19:24 ET
Australia Fixed Income Action: September 10-year bond futures firm 5 bp in price to 93.555, while 3-year bond futures firm 4 bp to 93.255. Bill futures are 1-3 bp firmer in price across the strip. Bond futures extend yesterday's gains on positive leads from US Treasuries in the wake of the US employment report. Regional equity market leads will be the main focus today ahead of local labour market data next week.
17:56 ET
Asia Market Outlook (July 4) Despite a 25 bp rate hike from the ECB and a weaker than expected U.S. employment report, equities managed to rebound and that could give regional markets a lift today. Bonds also rallied as ECB Trichet suggested the rate hike was a "one and done" for now. Treasuries climbed as the data further pared rate hike fears. A light regional calendar should see equity market developments dominate regional price action. In Japan, the preliminary May leaders index is seen at -0.3 (median 0.2) from 2 in April. (see Asian Fixed Income summary)
15:35 ET
Canadian bonds: C$2.5 bln will be offered at next week's 10-year auction (July-9), reopening the 4.25% June 2018. That is the same size as the last 10-year auction in April. C$8.1 bln is outstanding on the bond ahead of the auction. The BoC will make a minimum purchase of 375 mln. It will also conduct a repurchase operation for a maximum C$300 mln in bonds. See Call for Tenders.
15:17 ET
Canadian Market Summary: Canadas managed modest gains and the curve steepened on generally soft U.S. data and a bias free policy stance from the ECB. Pressure on equity and credit fed rotation into sovereign debt markets ahead of the U.S. Independence Day holiday, although Wall Street closed in modest positive territory. On the domestic front, growth in Ontario fell 0.3% in Q1, while closure of auto-part makers this week added further pressure on the province's auto sector. The 10-year yield closed little changed at 3.74%, while the 2s10s spread widened out 2 bps to +54 bps. USD-CAD rallied to a 1.0219 session high along with broader recovery for the greenback, before trimming gains. And the S&P/TSX Composite tumbled to a two-month low below 13,800 before rebounding into positive territory above the 14k threshold. See our summary.
14:28 ET
Canadian Ivey PMI Preview: We expect Friday's report to reveal an improvement to 63.0 in June (median 62.3) from 62.5 in May, a 0.8% rise. The expected increase would leave the index at the strongest level since last June. The increase in May was consistent with the seasonal trend (the index usually rises in May) and the projected rise in June would also fit in with the trend (the index typically moves higher in June.) While seasonal movements in this not seasonally adjusted index are always a key part of the PMI's interpretation, the main takeaway is that the index remains in solidly expansionary territory that is consistent with continued growth in Canadian businesses. See the preview.
14:14 ET
N.Y. FX Summary (July 3) The dollar was on a soft footing as the N.Y. session got under way on Thursday, with EUR-USD at trend highs near 1.5910 ahead of the ECB policy announcement and the June U.S. employment report. The ECB raised rates by a quarter point, as expected, though the subsequent press conference was not as hawkish as many had thought it would be. The jobs report was weak, but very near market consensus, and largely not as bad as some had feared. The result of all this was a sharp short covering related dollar rally, which eventually took EUR-USD to near 1.5680, and saw USD-JPY rally over 106.90, the highest level of the week on the back of higher U.S. equities. (See FX Trader page).
13:52 ET
The Bleak U.S. Payroll Trajectory: Today's payroll data adhered to the same bleak jobs trajectory of prior 2008 reports, with downward payroll revisions for April and May that reinforced the string of steady declines. And the unemployment figures sustained the May pop to a 5.5% rate. Yet, the remaining data reinforced existing June forecasts for other key macro reports, and leave the dichotomy between the near-term GDP and jobs market outlook intact. See our report.
13:49 ET
Canadian bonds: The curve has steepend in sympathy with Treasuries following soft U.S. ISM services data this morning, along with further pressure on equity and credit markets. News that growth in Ontario fell 0.3% in Q1 argues for patience on monetary policy. And following the closure of auto-part makers this week, auto consultant Dennis DesRosiers doesn't think the sector will recover until 2010. A research note from RBC has also caught attention. The bank lowered its growth forecast for Canada this year to 1.4%, but expects growth to rebound to 2.5% in 2009. The 10-year yield has held near 3.75%, unchanged on the day. The 2s10s spread has widened out 2.5 bps to +54 bps, toward the top of the recent range. Meanwhile, spreads versus Treasuries are mixed against a backdrop of Treasury curve steepeners.
13:44 ET
Treasury Closing Summary: Curve steepening and unwinding of Treasury longs against Bunds provided the main impetus for the shortened session after the predictably weak June employment report was accompanied by a rise-and-hold strategy from the ECB, which reverted to a bias-free policy stance after their quarter point hike. Stocks remained in peril near bear market territory to round out the week, which served to cap yields after the key events and data stirred up volatility briefly before the early close. See our summary.
