tame overnight after yesterday’s fireworks but don’t look away (Thursday)

Despite the volatility yesterday, or maybe “after” should be the right preposition, volume has been fairly light overnight in a rather orderly risk trade. Decent data out of Europe has underpinned risk sentiment as bunds weigh on global fixed income. As of 8:00 AM ET, Treasuries were either side of unchanged in a continuation of yesterday’s steepener, while equity index futures are trading marginally firmer ahead of the cash open.

The Asian session saw decent volume in swaps, lighter in Treasuries and futures, in a general continuation of yesterday’s bull steepener. There was two-way flow in belly of curve, with Japanese real money lifting some 10s, Asian real money better axed to sell in 7s and TY contracts. RV accounts were net sellers of 30s outright and on the curve in set-up for today’s 30y supply. There was some small central bank buying of 3s and 2-way flow in 2s, better Asian real money buying of 2s and fast money selling of TU futures. Swaps were a bit more active with early Japanese real money receiving in USD 7y and 10y swaps that set the tone for the Asian session, but hedge fund paying in USD 30y swaps and some small Asian bank paying in 3y swaps. There was 2-way flow in USD 5y swaps: hedge fund receiving against Asian bank paying. Asian rates were fairly quiet, with JGBs rallying 1 bps in 10y space after the performance of Treasuries yesterday, as Australian 10s rallied 1.5 bps. Did not hear much in flows or market moving events/news in those markets, mostly getting aligned with Treasuries. As for equities, Asian stocks traded small better on the session, just matching US rally from yesterday.

The early European session saw a continuation of the Asian trade, but eventually some decent data out of Europe bid risk and sent bunds careening lower. A revision higher to last month’s final (Final) HICP number in Germany along with a revision to Spanish growth number took the legs out from under bunds, with market selling off in bear steepener led by buxl. Issuance in Italy (passable 3y and 7y) and and Ireland (decent 10y and 14y) also weighed on European curve into and after the supply. After almost 8 full sessions of large receiving in EUR 30y swaps, the long end of the German curve there has been treated like a red-haired stepchild since Tuesday. Ugly does not do the description justice there. Hedge funds have been aggressive sellers of buxl and aggressive payers of EUR 30y swaps for two days now, macro accounts have added conditional steepeners in 3m (futures) and 6m (swaptions) expiries on 2s10s, 2s20s, and 5s30s structures in bunds and EUR swaps. Treasury futures saw a slightly bearish (extra TYU sold) $290K of DV01 TU/TY block steepener post at 3:14 AM ET. Treasuries saw better buying of TY against RX by macro accounts, better US and cash 30y outright and against buxl, the former by RV accounts ahead of the supply and the latter by RV accounts on the move in US/UB (US classic/buxl). Comments from Chinese Commerce Ministry about “moving ahead” on talks with the US also underpinned risk, bringing out macro selling of 10s and US classic futures mid-morning in Europe. Gilts have largely been passengers in the car driven by European and US rates. Please remember that volumes have been mediocre at best. There was better interest to pay in USD 5y swaps as US walked through the door. European equities are slightly firmer on the better risk sentiment.

Today in the US, we get CPI, claims, and real earnings at 8:30 AM ET, while the monthly budget statement will be released at 2 PM ET. We will also get a reprise of Powell at 10 AM before the Senate Banking Committee, along with Williams at 11:10 ET, Bostic at 12:15 PM, Barkin at 12:30, Williams at 12:40, and Kashkari at 5 PM ET. So you have plenty of tape bombs to watch throughout the day. The final event of the day will be Treasury’s wrap of this week’s long end auction cycle, as Treasury will auction $16BN in reopened 30s at 1 PM ET.

So, Powell made it clear that the Fed will cut 25 bps in a few weeks, that much I think is clear. TU (key reversal day higher), FV (key reversal day higher), and TY (outside reversal day higher) all put in very good sessions yesterday, while UXY, US, and WN traded effectively like dogs. Open interest was up across the curve, large in front end/belly, and volume was decent. Objectively, this indicates confirmation of the steepener, nothing more/nothing less. Don’t fight the technicals. If you are long gamma, keep it on, can add if it cheapens but would regret giving it away. Would not sell gamma here, but if without, would look (pray?) for a little back up to add some. You should not be short gamma until the event (Fed ease on July 31). As for choice today in TYU, let’s call the range at 127-23 to 127-07+. Resistance comes in above here at 127-16+, the 127-23 objective, 127-25+, 128-02, 128-07; support comes in at 127-09+ (daily pivot), 127-07+ objective, 127-00+, 126-27+, 126-24.

Have a great Thursday,