US EURODLR FUTURES: Post-LIBOR Settle Update: Forward Hike Pricing Moderates
Lead quarterly EDU2 pared gain slightly to 96.680 (+0.005) after latest 3M LIBOR set' new 3Y high of 2.45514% (+0.13014 total last wk).
- Forward Fed hike expectations moderating somewhat this morning after last Fri's strong jobs gain for Jun (+372) saw 10YY climb back to 3.099%; balance of Whites through Reds (EDZ2-EDM4) trade +0.045-0.065; Greens through Golds (EDU4-EDM7) +0.050-0.030 w/ Blues-Golds lagging.
- Front end inversion continues but easing off last Wed's lvls: Dec'22/Mar'23 currently -0.055 vs. -0.125 last wk. Most inverted calendar spd: EDH3/EDH4 at -0.680 vs. -0.715. Inversion moderation moving forward, currently start of Greens w/ EDU4/EDZ4 trading steady (97.095).
- Friday's FI option flow centered on wing options with better downside (rate hike) insurance buying via puts as markets adjusted to the stronger than expected June employment report +372k vs. +268k est underscored the likelihood of a 75bp hike at the end of the month.
- Despite the sharp post-data sell-off in underlying futures, overall volumes remain light, even in futures (TYU2<1.2M at the close) with traders close to the sidelines in early summer trade.
- Some trade highlights included a block buy of 7,500 FVU 111.25 puts at 54, 5,000 FVQ 110/110.5/111/111.5 put condors and 10,000 TYQ 114/115 put spds at 3. Late Eurodollar options blocks included a buy of 10,000 Jul 96.50/96.75 put spds at 9.0, 10,000 July 96.56/96.75 put spds at 8.0 and 20,000 Dec 97.00/97.50 put spds at 43.5. On the flipside, paper bought 20,000 Red Sep'23 99.00 calls at 9.0 ref 96.555, adding to +40k on Thursday.
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US: Def Sec Austin Delivering Remarks On Indo-Pacific Strategy
20:30 ET 01:30 BST: US Defence Secretary Lloyd Austin is continuing his ten-day tour of Asia with a speech at the IISS Shangri-La Dialogue in Singapore outlining "Next Steps for the United States' Indo-Pacific Strategy."
- The Secretary's speech will be livestreamed on the Pentagon website: https://www.defense.gov/News/Live-Events/
- Today, Austin met with Chinese counterpart Wei Fenghe to discuss "the need to responsibly manage competition and maintain open lines of communication."
USDCAD TECHS: Cements Short-Term Reversal
- RES 4: 1.3077 High May 16 and the bull trigger
- RES 3: 1.2982 High May 16
- RES 2: 1.2896 High May 18 and a key resistance
- RES 1: 1.2813 High Jun 10
- PRICE: 1.2792 @ 16:01 BST Jun 10
- SUP 1: 1.2518 Low Jun 8
- SUP 2: 1.2459 Low Apr 21
- SUP 3: 1.2403/02 Low Apr 5 and key support / 2.0% 10-dma env
- SUP 4: 1.2387 Low Nov 10. 2021
A sharp rally in USDCAD continued Friday, cementing the short-term reversal. Key near-term support has been defined at 1.2518, the Jun 8 low. An extension higher would signal potential for a climb towards resistance at 1.2896, the May 19 high. For bears, a resumption of weakness and a breach of 1.2518 would again expose 1.2459, Apr 21 low and 1.2403 further out, the Apr 5 low and a key support.
US TSYS: Hot CPI, 2Y Yld Over 3% First Time Since 2008
Rates extend lows after May CPI came out higher than est at 1.0% vs. 0.7% est, unrounded 0.974%, core 0.631%. Heavy short end selling on inflation surge has market expecting Fed to hike US into a recession.
- Notably, 2Y yield surged to 3.0611% - the highest level since 2008, while curves bull flattened after some initial volatility in the long end: 2s10s at 9.858 (-12.786) vs. 9.421 low, 5s10s inverted, flattening -7.273 at -9.761 vs. -10.722 low, while 5s30s slipped to inverted low of -6.661.
- Reaction spurred several dealers to up their rate hikes estimates with Barclays now sees a 75bp Fed hike next week. They have also raised their forecast for the terminal rate by 25bp to 3.00-3.25% in early 2023, implying 150bp of hikes after June's meeting. That's the most aggressive June FOMC hiking call that we are aware of, but markets are pricing in a modest chance of such a surprise (15-20% probability per futures).
- GS upped they're hike forecast to 50bp in June, July and September (from 50bp in Jun/Jul and 25bp in Sep).
