Newsquawk US Market Wrap: Yen surges and USTs tumble on historic intervention [temporary issues with research suite]


Stocks were lower across the board Thursday with cyclical weakness amid a wave of central bank hikes. The Yen saw a massive bid after Japanese officials announced intervention to stop the currency's rot. As a result, there was a later spell of pronounced Treasury selling in the NY session amid anticipation around Japanese Dollar reserve sales. The cash 10yr yield made new peaks at 3.72%, marking the largest absolute yield rise (near 20bps) since June 13th (+21bps), and the second largest since the 2020 dash for cash. Although the moves were by no means a liquidity event this time with traders noting decent liquidity in Treasuries despite the tumble. Elsewhere, the SNB hiked 'just' 75bps, hitting the Franc with a lot of expectations for a larger 100bps hike. While the Old Lady also pushed back on some of the more hawkish expectations with just a 50bps hike in the Bank Rate, although the BoE did confirm its QT plans, i.e. outright Gilt sales, which saw 30yr UK yields hit new peaks. Turkey also managed to turn heads after the CBRT made a shock 100bps rate cut. Looking ahead, traders now look to Friday's Powell remarks at a Fed Listens event, alongside any other unscheduled Fed speakers post-blackout.


BOE REVIEW: A unanimous decision to increase the Bank Rate, but three-way dissent on the eventual 50bp hike with Dinghra taking the dovish mantel from Tenreyro and voting for 25bp while known hawks Haskel, Mann and Ramsden supported a 75bp increase. Given the 50bp hike disappointed market pricing for 75bp, a snap dovish-reaction was seen sending Gilts to session highs and pressuring Sterling. However, with reference to the Gilt move, this swiftly reversed to below pre-release levels given numerous bearish factors. Specifically, the BoE confirmed that they are going to reduce their holdings of gov’t bonds by GBP 80bln over the next 12 months. A reduction that, while caveated by a statement that the schedule can be amended, is of particular note at a time when the UK gov’t is likely to substantially increase Gilt issuance to fund energy measures. Additionally, the BoE retained its guidance that they will continue to “respond forcefully” as necessary to inflation and while the peak forecast was reduced vs August’s update, it remains elevated and well above target. Finally, the Bank has downgraded its view on the UK economy in the near-term, Q3 2022 is now expected to see GDP declining by 0.1% (vs August projection of +0.4%), for a second quarter of contraction; a forecast which, if confirmed by the ONS release, implies the economy is already in a technical recession. Next up, we look for any guidance from rate-setters on the UK govt's recently announced fiscal support measures, particularly those pertaining to energy, and what tightening action the associated demand-push implications of such assistance may warrant.

SNB REVIEW: As expected, the SNB lifted its Policy Rate out of NIRP to 0.50% via a 75bp hike; however, this magnitude disappointed market pricing for a 100bp move and thus a pronounced dovish reaction in the CHF, and to a lesser extent in markets broadly, occurred. A hike that was once again deemed to be merited by the inflation situation and as such was accompanied by reiterated guidance that further hikes cannot be ruled out. Additionally, repeating guidance that they are willing to intervene in FX markets as necessary with Chairman Jordan subsequently stressing they are ready to step in to prevent excessive weakening or strengthening of the Franc. Rates/FX aside, the SNB has altered the mechanics of its Exemption system, the Threshold for this was reduced to 28x (prev. 30x) at the June gathering, and now sight deposits above the threshold are to be remunerated at a 0.00% interest rate - essentially flipping the prior system to account for the lifting of rates into positive territory.

NORGES BANK REVIEW: The second consecutive 50bp hike lifted the Key Policy Rate to 2.25% and now takes the total magnitude of tightening to 225bp worth over the past year. In face of this pronounced hawkish action, the Norges Bank will now be taking a “more gradual approach” to policy tightening. Specifically, Governor Bache said the November meeting will likely feature a 25bp hike. A magnitude that is also implied by the updated Policy Path that is seen peaking around 3.0% towards end-2023. The Bank justifies this more gradual approach due to the clear signs that the economy is cooling in wake of the pronounced monetary tightening. Overall, the meeting was in-fitting with expectations and sparked relatively limited NOK reaction.


