MNI US MARKETS ANALYSIS - Markets Tread Water Ahead of Key CPI Release

US TSYS SUMMARY: A Calm Start To A Busy Session With CPI and More

• Treasuries sit modestly richer as they await direction from the June CPI report at 0830ET, with sizeable two-way risk eyed after large moves in the approach to the report.
• Despite a very small bull steepening on the day, front end yields still sit 3-4bps higher than before Friday’s strong payrolls report, but the belly has clawed back the increase and longer end yields are below as the curve continues to flatten (2s5s and 2s10s both inverted) on lower growth expectations. The Fed’s Beige Book’s later in the session could be interesting on this front.
• 2YY -2.1bps at 3.029%, 5YY -1.5bps at 3.002%, 10YY -1.7bps at 2.952% and 30YY -1.4bps at 3.147%.
• TYU2 trades 2+ ticks higher at 118-23+ in the middle of yesterday’s range on soft volumes. It continues a bullish focus with resistance eyed at 119-05 before the bull trigger at 120-16+ (Jul 6 high).
• Data: MBA mortgage apps (0700ET), CPI & real average earnings (0830ET), Fed Beige Book (1400ET), Monthly budget statement 1400ET.
• Bond issuance: US Tsy $19B 30Y Bond auction re-open (912810TG3) – 1300ET
• Bill issuance: US Tsy $30B 119-day bill CMB auction – 1130ET

STIR FUTURES: 75bp Fully Priced For July FOMC Pre-CPI

• Hikes implied by FOMC-dated Fed Funds finally nudged above 75bps to 76bps having sat on and off at 74.5bps since Friday’s payrolls.
• The 132.5bp for Sep holds at gains seen through yesterday whilst the 183bp for the four meetings to Dec is unchanged from late yesterday having eased from a post-payrolls high of 191bps.
• Rates are seen peaking at 3.44% in Feb’23 (186bp of hikes), which as mentioned in our CPI preview is both ~50bps below mid-June highs just prior to the Jun FOMC and more than 30bps higher than prior to the May CPI beat, leaving plenty of room to swing either way with CPI later.

Source: Bloomberg

EGB/GILT SUMMARY: Mid-Week Breather Following Earlier Rally

European government bonds have traded weaker this morning, although there has been limited unwinding of the gains made earlier in the week. Equities have pushed lower again while oil is incrementally higher

• UK monthly GDP data for May came in stronger than expected (0.5% M/M vs 0.1% expected) with industrial production and construction activity leading the rebound.
• The list of candidates to replace outgoing UK PM Boris Johnson has narrowed to 8 from 12, with notable dropouts being Sajid Javid and Priti Patel.
• Gilts initially opened lower before reclaiming loses and then reversing course again to now trade marginally below yesterday's close. Yields are broadly 1bp lower on the day.
• Eurozone industrial production similarly expanded faster than expected in May (1.6% Y/Y vs 0.3% expected).
• Speaking on French radio, the ECB's Francois Villeroy de Galhau earlier stated that the euro exchange rate is being monitored closely as it is important for inflation.
• Bunds have sold off at the curve has bear flattened. The 2s30s spread has narrowed 6bp.
• The OAT curve has similarly flattened with the 2s30s trading down 2bp.
• The BTP curve has sharply twist flattened at the very long end with the 2-year yield up 5bp and the 50-year yield down 5bp. Sub-10-year yields are 1-7bp higher on the day.
• Supply this morning came from Germany (Bund, EUR1.325bn allotted) and Italy (BTP, EUR7bn)

EUROPE ISSUANCE UPDATE

Italy auction results:
E3.25bln of the 1.20% Aug-25 BTP. Avg yield 1.84% (bid-to-cover 1.57x)
E2.5bln of the 2.80% Jun-29 BTP. Avg yield 2.76% (bid-to-cover 1.58x)
E1.25bln of the 3.25% Mar-38 BTP. Avg yield 3.45% (bid-to-cover 1.60x).

German auction results
E1.5bln (E1.325bln allotted) of the 0% Aug-52 Bund. Avg yield 1.41% (bid-to-cover 1.85x).

FOREX: Currencies Tread Water Pre-CPI

• Markets are generally treading water ahead of the key US data releases later today, with JPY marginally the poorest performer in G10 ahead of the NY crossover. The USD/JPY outlook remains bullish, but prices hold below the cycle highs printed earlier in the week at 137.75.
• The greenback is moderately weaker as equity markets look more stable after Tuesday's late sell-off. Futures markets across the US are indicating a positive open on Wall Street later today, helping currency markets adopt a modest risk-on tone.
• AUD is extending the recovery posted off the week's low yesterday, putting the pair closer to 0.68. Nonetheless, AUDUSD maintains a bearish tone and 0.6685, the Mar 9 2020 high, remains the key support. On the upside, initial firm resistance is seen at 0.6881, the 20-day EMA.
• US inflation data takes focus going forward, with markets expecting CPI to rise 8.8% on the year and 1.1% on the month. Core price rises are expected to decelerate, dropping to 5.7% from 6.0% in May. MNI's full CPI preview found here: https://marketnews.com/homepage/mni-us-cpi-preview...
• Elsewhere, the Bank of Canada announce rates later today, with markets expecting the Bank to raise rates by 75bps to 2.25%. MNI's full preview here: https://marketnews.com/mni-boc-preview-jul-22-eyei...