13:12 ET
Treasury supply picks up next week with a 10-year TIPS offering and an increase in 3- and 6-month bill issuance. The debt managers will sell new 10-year TIPS next Thursday (announced Monday, along with 4-week bills). We expect the size to be increased by $1 bln to $9 bln, compared to last January's $8 bln size. The Treasury will also sell $47 bln in 3- and 6-month bills on Monday, that's up $2 bln from this week. The TIPS auction will be especially interesting given the widening in the breakeven spread through 260 bps, after holding tightly in the 255 bp area. That's also in line with the steeper Treasury curve this week. Though sources contacted weren't sure why the market broke out yesterday, indications of rising inflation expectations will keep the Fed on the hot seat and complicate their policy actions if it is the case that the economy is slowing down into Q4.
13:05 ET
Oil Action: There is a rumor floating in the NYMEX pits that margin requirements on petroleum and some agricultural futures contracts will be raised "massively" after the N.Y. close on Thursday, apparently aimed at driving out the evil speculators. There is no other substance to the rumors, and it must be noted that the NYMEX did increase petroleum contract margins slightly on Wednesday.
13:03 ET
Canadian oil sands investment could be on the horizon for India. Of interest for medium-term CAD bulls, Indian companies could invest $2 bln to $2.5 bln for oil sands stakes, according to a top official. It is part of an effort to secure overseas energy assets to feed the country's fast growing economy (see Globe and Mail).
12:42 ET
Canadian province Ontario maintained its balanced budget projection for 2008-09. The consensus forecast predicts slower growth for Ontario than was predicted in the 2008 Budget. Nonetheless, the revenue and expense outlook remain unaltered at $96.9 bln and $96.2 bln respectively. Meanwhile, the outlook continues to include a $0.8 bln reserve to help protect against adverse changes in revenue and expenses. See 2008-09 First Quarter Ontario Finances.
12:28 ET
The U.S. economic calendar cools off next week relative to the past week's run-up to June payrolls, which came in predictably weak, but perhaps not as dire as feared. May wholesale trade starts off on Tuesday, with inventories seen up 1.0% and sales 1.4% higher. The NAR's pending home sales index for May is also due and likely to fall to 84.7 from 88.2, while consumer credit may rise to $10.0 bln in May (median $6.8 bln). Wednesday is limited to the usual MBA and EIA reports, followed by initial jobless claims on Thursday, where we see a downshift to 380k after last week's jump above 400k following likely distortions from recent Midwest floods and auto-retooling. Friday rounds out with a small flurry, including the May trade deficit, seen widening to -$63.5 bln (median -$62 bln); Jun import and export prices, forecast +2.4% and +0.9% respectively; Jul Michigan sentiment likely to fall to 55.0 (median same); the Jun Treasury budget seen posting a $23 bln surplus (median +$18.7 bln). All in all, mostly second-tier data.
11:58 ET
A double-header from Fed Chairman Bernanke next week will come via appearances on both Tuesday and Thursday. At the first he will be speaking before an FDIC forum on mortgage lending for low- and moderate-income households, where there seems less risk he will elaborate on the policy bias. Later in the week he will testify with Treasury Secretary Paulson before the House Financial Services Committee on financial market regulation, which could include a broader remit for the Fed to oversee non-commercial banking with an eye to more actively avoiding systemic risk in the financial sector. Other speakers will include SF Fed's dovish Yellen on Monday on the economy and outlook, Richmond Fed's hawkish Lacker on the economic outlook Tuesday and Yellen again on Thursday, subject unknown.
11:28 ET
U.S. Treasury will auction $47 bln in 3- and 6-month bills on Monday, that's up $2 bln from this week's volume. The debt managers boosted each tranche by $1 bln, bringing the 3-month to $24 bln, and the 6-month to $23 bln. This will raise $4 bln in new cash. The Treasury will also be auctioning 10-year TIPS next week.
11:18 ET
Canada's S&P/TSX Composite tumbled to a two-month low below 13,800 in early trading, but has since rebounded into marginal positive territory above 14,000. The materials sector has been the major drag for a second day, plunging 2.5% on macro economic concerns and pullback in base and precious metal prices. Energy has dipped 0.6% on apparant profit-taking, shrugging off a fresh record high for crude oil. However, financials have rebounded 0.9% and consumer staples have firmed 0.6%, helped by the oversold bounce on Wall Street.
11:13 ET
Action Report: The ECB hiked official interest rates, as expected. The press conference was less hawkish than many feared and supported our view that today's hike was the end, rather than a restart of the tightening cycle, even though the central bank left the door open for further moves down the line. See full report.
11:13 ET
Bund Recap: Bund futures have shrugged off the rate hike and are sharply higher on the day after president Trichet signaled a return to a neutral stance no further rate hikes for the time being. As of 15:11GMT the September 10-year Bund future is up 70 ticks on the day at 110.83 and the 2-year Schatz future is up 29 ticks at 102.495. The 10-year cash yield is down 8bp at 4.56% and the 2-year yield is down 15 bp at 4.48%. In the money markets the Sep 3-months Euribor future is up 0.055 at 94.950, and back months futures are up as much as 0.195 in the Sep 09 future as rate hikes are being priced out.
