US TSYS: Treasury Yields Rise, Focus on FOMC Rate Decision Next Week

• The greenback again traded weaker, making for a second session of losses for the USD Index. Key support into the early August low at 97.945 has given way, opening 97.109 in the short-term ahead of the bear trigger at 96.377. USD weakness came alongside further reports around the leadership and make-up of the Fed into next year. Treasury Secretary Bessent spoke on the interview process, and stated that if the Fed had effective leadership the key rate would be as much as 175bps lower now than it would have been otherwise - further affirming the administration's preference for a low-rates Fed chair once Powell departs next year.
• The list of candidates grew further according to reports, with a number of private sector economists added to the list of those considered, on top of the well known names of Hassett, Warsh, Waller and Bowman.
• GBP rallied further, extending the recent spell of strength and further building on the gains posted after the break of the 50-day EMA on the August BoE rate decision. This firms the speed of the recovery off the 1.3142 pullback low and signals a greater probability of a bullish reversal. For now, S/T momentum is still pointed higher, with the Jul 24 high of 1.3589 the next notable upside level.
• Meanwhile, speculation around the Trump-Putin meeting in Alaska at the end of the week continues to build. Following a call with European leaders today, it was disclosed that Trump is set to pursue an immediate ceasefire in the conflict - at which point more sincere negotiations and talks can begin over a conclusion to the war. Territory remains the key issue, with Kyiv ruling out the handing over of eastern territories, and Putin requiring some concessions as a result of his multi-year special operation. Oil and risk markets remain sensitive to the issue, with Trump warning of "very severe consequences" if no interim agreement is reached on Friday.
• Australia jobs data is the highlight Thursday. With May and June employment gains disappointing, the July data will be monitored closely for signs that the labour market has turned. Q2 employment averaged 28.8k/month up from Q1's 1.4k but slightly lower than Q2 2024's 32.2k. Consensus expects a 25k gain in July after June's +2k, slightly below the Q2 average. The unemployment rate is forecast to decline 0.1pp to 4.2%, returning to the Q2 average.

Wednesday's US rates/bond options flow included:

• SFRU5 96.00/96.12/96.25c fly, trades again for 1, bought for 0.75 and 1 in 15k Total
• SFRU5 95.81/95.75/95.68p fly, traded half in 3k.
• SFRU5 95.93/96.00/96.12c fly 2x3x1, traded 2.25 in 2.5k.
• SFRU5 96.00/95.75ps, traded 8 in 5k.
• SFRU5 96.00p, traded 8.5 in 5k.
• SFRU5 96.06/96.12cs traded 1 in 8k total.
• SFRU5 96.12/96.25cs, traded 1.5 in 13k.
• SFRU5 95.8125 puts bought for 1.75 in 5k (block)
• SFRV5 96.37/96.50cs, traded 3 in 2k.
• SFRZ5 95.75/95.68cs, traded 0.25 in 12k.
• SFRZ5 96.37/96.50cs vs 2QZ5 96.93/97.06cs, bought the front for -0.25 in 2.5k. This was bought Yesterday for -0.5 in 2.5k.
• SFRH6 96.25p, traded 10.5 in 2k.
• FVU5 109/108.5 put spread sold at 10.5 in 7.5k (block) - (cov 109-00, 34%)
• TYU5 113 calls bought for 6 in 15.5k (block) - (vs 112-03+, 5%)

The summary of the BOC's deliberations of the July monetary policy decision (link) showed some disagreement among members about the economic outlook and the appropriate policy response, best summed up with "given the uncertainty around estimates of slack and underlying inflation, and how households, businesses and governments will adapt to tariffs, members agreed they would need to wait for more clarity before drawing firm conclusions."

• Governing Council debated whether to cut 25bp, which is no surprise. While they ultimately held rates, the debate was between:
  • "some members" who "held the view that, having reduced the policy interest rate to the middle of the Bank’s estimated range of the neutral interest rate, and the economy showing some resilience to US tariffs, the Bank may have already provided sufficient support to aid in this transition....there was a risk that further easing might take effect only as demand was recovering, which could add to price pressures."
  • and "others " who "highlighted that further monetary policy support would likely be needed given the estimated amount and persistence of slack in the economy, particularly if the labour market softened further. If incoming data showed that the upside risks to underlying inflation were not materializing, there could be more room for monetary policy to ease further, reducing economic slack and supporting the economy’s adjustment to the reconfiguration of global trade."
• The document notes that inflation was a focus ("Discussions about different indicators of inflationary pressures, and the trajectory for headline inflation, occupied much of the deliberations.") and ultimately "Members agreed that the degree of firmness in underlying inflation was an important consideration for the policy decision....members assessed underlying inflation to be around 2½% recently, up from around 2% in the second half of last year."
• Looking forward they didn't sound particularly concerned about the inflation outlook. While "the impact of tariffs on consumer prices appeared to be modest so far. They also noted that wage increases and unit labour costs had continued to ease and the recent appreciation of the Canadian dollar had reduced import prices. There were no signs that inflation expectations had become de-anchored. Moreover, none of the three tariff scenarios suggested a sharp rise in inflation." However "members judged the risks to inflation to be elevated given evident pressures on underlying inflation and the uncertainty around the impacts that tariffs and trade disruptions could have on Canada’s economy over time".
• There was "considerable" discussion about "how households, businesses and governments will react and adapt to tariffs", but to sum up, "members agreed that it was still too early to assess how tariffs and the rewiring of trade would affect economic activity and inflation in Canada."
• There was little market reaction to the release, which in any case captured deliberations that occurred before a weak July labour market report. Futures markets currently price a September rate cut at 33% probability, with a full 25bp cut nearly priced through the end of the year (24bp Dec).