FX OPTIONS: Expiries for Jul13 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0195-00(E1.0bln)
• GBP/USD: $1.2035(Gbp1.2bln)
• USD/JPY: Y134.40-55($1.1bln), Y136.00($830mln)
• EUR/JPY: Y137.00(E936mln), Y138.00(E641mln), Y139.00(E823mln)
• NZD/USD: $0.6180(N$794mln)
• USD/CAD: C$1.3000($1.6bln)
• USD/CNY: Cny6.7500($615mln)

Price Signal Summary - Oil Futures Remain Vulnerable

• In the equity space, S&P E-Minis traded lower yesterday but the contract remains above recent lows. Trend conditions are bearish and a deeper pullback would open 3735.00, the Jun 23 low. A break of this level would expose key support at 3639.00, the Jun 17 low and bear trigger. Clearance of 3950.00, Jun 28 high, is still required to signal potential for a stronger recovery. EUROSTOXX 50 futures are consolidating. The contract remains above last week’s 3343.00 low on Jul 5. Recent gains are considered corrective and the trend outlook is bearish. The breach on Jul 5 of support at 3384.00, Jun 16 low, reinforces bearish conditions and confirms a resumption of the broader downtrend. The focus is on 3321.30, 50.0% of the major 2020 - 2021 upleg. Key short-term resistance is unchanged at 3584.00, the Jun 27 high.
• In FX, EURUSD touched parity yesterday. This remains a key psychological support and note that the base of the bear channel, drawn from the Feb 10 high. Intersects at 0.9991 today. A clear breach of this support zone would open 0.9944, 1.618 projection of the Jun 9 - 15 - 27 price swing. GBPUSD remains vulnerable and the pair traded to a fresh trend low yesterday. The focus is on 1.1795, 0.764 projection of the Mar 23 - May 13 - 27 price swing. USDJPY cleared 137.00 resistance on Monday and resumed the primary uptrend. The focus is on a climb towards the 138.00 handle next.
• On the commodity front, Gold remains vulnerable following the recent break of $1787.00, May 16 low. This confirmed a resumption of the broader downtrend and has opened $1706.3 next, 1.618 projection of the Mar 8 - 29 - Apr 18 price swing. This week’s extension reinforces current bearish conditions. In the Oil space, WTI futures traded sharply lower Tuesday, signalling a resumption of the downtrend. Price has traded below $95.10 today, the Jul 7 low and a bear trigger. The focus is on $93.45, the Apr 25 low.
• In the FI space, a short-term bull cycle in Bund futures remains in play and yesterday’s gains confirmed a resumption of the uptrend. This signal scope for a climb towards the 154.00 handle next. Trend conditions in Gilts remain bullish and scope is seen for a climb to 117.48, 1.236 projection of the Jun 16 - 24 - 29 price swing.

EQUITIES: No Clear Themes Ahead Of CPI

• Asian stocks closed mostly higher: Japan's NIKKEI closed up 142.11 pts or +0.54% at 26478.77 and the TOPIX ended 5.55 pts higher or +0.29% at 1888.85. China's SHANGHAI closed up 2.825 pts or +0.09% at 3284.292 and the HANG SENG ended 46.79 pts lower or -0.22% at 20797.95.
• European equities are a little weaker, with no clear themes present (a mix of cyclicals and defensives are both leading and lagging), with the German Dax down 96.39 pts or -0.75% at 12818.98, FTSE 100 down 59.66 pts or -0.83% at 7142.7, CAC 40 down 19.8 pts or -0.33% at 6019.93 and Euro Stoxx 50 down 20.28 pts or -0.58% at 3469.27.
• U.S. futures are a little higher, with the Dow Jones mini up 78 pts or +0.25% at 31042, S&P 500 mini up 10.25 pts or +0.27% at 3834, NASDAQ mini up 40.75 pts or +0.35% at 11819.75.

COMMODITIES: Oil Claws Back From Overnight Lows

• WTI Crude up $1.3 or +1.36% at $97.26
• Natural Gas up $0.13 or +2.14% at $6.296
• Gold spot up $3.89 or +0.23% at $1727.23
• Copper up $2.5 or +0.76% at $331.1
• Silver up $0.08 or +0.4% at $18.9825
• Platinum up $4.66 or +0.55% at $850.18