OUTLOOK: What to watch
- The main focus of the week ahead will be the ECB meeting on Thursday where the focus is on whether the ECB hikes 50bp or 75bp (or potentially even more). Markets were pricing in around 66bp for this week's meeting at Friday's close, up around 3bp on the week. Pricing for year-end ended last week at 168bp (up around 20bp last week) while pricing one-year ahead ended the week down around 4bp at 215bp. The magnitude of this week's hike is likely to determine the slope of the curve, particularly for the near-dated meetings, as well as moving the terminal rate.
- European gas prices are being closely watched this morning after the Nord Stream pipeline remained indefinitely closed and are up around 30% on the open, but are still some way off the highs seen over the past two weeks. The EU is holding an emergency summit on Friday to discuss an EU-wide plan to deal with the high gas prices this winter - and this combined with the better storage levels is likely stopping gas prices reach such extremes. Nevertheless, Bund prices are under some pressure this morning following the open of the European gas market.
- Focusing more on today, we have services PMI data with first prints from Spain and Italy and final prints from France, Germany, the Eurozone and the UK.
- Today will also see the announcement of the new Prime Minister. Betting markets see a 98% probability that Liz Truss has defeated Rishi Sunak in the run-off. The result will be announced shortly after 12:30BST. Focus in UK markets (and in UK politics) will then turn to which measures Truss will announce to deal with cost of living issues - with the weekend papers suggesting one possible measure could be freezing energy bills at current levels (rather than increasing by the 80% announced by the Ofgem price cap change.
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US TSYS: What Recession?
Rates trading weaker after the bell, just off midday session lows after FI markets gapped lower on stronger than expected jobs gains for July: +528k vs. +250k est, unemployment rate dropped a tenth to 3.5% after flattening out at 3.6% for six months. Average hourly earnings rose 0.5%, a tenth faster than in June. Better than expected data spurred heavy selling across the board but particularly in shorts to intermediates as yield curves extend inversion to new 22 year lows (2s10s -44.034).
- Heavy short end selling included 5Y Blocks as strong data spurs recession position unwinds as payrolls close gap with pre-pandemic levels, 75bp rate hike in September getting priced in again.
- Some faded the deep curve inversions w/ Block buying over 15,000 TUU2, 2s10s currently -5.686 at -41.947. Currently, 2-Yr yield is up 20.2bps at 3.2442%, 5-Yr is up 17.9bps at 2.9709%, 10-Yr is up 14.8bps at 2.836%, and 30-Yr is up 9.9bps at 3.0638%.
- Cross asset update: Stocks marginally lower/off lows (SPX eminis -15.0 at 4137.25 vs. 4104.25 low); Spot Gold weaker -16.10 at 1775.18; Crude weaker (WTI -0.39 at 88.15).
- Data: Slow start to next week, nothing scheduled for Monday except US Tsy bill auctions ($54B 13W, $42B 26W). Tuesday picks up with Nonfarm Productivity (-4.6% est) and Unit Labor Costs (9.8% est), US Tsy $34B 52W bill and $42B 3Y Note auctions.
US: Late Corporate Credit Update, Hold Narrow Range
Investment-grade corporate credit risk held near steady Friday as stocks see-sawed off post-jobs data lows. Currently, SPX eminis trade SPX eminis trade -21.5 (-0.52%) at 4131.75; DJIA -14.29 (-0.04%) at 32715.8; Nasdaq -121.6 (-1%) at 12599.4.
- Investment grade risk measured by Markit's CDXIG5 index +0.295 to 81.208; CDXHY5 high yield index at 101.366 (+0.137).
- Outperforming credit sectors (tighter or least wide): Materials (-2.0) followed by Senior and subordinated Financials (-1.7, -1.4 respectively), and Consumer Discretionary (-0.7)
- Lagging sectors (wider or least narrow): Communications (+0.8), Health Care (+0.4) followed by Technology and Industrials (+0.2).
US TSYS: Eurodollar/SOFR/ Tsy Options Roundup
Better buyers of FI puts in the latter half of the week made the right call as underlying futures came under heavy pressure early Friday after an unexpectedly strong July employment report. July jobs gained +528k vs. +250k est. while, unemployment rate dropped a tenth to 3.5% after flattening out at 3.6% for six months. Average hourly earnings rose 0.5%, a tenth faster than in June.
- Surge of selling in shorts to intermediates, yield curves extended inversion to new 22 year lows (2s10s -44.034) as pricing of another 75bp rate hike in September returned. Friday's option volume was rather disappointing, however, victim to summer trade malaise.
- Salient trade included +7,500 October SOFR 96.00/96.25 put spds 1.0 over 97.00 calls as well as a sale of -10,000 March'23 SOFR 98.25 calls .75 over 95.25/95.56/96.00 put flys. An early Eurodollar block post had -11,500 Mar 96.37/96.87 1x2 call spds, 5.0 vs. 11,500 Mar 95.50/96.00 2x1 put spds, 2.0. Meanwhile, Treasury options included +21,000 (7.5k blocked) FVV 111/111.75 put spds, 9.5.
