Mizuho's US View - FJElite

USTs head into today’s session still adjusting to last week’s hawkish FOMC, but with the sell-off looking increasingly stretched in the very front-end unless PMIs materially re-accelerate. Overnight price action has been more constructive, with Treasuries bull steepening in Asia as equities remained under pressure and the latest leg lower in oil helped take some of the heat out of the post-FOMC inflation narrative.

 The bigger overnight development was on Iran. The US has now moved ahead with a temporary waiver on Iranian oil exports, which points to a shift towards a supply normalisation story. This should be enough for markets to reduce one of the sources of near-term inflation anxiety, although it may not be enough to reverse the repricing in Fed expectations yet (~48bp of hikes priced by H1-27).

The more immediate test today is the PMI set. PMIs tend to correlate relatively well with growth momentum, and after the sharp repricing in front-end rates we need to know whether survey sentiment is validating the move higher in front-end yields or starting to soften. A strong US print would leave 2Y yields vulnerable into the $69bn auction. Consensus is for an improvement in the composite to 52.1 from 51.5 in June, driven by services.

On risk, the equity sell-off feels headline driven (SPCX and GOOGL), but I think that the discussion around asset rebalancing out of equities and into bonds into quarter end should not be dismissed given how aggressive the rally has been this quarter. If that flow starts to show up more clearly, it could help cap term yields even if the front-end remains hostage to the data.