MNI ASIA MARKETS ANALYSIS: Biggest Midterms Risk Is Status Quo

US TSYS: Increasingly Parallel Cheapening Across The Curve

• Cash Tsys are seeing an increasingly parallel cheapening across the curve, with 2YY +6bp and 10YY +5bp after the longer end unwound an overnight rally.
• In a light docket, one of the main drivers came from WSJ sources saying China is weighing a zero-Covid exit, albeit with caution and without a timeline, going against long end yield downward pressure when China NHC officials noted unswervingly adhering to current controls.
• Treasuries also contend with 15 IG deals looking to price (12 left after Wisconsin, Duke Energy and Southern California Gas so far).
• TYZ2 of 109-21+ comes close to session lows of 109-19 but doesn’t yet trouble support at Friday’s low of 109-10+.
• Still to hear ’22 voters Collins & Mester at 1540ET before Barkin (’24) on inflation at 1800ET. A dearth of data/Fedspeak follows tomorrow.

MNI MARKETS ANALYSIS:  Biggest US Midterms Risk Is Status Quo

EXECUTIVE SUMMARY:

• Heading into Tuesday's midterm elections, the overwhelming expectation is that the Republicans win at least one if not both chambers of Congress. MNI's Political Risk team's midterm elections preview is available here.
• From an asset class perspective, the impact of that outcome is likely to be muted, and besides, there is little discernible pattern in recent post-midterm asset moves.
• But we could see a strong bearish Treasuries, bullish dollar move in the event the Democrats do the unlikely and win both the Senate and the House.
• That may seem counterintuitive given that it would simply return the status quo. But a strong reaction would be likely as it would change the macro policy setup for 2023 in a more expansionary fiscal / tighter monetary direction than is currently (overwhelmingly) priced in.

FULL ANALYSIS AVAILABLE HERE:

Midterms2022.pdf

Table 1: Post-Midterm Election Returns (changes calculated from Oct 31 of midterm year)

Source: MNI

US MNI Employment Insight, Nov'22: Supply Limitations Keep Pressure On Fed

• Labour data for October were mixed, with payrolls coming in stronger than expected but the u/e rate rising more than expected.
• However, still strong jobs growth at this stage of the cycle and tight household survey metrics (u/e rate close to historical lows, participation rates trending sideways) keep the onus on the Fed to keep hiking aggressively.
• The dial moves more in favour of a guided 50bp hike instead of a fifth 75bp in Dec (56.5bp priced), although as former Richmond Fed research director tells MNI, the Fed could be set for a lively debate.
• Thursday’s CPI report for October will be pivotal in the near-term although we still have November reports for both payrolls and CPI before the Dec FOMC (only just for CPI, Dec 13 vs Dec 14 decision).
• Full report: https://roar-assets-auto.rbl.ms/documents/20078/USEmploymentReportNov2022.pdf

MNI NBP Preview - November 2022: Stubborn Inflation Likely to Tilt NBP to Hike

Executive Summary:

• Expected to raise rates by 25bps to 7.00%
• Persistent upward pressure on both core and non-core components of inflation are likely to have tilted the balance
• Sell-side analysts split between a 25bp hike and no change

Full preview including summary of sell-side views here:

NBPPreviewNov22.pdf

The National Bank of Poland are expected to hike rates 25bps to 7.00% at their November decision. Persistent upward pressure on both core and non-core components of inflation are likely to have tilted the balance despite a number of board members seeing the tightening cycle in the rear view mirror.

The outcome of the November decision will be largely dependent on the new NBP macroeconomic forecasts. Should this indicate a higher CPI projection, the dovish majority will find it difficult to resist calls from the hawks of a hike of at least 25bp.

FOREX: Broad Greenback Weakness Persists, GBP Soars 1.4%

• Despite the US Dollar gapping higher at the open, the greenback has resumed its weakening bias that ensued following the US employment release on Friday amid ongoing optimism surrounding the potential relaxation of Covid measures in China and the underlying supportive tone for equity markets.
• The USD index (-0.71%) comfortably traded through last week’s lows and now resides roughly 2.4% below the post-NFP high. Price action has been extending below the 50-day moving average which intersected at 111.21 today. Fairly consistent and broad-based USD weakness extended towards the end of the European session, with EURUSD climbing back above parity and GBPUSD testing the 1.15 handle.
• Little immediate resistance of note for the single currency may pave the way for a move towards 1.0094, the high on Oct 27 and a technical bull trigger.
• For cable (+1.36%), consistent demand has seen a clean break of the 50-day exponential moving average at 1.1429 and further strength now brings into focus 1.1566, the October 27th high.
• The Yuan matched the US Dollar's underperformance as the central bank dialed back its support for the currency via fixings and the strong performance for major equity indices was unable to filter through despite other EM currencies continuing to perform well such as the ZAR (+1.05) and MXN (+0.42%).
• US Mid-Terms are likely to dominate the newsflow over the course of Tuesday, however, markets will remain focused on the US inflation release due Thursday.

EU FI: EGBs-GILTS CASH CLOSE: Bear Flattening

European curves bear flattened to start the week, with Gilts underperforming Bunds.

• Amid a fairly quiet session with limited volumes and newsflow, the flattening move accelerated in the afternoon (UK2s10s moved 6bp lower) with the BoE's APF tender showing a low cover ratio.
• Heavy corporate issuance on both sides of the Atlantic maintained pressure on global bonds.
• Rate hike expectations picked up across the board: BoE terminal pricing up 1.8bp, with ECB up 4.3bp.
• Periphery spreads tightened modestly.
• Attention remains on US elections Tuesday and CPI Thursday.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 8.1bps at 2.209%, 5-Yr is up 6.3bps at 2.236%, 10-Yr is up 4.8bps at 2.343%, and 30-Yr is up 3.4bps at 2.267%.
• UK: The 2-Yr yield is up 16bps at 3.23%, 5-Yr is up 11.5bps at 3.54%, 10-Yr is up 10.1bps at 3.638%, and 30-Yr is up 8.3bps at 3.853%.
• Italian BTP spread down 2bps at 214.6bps
• Spanish bond spread down 1.3bps at 104.4bps

EUROPE OPTIONS: Mostly Sonia Calls To Start The Week

Monday's Europe rates/bonds options flow included:

• OEZ2 118/117 put spread bought for 25 in 2k
• RXZ2 135/132 put spread sold at 67.5/68 in 1.5k
• SFIZ2 9590/9610 call spread bought for 16.5 in 3k (vs 21.5)
• SFIZ2 9530/60 call spread sold at 29 in 2k (vs 20.5)
• 0NZ2 9550/9600/9650 1x1.5x0.5 call fly sold at 14.5 in 1k

COMMODITIES: Oil Fluctuates As Markets Assess China Zero-Covid Policies

• Crude oil prices have broadly trended higher today but for the most part haven’t made up for the sharp decline at open on limited prospects of China moving away from its zero-Covid policy (NHC officials saying the country will "unswervingly" adhere to current controls). WSJ sources then saying that this could be under consideration spurred some intraday increases but they were limited by the noted caution that would be taken and the fact there is no timeline.
• WTI is -0.9% at $91.74, pulling back from a high of $93.74 having cleared resistance at $92.87 (Nov 4 high). Most active strikes in the CLZ2 are by far $100/bbl and $95/bbl calls.
• Brent is -0.8% at $97.79, having also cleared resistance at $98.81 (Nov 4 high) before retreating.
• Gold is -0.3% at $1676.80 as higher US yields help offset any tailwind from a weaker USD. It sits close to resistance at $1682.1 (Nov 4 high).