JOBLESS CLAIMS: Initial jobless claims marginally rose to 213k from the revised lower 208k but it was beneath the expected 218k. Meanwhile, continued claims fell to 1.379mln (prev. 1.401mln), also lower than the consensus 1.4mln, and dipped beneath 1.4mln for the first time since mid-July. Oxford Economics note, “while overall economic activity is expected to slow, leading to a mild recession in H1 2023, the low level of claims is a reminder that labor market conditions remain extremely tight.” As such, OxEco does not expect claims to fall much from current levels, but at the same time it does not look for a spike anytime soon either. The consultancy adds, claims are more likely to trend higher in 2023 when we expect a mild recession, but at this time “the supply and demand for labor continue to be out of balance and we look for employers to continue to slow the pace of hiring workers well in advance of any significant layoffs, which we don't anticipate until next year.” Lastly, Oxford concludes imbalance between the supply and demand for workers is a pivotal factor behind the Fed's plans to continue aggressively raising interest rates.



Treasuries saw pronounced selling in the NY session amid anticipation around Japanese Dollar reserve sales. 2s +11.4bps at 4.109%, 3s +18.2bps at 4.122%, 5s +20.0bps at 3.915%, 7s +20.3bps at 3.847%, 10s +18.8bps at 3.700%, 20s +14.9bps at 3.909%, 30s +11.2bps at 3.632%.

INFLATION BREAKEVENS: 5yr BEI -1.7bps at 2.514%, 10yr BEI +3.3bps at 2.412%, 30yr BEI +0.5bps at 2.285%.

TOKYO/LONDON: The Treasury curve had seen some flattening on strong volumes during APAC and London morning on Thursday to see T-Note hit session highs of 114-00 - perhaps some relief buying after other global Central Banks hiked broadly in line with expectations, or less in the case of the SNB. There were two-way, kneejerk flows after the BoE hiked just 50bps (with some expectations for 75bps), although better selling sustained as the bank confirmed QT (outright sales) that saw particular pressure in the long-end of the Gilt curve, spilling over to USTs.

NEW YORK: The selling sustained through the NY morning, gaining viscous momentum as desks started to point to the Japanese Yen intervention, and the related reserve (Treasury) selling to facilitate it. However, just how much was actually Japan or just traders attempting to front-run Japan remains to be seen. There was a slew of block futures sales aiding the tumble too. T-Notes ultimately printed session lows of 112-21+ before Europe closed up for the session, with the contracts hovering near lows through settlement; a strong 10yr TIPS auction provided some support too. The cash 10yr yield made new peaks at 3.72%, marking the largest absolute yield rise (near 20bps) since June 13th (+21bps), and the second largest since the 2020 dash for cash. Although the moves were by no means a liquidity event this time, with bid/ask spreads in on-the-run and off-the-run Treasuries contained, whilst book depth in futures was also decent.

REFUNDING: US to sell USD 43bln of 2yr notes on Sept 26th, USD 44bln of 5yr notes on Sept 27th, USD 36bln of 7yr notes on Sept 28th; all to settle on Sept 30th.




Crude futures were firmer but choppy on Thursday, aided by the softer Dollar and lower Russian supply forecasts, while aggressive central bank hiking keeps the demand outlook pressured. Russian supply was in focus after Moscow proposed hiking the export duty on nat gas (pipeline and LNG), as well as the introduction of export duty for fertilizers and coal. Meanwhile, RIA reported, citing a government document, that Russian oil output is seen declining to 490mln T in 2023, compared to 2022 forecasts at 520-525mln T. Elsewhere, a Polish official said via Reuters that Poland can only help to supply Germany's Schwedt refinery if Rosneft is removed as a shareholder. There were comments from French President Macron noting French gas storage is at over 96% now, and France would scale back price caps on gas progressively after 2023. While German Economy Minster Habeck said Chancellor Scholz will close LNG contracts during a visit to the UAE.