11:12 ET
Gilts Recap: Gilt futures extended gains after U.S. ISM data. Earlier, Gilts rose during the ECB press conference, where President Trichet appeared less hawkish than market players have feared. U.K. data earlier this morning showed that the important services sector contracted for a second month in June, with the PMI index falling more sharply than expected. The September 10-year Gilt future is up 72 ticks to 105.15. The 2-year U.K. cash yield is down 9 bp to 5.05%, while the 10-year yield is down 10 bp to 5.04%. FTSE-100 was up 1.24% on the session at 14.41GMT.
11:02 ET
FX Action: EUR-USD cleared out stops amid European account selling below 1.5720 and 1.5700. The pair recorded 1.5695 lows before buyers came back in and is currently changed hangs around 1.5715. Today's sharp sell off set up the euro for a key day reversal on the daily chart after it cleared the low of the four previous sessions, which is usually a signal for further weakness. Further support at 1.5680 may be threatened once intra-day profit taking has fed through the market.
10:39 ET
Hawkish noises from St Louis Fed's Bullard came via an editorial in that regional bank's magazine, "The Regional Economist," according to Reuters. Bullard is a hawkish non-voter, who recently replaced William Poole at the helm after rising from the ranks of the research department. He argued that "It is hurting Fed credibility to say that we are trying to keep inflation low and stable, but at the same time we are not counting some of the prices that are going up at the most rapid pace." That is in reference to the Fed tracking core inflation and Bullard defined price stability as a 0.5-1.5% inflation rate.
10:36 ET
Canadian technicals: The Sep CGB has consolidated near unchanged levels, but Wednesday's intraday penetration of the Jun 20 high at 117.08 was a slight disappointment. As a result of this modest weakness we think the chances of a retest of the Jun 4 peak at 118.59 have been taken off the table. Risk is on the rise for a drop below the Jul 2 low at 116.95 that would expose risk for follow-thru lower targeting the Jun 13 low at 115.96. See our CGB technicals.
10:31 ET
Treasury Option Action: some light bearish trades followed the sub-50 ISM NMI print, with demand for 113 "puts" and sales of 114 "calls"on Aug 10-year futures reported in its wake.
10:27 ET
Fed policy outlook: policymakers will likely remain sidelined until at least year end at the earliest given the slip in the economy in late Q2 and weakness in the labor market. Though the Fed indicated bias toward inflation in its June policy statement, it also acknowledged downside risks to the economy, which seem to be coming to pass. Implied Fed funds futures have fallen as traders pare tightening expectations. The November elections could also complicate policy actions later this year, and unless the FOMC's hand is forced by an unexpected surge in price pressures, we suspect they'll prefer to let the elections play out unencumbered by monetary policy actions. See our policy outlook.
10:20 ET
FX Action: EUR-USD implied volatility moved sharply lower after the ECB press conference. The rejection of the 1.5900 handle and subsequent move down to 1.5737 lows forced a number of gamma longs to liquidate positions ahead of the long U.S. weekend. Theta hedging, along with general unwinding of vega was noted as EUR-USD is now seen back in the comfort zone after failing to challenge option barrier congestion from 1.5925. Large amounts changed hands, with reports of one U.S. account selling EUR 1 bln around 10.0% in the 1-mth and depressed the contract to 9.5/9.7%, while 2-mth ATM was given in EUR 1 bln at 10.55% and is now at 9.75/9.90%. The contraction in volatility is noted right along the curve, with 3-mth at 9.95/10.20%, 6-mth at 10.35/10.55% and the 1-yr at 10.50/10.65%. The curve is expected to remain soft, with expiry congestion around the 1.5750 region likely to weigh in the absence of U.S. traders on Friday.
10:12 ET
The U.S. ISM-NMI drop in June to 48.2 from 51.7 translates to a similar drop on an ISM-adjusted basis to 49.2 from 52.2 in May. The June reading is below the 49-53 range seen since June of last year. Today's result under-performed Tuesday's ISM reading of 50.2, which left that measure closer to the upper end of its 48-51 range since last July. Today's data also under-performed Monday's Chicago PMI headline rise to 49.6 that translated to a 50.6 reading on an ISM-adjusted basis. The data were more in line with the Empire State report, where we saw a headline drop to -8.68 in June from -3.23 that translated to 47.8 on an ISM-adjusted basis, and the Philly Fed report, which revealed a headline drop to -17.1 from -15.6 in May to leave a drop in the ISM-adjusted figure to 45.2 from 46.9. The mix leaves the average ISM-adjusted reading for the major indicators at the same 49 seen in both April and May, following readings of 48 in March, and a recent 47 trough in February. The prior down-trend in the average from 54 in the middle four months of 2007 paralleled the slowing in GDP growth to a 0.8% average in Q4 and Q1. The sentiment rise in Q2 is consistent with our 2.2% GDP estimate, though the down-spin to many of the sentiment figures in June implies downside risk to Q3 GDP growth, which we also currently peg at 2.2%.
