.0895(E1.1bln)
• USD/JPY: Y149.00-10($1.0bln), Y149.50($1.0bln), Y150.20-40($1.6bln), Y151.50($751mln)
• EUR/JPY: Y163.50(E1.2bln)
• AUD/USD: $0.6485-05(A$3.2bln)
• NZD/USD: $0.6050-65(N$891mln), $0.6170-80(N$1.5bln)
• USD/CAD: C$1.3530-50($1.5bln)

GILTS: Remain Underpinned

Gilt futures +51 at 98.54 (98.33-61 range) Initial resistance breached, bulls now need to break 99.00.

• Cash gilt yields are 1bp higher to 3bp lower as the curve twist flattens.
• Some pre-auction concession provided decent demand at the GBP3.75bn 3.75% Mar-27 Gilt offering.
• That, coupled with the softer-than-flash final services PMI reading, has helped gilt futures back towards early session highs.
• Still, PMI details re: wages and selling prices would not have comforted the BoE.
• Those matters, coupled with the seemingly impending fiscal easing (latest reports revert back to idea of 2ppt NI cut), help promote the idea of higher for longer interest rates in the background.
• Lower tier domestic retail activity surveys disappointed overnight but weren’t seen as a meaningful driver for gilts.
• SONIA futures are -0.5 to +4.5 through the blues.
• BoE-dated OIS shows ~59bp of cuts.
• The UK calendar is essentially empty for the remainder of Tuesday.
• Expect our full preview of tomorrow’s Budget to cross in the next few hours.

EQUITIES: Eurostoxx 50 Futures Record Fresh Cycle High Monday

• Eurostoxx 50 futures traded higher Monday, delivering another fresh cycle high, confirming a resumption of the current uptrend. MA studies remain in a bull-mode position and this set-up highlights positive market sentiment. Sights are on 4939.30 next, a Fibonacci projection. Further out, scope is seen for a climb towards a bull channel top at 5002.00. The channel is drawn from the Oct 27 low. Initial firm support lies at 4808.40, the 20-day EMA.
• The trend condition in S&P E-Minis remains bullish and the contract traded higher Monday. Price action continues to highlight the fact that corrections remain shallow - this is a bullish signal. Support to watch is 5045.84, the 20-day EMA. A clear break of this average would signal potential for a deeper retracement towards 4936.50, the Feb 13 low. For bulls, sights are on 5170.86, a Fibonacci projection.

COMMODITIES: Latest Pullback in WTI Futures Considered Technically Corrective

• WTI futures traded higher last week and in the process, the contract delivered a print above key resistance at $79.09, the Jan 29 high. The clear breach of this hurdle strengthens a bullish theme and highlights potential for a continuation towards $81.70, a Fibonacci retracement. On the downside, support to watch is $76.16, the 50-day EMA. A break would instead signal a possible top. The latest pullback is considered corrective.
• Gold traded sharply higher Friday, extending the recovery that started Feb 14. The yellow metal has also started this week on a firm note and price rallied yesterday. Resistance at $2065.5, Feb 1 high, has been cleared. Note too that Gold has also cleared $2088.5, the Dec 28 high, and $2097.1, 76.4% of the Dec 4 - 13 bear leg. Sights are on 2135.4, the Dec 4 all-time high. Initial firm support to watch lies at $2029.2, the 50-day EMA.