EU DERIVATIVES: EU's ESMA is proposing a temporary new emergency brake for halting trading in energy derivatives during price spikes, saying it should be calibrated at the EU level. The ESMA also expressed concerns over the use of EU carbon emission allowances as collateral in energy derivatives trading, as well as concerns over using uncollateralised bank guarantees for backing energy derivatives trades at clearing houses, calling for conditions, including capital requirements, on issuing bank guarantees. There were FT reports that the EU Commission has cast doubt on the ability to intervene in energy derivatives markets, where in a presentation to diplomats the EU concluded that the big swings in power prices are not due to "market malfunction", also casting doubts on the degree to which collateral rules could be broadened, as the ESMA has recommended.


CLOSES: SPX -0.84% at 3,757, NDX -1.17% at 11,501, DJIA -0.35% at 30,076, RUT -1.90% at 1,728.

SECTORS: Consumer Discretionary -2.16%, Financials -1.66%, Industrials -1.49%, Materials -1.24%, Technology -0.98%, Real Estate -0.94%, Energy -0.4%, Utilities -0.38%, Consumer Staples -0.19%, Communication Services +0.06%, Health +0.51%.

EUROPEAN CLOSES: EURO STOXX 50 -1.85% at 3,427, FTSE 100 -1.08% at 7,159, DAX 40 -1.84% at 12,531, CAC 40 -1.87% at 5,918, FTSE MIB -1.07% at 21,799, IBEX 35 -1.24% at 7,774, SMI -1.26% at 10,297.

EARNINGS: FedEx (FDX) released earnings early, and announced a USD 4bln cost savings plan and expects cost savings in FY23 of USD 2.2-2.7bln. Meanwhile, it beat on EPS and missed on revenue but this was in line with its prelim results last Thursday. Accenture (ACN) beat on EPS and revenue but FY and Q1 guidance was light due to IT spending cuts by corporate customers and a negative impact from the stronger dollar. Darden Restaurants (DRI) missed on revenue and comparable sales, while it largely reiterated FY guidance. EPS was inline. FactSet Research Systems (FDS) fell short on EPS but topped on revenue as it reported an increase in organic revenue and annual subscription value. However, FY23 EPS view was light. Home builders, Lennar (LEN) and KB Home (KBH), both reported better-than-expected quarterly earnings, but posted lower-than-expected revenue as a housing market slowdown weighed on new home orders.

STOCK SPECIFICS: Tesla (TSLA) had the NHTSA recall nearly 1.1mln US vehicles because the window automatic reversal system may not react correctly after detecting an obstruction. Musk later noted the vehicles just need an over-the-air software update and that Tesla knows of no injuries from the recalled vehicles. Target (TGT) announced it will hire 100k seasonal team members, more than WMT's 40k seasonal members. Salesforce (CRM) disclosed a plan to operate more efficiently and raise profit margins; targetting FY26 revenue at USD 50bln (exp. 47.7bln) and aiming for a 25% adj. operating margin, compared with the 20% it had targeted for fiscal 2023. Novavax (NVAX) was downgraded at JPMorgan, who cited cos. recent guidance cut may not have gone far enough, given reduced vaccine demand as well as other factors. Royal Caribbean (RCL) said demand remains strong and bookings are outpacing 2019. Microsoft (MSFT) plans 1k new jobs in China despite a slowing economy and widespread tech lay-offs, according to SCMP. Credit Suisse (CS) approached investors about launching a possible capital hike, mulling options to scale back investment bank including largely withdrawing from the US, according to Reuters sources. Following this, Credit Suisse said reports of the bank's US exit are "categorically false”. Humana (HUM) and other potential buyers circle Cano Health (CANO), according to WSJ, with CVS (CVS) among potential bidders. Jana Partners has an almost 10% stake in Freshpet (FRPT), according to WSJ sources; the activist plans to push the co. to make changes to boost stock price and explore sale. Qualcomm (QCOM) said automotive design-win pipeline expands to USD 30bln and over USD 10bln increase from numbers provided in July.


