NY Open – Open ended
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Risk sentiment steadied overnight, encouraged by resilient price action in US equities into Wednesday’s close and a lack of macro developments. A very quiet session for US Treasuries, though combined with Nikkei outperformance, USDJPY trades weaker. Risk correlated currencies and commodity complex trades better, but we think this is more of a partial retracement than a meaningful return in risk appetite. The ECB decision at 08:15 EDT is expected to deliver a 25bp rate cut, open-ended guidance about the next move and modest projection tweaks. There could be slight hawkish pushback on Oct ECB rate cut odds, but markets also need to digest US data. Citi is in line with consensus for claims, forecasting 228k initial and 1855k continuing, as well as for PPI. Mexico’s Senate has approved the constitutional reform proposal but we continue to like selling rallies in MXN. Elsewhere, INR CPI and IP due at 08:00 EDT, BRL gets July retail sales, UYU gets IP/GDP while ZAR BER inflation expectations slightly moderated. |
DeskTalk – US Treasuries: It’s complicated
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By Ed Acton, US Rates Desk Strategist After some mild duration strength overnight, the 0.3% Core CPI print proved firmer than most expected, aligning with just 5 of 65 forecasters in the BBG survey. The primary concern for Fed officials was likely the 0.50%MoM reading for OER (largest since Jan). Still, labor outcomes are being weighed more heavily in the Fed’s rate calculus, but the stubborn reading is a non-starter for a 50bp cut in September (OIS at 27bps). As the Fed’s Waller noted last Friday, the Fed sees “sufficient room to cut the policy rate while still remaining somewhat restrictive to ensure inflation continues on path”. For now however, the rates market is leaning towards a glide-path that sees a landing in accommodative territory, with the trough of the SOFR strip below 2.85%. Today’s print moderated that view to a degree, with the U4-H5 curve 2bps steeper and 2y yields off 6bps, though much of the nominal backup was driven by breakeven inflation (2y BE +7bps). With positioning complications evident, there was an initial tug-of-war post-data, with cross-asset indications of disinflation/risk-off driving a dip-buying effort that saw 10y yield nearly retrace the ~5bp selloff post-CPI. Still, into the pre-10y auction period, centers of risk-asset concern (Oil, Banks, JPY) saw general improvement that allowed for a consistent concession out of the European close into the 1pm auction. Our desk flow featured 5-10y sectors selling from a varied account base, as well as steepener profit-taking. The supply event went quite well considering the circumstances, a -1.4bp through bid on a solid 2.64x bid-cover ratio, and the strongest indirect award since Feb ’23 (not unlike the 3-year auction). Still, some selling post-auction left a bear-flattening impact on the session. Ample easing expectations remain priced in, with 100bps of easing through DEC and 175bps through March. Any further weakness leaves the onus on tomorrow’s jobless claims data, which we see coming in at rather benign levels (227k BBG estimate), to further drive some long-side liquidation into next week’s FOMC as 10s pivot around the key 3.66% level. |
Our preferred expressions for the tightening cycle we
expect in Brazil are DI curve flatteners and long
BRLCOP via forwards. We have tightened the stop on
the latter after this week’s COP sell-off.
With September set in stone, policy convergence begins
Following the payrolls report last week, we updated our Fed call. We now expect the Fed
to cut rates by 25bp per meeting starting next week and until March 2025. After these
cuts, we think the Fed will be more gradual and resort to one cut per quarter. We still see
outsized recession-like cuts as unlikely unless the economy materially deteriorates