US EURODLR FUTURES: Post-LIBOR Settle Update: 3M Dip
Lead quarterly EDU2 pares losses slightly, currently trading 96.72 (-0.030) after 3M LIBOR set' dips -0.00286 to 2.23157% after climbing +0.13857 total last wk to highest level since July 2019 last Friday.
- Last wk Thu's sharp rate hike repricing continues to moderate slightly as futures trade lower out the strip: balance of Whites through Reds (EDZ2-EDM4) trading steady to -0.035-0.055, Greens through Golds (EDU4-EDM7) -0.045-0.055.
- Recession expectations priced in front end cools slightly as Dec'22/Mar'23 trades flat now, Mar'23/Jun'23 inverted by -0.095. Most inverted calendar spd: EDH3/EDH4 at -0.445 vs. -0.500 last week.
- While near-term rate hikes remain (75bp new Fed baseline) since last week's testimony from Fed Chair Powell, softer data (last Thu's second consecutive weak PMIs) has futures pricing end of rate hikes has migrated from mid-2023 to end of this year.
- Friday option roundup: Difficult to draw any conclusions from Friday's FI option trade, flow two-way, mixed on light volumes, vol sellers in Treasury options as underlying futures scaled back from the week's rally (30YY climbed to 3.2640% high on day vs. 3.1632% low).
- SOFR options set the theme was flurry of limited up- and downside flys in late morning trade:
- +8,000 (3k Block) SFRQ2 97.12/97.25/97.37 call flys, 1.5
- +8,000 (3k Block) SFRU2 97.12/97.25/97.37 call flys, 1.25
- +5,000 SFRV2 95.75/96.00/96.25 put flys, 2.0
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US TSYS: Late Risk Appetite Gathers Momentum
Midweek risk-on tone gathered momentum into Fri's close: Tsys steady/mixed with long end firmer but near second half lows while stocks continued to extend rally.
- SPX eminis were up near 5% for the week as risk appetite improved following Wed's May FOMC minutes release that showed a flexible Fed and no discussion of larger rate hikes ESM2 +105.25 (2.47%) at 4161.0.
- Bonds receded off early session highs post data, Apr core PCE at 4.9% YoY but headline of 6.3% YoY slightly higher than expected and fastest of last three months.
- Aside from PCE, Apr Advance Goods Trade Balance shows deficit of $105.9B vs. $114.9B expected; Wholesale Inventories +2.1% MoM vs. +2.0% exp.
- General quiet ahead Monday, May 30 Memorial Day national holiday. Cash FI markets closed while Globex opens at normal time Sunday evening at 1800ET through Monday at 1300ET. Globex reopens at 1800ET Monday evening.
- Tuesday focus: FHFA House Price Index MoM (2.1%, 2.0%); QoQ (3.3%, --); MNI Chicago PMI (56.4, 54.8); Conf. Board Consumer Confidence (107.3, 103.5); May-31 1030 Dallas Fed Manf. Activity (1.1, 1.5)
USDCAD TECHS: Fresh Bear Cycle Low
- RES 4: 1.3091 High Nov 24 2020
- RES 3: 1.3077 High May 16 and the bull trigger
- RES 2: 1.2982 High May 16
- RES 1: 1.2896 High May 18
- PRICE: 1.2742 @ 15:47 BST May 27
- SUP 1: 1.2728 Low May 27
- SUP 2: 1.2714 Low May 5 and a key support
- SUP 3: 1.2568 Low Apr 22
- SUP 4: 1.2459 Low Apr 21
USDCAD traded lower Friday and has breached support at 1.2765, May 24 low. This also means that the pair is below its 50-day EMA. An extension lower would open the next key short-term support at 1.2714, May 5 low. The latest bear leg is still considered corrective and the broader trend outlook is bullish. Initial resistance is at 1.2896, May 18 high. A break would signal a potential bullish reversal.
GLOBAL: Fiscal Tightening And Yield Curves
An excerpt from this month's MNI's Macro Deep Dive focusing on structural drivers from fiscal policy (full note here: https://marketnews.com/mni-macro-deep-dive-may-2022).
- Fiscal policy is clearly just a single factor behind yield curves yet the countries that have the flattest curves also happen to be those expected to see the largest cumulative tightening over 2022 and 2023.
- Tightening here is the annual change in the cyclically adjusted primary balance taken from the IMF's Fiscal Monitor published Apr-2022.
- Of the G10, the UK and Australia could be more prone to further flattening.
- That’s not to say the impact of tighter fiscal policy can’t be felt further on growth expectations though, with only the Czech curve already inverted and with scope for others to follow suit if recession fears do mount.
