not exactly on fire, but at least market showing some life today…. (Wednesday)

After two days of horrendous overnight activity (not much better during US day either), the market has “surged” to 50% greater volume today than the first two days of the week (300K TY contracts vs only 200K Monday and Tuesday), but still is well below average activity. Soft Markit PMI reports have underpinned global fixed income markets and left risk mixed. Meanwhile, markets remained focused on transition of power in UK, ECB meeting tomorrow, and FOMC next week. As of 8:15 AM ET, Treasuries are 2 to 3 bps lower in yield as the curve bull flattens while US equity indices trade marginally softer.

Risk was slightly better bid to kick off the Asian session on news reports late yesterday that US trade negotiators were preparing a trip to China for continued intensive trade negotiations, but that bid was fairly short-lived as the soft Asian PMI’s derailed the plan. Aussie PMI disappointed enough that Westpac moved forward its call for next RBA ease from November to October (and making September “live”), while lowering their terminal rate from .75% to .5%. As for Treasury flow, early levered account selling of US classic contracts on the trade reports, continuing yesterday’s theme, also saw small Japanese bank selling in belly of US cash curve; after the Aussie PMI, Treasuries bounced to unchanged on extremely light volume and then flat-lined either side of unchanged across the curve right through the European open. Asian real money was a small buyer of US 10s, central bank lifted US 2s, there was some Asian bank receiving in USD 5y swaps that offset the Japanese bank selling in cash 5s. Locally, Aussie bank bills rallied on very good volume after the soft Aussie PMI, helping Aussie 10s rally 2.5 bps while JGBs were only marginally firmer as PMI there was better. After yesterday’s very sloppy 40y JGB issuance, fixed income in Japan was happy to trade sideways and regroup. As for equities, Chinese bourses and NIKKEI traded slightly firmer while rest of Asia markets were softer after pressure on commodity-based currencies.

The news in Europe was uniformly weaker PMI reports: France fell to 50 from 51.9, Germany fell to 43.1 from 45 (ouch!), and the Eurozone fell to 45.4 from 47.6. You get the idea. German fixed income dragged US higher, with bunds rallying a quick 3/4 of a point as Treasuries saw a small bull flattening with long end rallying 2.5 bps. Bund flow saw aggressive CTA buying above the old contract highs at 174.05, stops run above 174.20. Macro account added RX/OE (bund/bobl) flatteners, European real money lifted buxl (up 1.25 points), and RV account lifted bobls against 5s ahead of today’s supply in the latter. Treasuries saw some macro account buying of 10s and some hedge fund short covering in 30s, while there remained better RV interest to sell 5s and WI 5s ahead of today’s supply. Volume picked up only slightly, and has tailed off dramatically since mid-morning in Europe; very little has traded since NY arrived as well. Gilts are under minor pressure this morning in nondescript trading, while peripherals are putting in a good day, with better interest to sell upticks in those sectors (since the rally is on the hopes of cheaper funding, might be wise to consider why funding will cheapen) as seen by the European real money selling of SPGBs in decent size since mid-morning in Europe. European stocks are mixed to slightly lower thus far today.

Today’s US calendar includes Markit PMI for the first half of July at 9:45 AM ET, followed by new home sales at 10 AM. Fed is in blackout period so no joy there. All we really have for entertainment is Treasury issuance: $20BN in 2y FRN will be auctioned at 11:30 AM ET, followed by dessert in the form of $41BN in new 5s at 1 PM ET. Given month end extensions should be around .06 years (vs an average of .08 years), market may need to do a little heavy lifting this afternoon and tomorrow ($32BN 7y auction to wrap up the week).

Wish we had a good idea, a trade, a hole, anything to talk about. Alas, we are sitting in the middle of “no man’s land” with very little impetus to move yields outside the 10 bps point range since this time last week. We have August options expiration at the end of this week that may (just may) provide us a little impetus, but I wouldn’t hold out too much hope. Tomorrow’s risk for the ECB is a dove surprise, but that is looking more like an August meeting event. So for choice today in TYU, let’s call the range at 127-26 to 127-12+. Yeah, after everything I wrote, looking to extend the range up toward the lower yield bound of the range cited above, as risk today is to a creeping bull flattener. Gotta have some fun, but market is lining up for that trade. As for levels, support comes in below 127-12+ at 127-07, 127-05, 127-00+, 126-27, 126-24+; resistance comes in at 127-21+, 127-24, the aforementioned 127-26+, 128-02/02+, 128-11. Don’t have an axe in vol here (promise that will change early next week), just keep it close to flat for now.

Have a good hump day….