The Dollar was very choppy but eventually lower Thursday in the latest edition of ‘Super Bank Thursday’ which lived up to its reputation as it took a large part of the gloss off Wednesday’s hawkish 75bps Fed hike. In the European morning, the Buck dropped to session lows of 110.460 from 111.580, after Japan Vice Minister for Financial Affairs stated the Government and BoJ took decisive action in FX markets and intervened, and as such the DXY and USD/JPY sank (further details below). Following this, the Buck was on a mission to retrace its losses, and it managed to find a base around 111.30 heading into the close, as it got a partial reprieve from upbeat US data where jobless claims were less than expected and narrower than forecast current account deficit. Looking ahead, Fed Chair Powell is offering opening remarks at a Fed Listens event Friday and Flash PMIs are the highlights, ahead of a plethora of Fed speak next week.

JPY was the distinct outperformer and notably firmer against the Buck, as it traded between extremely wide parameters of 145.89 and 140.36 after the aforementioned Japanese intervention. Regarding the day, the BoJ followed hot on the heels of the FOMC and largely stuck to its ultra-easy script, but the fireworks came after as Governor Kuroda sounded extra dovish in the presser with the usual pledge to pursue powerful stimulus supplemented by the remark that he does not envisage having to change forward guidance for two to three years. Moreover, Kuroda contended that he did not anticipate any request from the Government to address Yen depreciation, so the subsequent ‘decisive’ intervention by the MoF and BoJ caught markets even colder than they might have been. USD/JPY was hovering near the top of a decent range that extended to almost 146.00 before dropping like a stone and retreating further in flash crash-like conditions all the way down to circa 140.35.

CHF was the clear laggard and saw significant losses against the Buck as USD/CHF in the wake of the SNB rate decision. The Franc sunk after the SNB ‘only’ matched the Fed and ECB with a 75bps rate hike to 0.5%, as expected, rather than rivalling the Riksbank with a full point rise that was roughly 80% factored in. As such, the skew of market expectations for a 100bps move resulted in USD/CHF reaching 0.9850 from a 0.9623 low and EUR/CHF topped 0.9700 having been around 0.9470. In wake of the rare decision, SNB Chair Jordan said SNB is ready to intervene to prevent excessive weakening or strengthening of the CHF and recent appreciation has helped dampen inflation. Additionally, he reiterated that the SNB can do interim rate decisions if needed.

Activity currencies were choppy, and traded within wide ranges, but at pixel time GBP and NZD are flat, with AUD and CAD marginally firmer and weaker, respectively, against the Buck. On the day, the BoE hiked the expected 50bps, albeit fairly dovish, as it contained a 25bps dissenter from new MPC member Dinghra, especially considering the market was skewed to risks of a 75bps move. Nonetheless, in wake of the release Cable was choppy, and while it dipped initially, it then recovered as guidance for further forceful tightening was retained, if the outlook indicates more persistent inflation pressures, while the BoE also confirmed its QT plans (outright bond sales), weighing on the back-end of the UK Gilt curve. Elsewhere, the Aussie, Kiwi and Loonie were mostly at the dispense of outside influences and their US rival’s fluctuations. Looking ahead, Australian flash PMIs for September are on Friday, as well as July Canadian retail sales.

EUR was flat vs the Buck, but chopped around between 0.9907 and 0.9810 parameters, as the single currency fell foul to incidents out of its control. Although EUR did have some support via EGB yields moving up in kilter with Treasuries.

EMFX was predominantly firmer vs the Greenback, with RUB the outperformer amid continued geopolitical tensions where Russia noted Russian weapons, including nuclear, can be used to defend territories in Russia. Meanwhile, there was a slew of central bank decisions as the ZAR rallied on an expected SARB 75bps hike, while the Lira was the EM underperformer after the CBRT unexpectedly cut rates by 100bps to 12%. CNH/CNY and other EMs piggy-backed Yen’s bounce, but the BRL lagged following no move from the BCB, the HUF retreated amidst comments from NBH Deputy Governor Viraj on inflation, where he said domestic inflation is to rise until end-2022 and inflation is close to peaking. He said all options were on the table for next week's meeting.

Scandi’s were mixed, as the NOK failed to derive much from an in-line 50bps Norges Bank rate increase, and maybe partly because the bar was set so high by its Swedish Central Bank counterpart on Tuesday, but mainly due to the rate path getting trimmed further out and the fact that Governor Bache said the next move in November is likely to be 25bps.

Analysis details (21:42)

22 Sep 2022 - 21:34- Research Sheet- Source: Newsquawk

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