OUTLOOK: Price Signal Summary - Bull Cycle In Gilts Remains Intact

RXU5 127 puts, paper pays 2.0 in 3.625k

• RES 4: 113-23   76.4% retracement of the Sep’24 - Jan’25 sell-off
• RES 3: 113-07   76.4% retracement of the Apr 7 - 11 sell-off 
• RES 2: 112-23   High May 1 
• RES 1: 112-15+ High Aug 5
• PRICE:‌‌ 111-25+ @ 11:52 BST Aug 18
• SUP 1: 111-10+ 50-day EMA         
• SUP 2: 110-23+/08+ Low Aug 1 / Low Jul 15 & 16
• SUP 3: 110-03   76.4% retracement of the May 22 - Jul 1 bull leg
• SUP 4: 109-28   Low Jun 6 and 11 

The underlying bullish theme in Treasury futures remains intact, supported by the recent clearance of the bull trigger at 112-12+, the Jul 1 high. A resumption of gains would open 112-23, the May 1 high and the next important resistance. Above 112-23, retracement levels are layered between 113-07 and 113-23. On the downside, key support is 110-08+, the low on Jul 15 and 16. First important support lies at 110-23+, the Aug 1 low. 

Late on Friday J.P.Morgan recommended a tactical short hedge in 3s to “protect the profits” in their 5s/20s steepener, suggesting that “5s/20s currently appears about 5bp steep adjusted for the level of 3-Year yields”.

• They “have a hard time seeing the case for a deep (Fed) easing cycle. It’s clear that the economy is slowing, but its resilience remains evident”…“Resilience is also being supported by easy financial conditions, as the Fed's Financial Conditions Impulse on Growth index indicates they are a modest tailwind for growth right now”.
• J.P.Morgan go on to flag that “recession risks have declined. Thus, despite an expectation of a more diffuse set of opinions on the FOMC over time, we think it will be challenging to price a more aggressive path for Fed easing unless the labor market loosens decisively from here, given that progress toward 2% core inflation has stalled”.
• As a result, they think “near-term risks skew toward some mean reversion higher in front-end yields over the near term. The biggest risk to this view stems from Chair Powell, as he is slated to speak on the economic outlook at the Jackson Hole Symposium Friday morning. However, with still one more employment and inflation reading ahead of the September FOMC meeting, we do not think the Chair will necessarily pre-commit to or ratify expectations of a cut next month”.