MNI ASIA MARKETS ANALYSIS - Friday's Risk-Off Reversed With Geopolitics In Spotlight

US TSYS: Treasuries Revert Back To Post-CPI Levels As Volumes Fizzle Out

• Treasuries have recently touched new lows on the day for 2s and 5s, but it doesn't materially alter a large bear steepening on the day, between 4.5-11.5bp cheaper as the long end of the curve shifts back to post-US CPI levels. It’s attributed at least in part to little new news out of the Israel-Hamas conflict, which has helped see a notable pullback from Friday’s highs, although geopolitical tensions continue with Iran’s minister of foreign affairs warning the probability of the conflict spreading to other fronts is approaching the avoidable stage.
• Limited data has helped support some of this steepening, with a small beat for the Empire manufacturing survey for October and more notably another month with its six-month ahead metric at pre-pandemic level to support a softer landing thesis.
• TYZ3 has broadly traded sideways in recent hours, currently at 107-06 (-16+) off the low of 107-04 that stopped just short of support at 107-02+ (Oct 10 low) with firmer focus on 106-03+ (Oct 4 low). Having started off with decent relative volumes heading into the NY crossover, volumes have since been more lackluster, only just ticking over 1M for the day.
• Tomorrow sees a more notable docket, with retail sales for Sep, Fedspeak from Williams, Bowman, Barkin and Kashkari and a picking up of earnings releases including Johnson & Johnson, BofA and GS before the cash equity open.

FX: Antipodean FX Grinds Higher Amid Bolstered Equities

• Positive sentiment across major equity benchmarks have weighed on the greenback to start the week, with the USD index declining around 0.35% as we approach the APAC crossover. The more positive mood has boosted the more risk sensitive currencies in G10 such as AUD, NZD and GBP, with emerging market currencies also being favoured.
• AUDUSD is registering gains of 0.75% on Monday and it is worth noting the RBA minutes will be released overnight. Overall, AUDUSD remains bearish following the recent breach of support at 0.6331, the Sep 27 low. A clear break of 0.6286, the Oct 3 / 13 low, would confirm a resumption of the downtrend and this would open 0.6215, a Fibonacci projection.
• GBP has also started the week on a firmer note as we approach Tuesday’s partial release of labour market data and Wednesday’s CPI. In similar vein to Aussie, GBPUSD trend conditions remain bearish, and the recent recovery is considered corrective. A continuation lower would refocus attention on support and the bear trigger, at 1.2037, the Oct 4 low.
• In emerging markets, the Polish Zloty is the best performer (EURPLN down 2%) following the weekend election and the firmer equities have underpinned a strong bid for the likes of MXN, HUF and ZAR, all rising around 1% versus the dollar. Despite no major developments regarding the Israel-Hamas conflict, Israeli assets continue to suffer, seeing USD/ILS rise 0.9%, topping 4.00 for the first time in 8 years.
• Other than aforementioned data releases, Canadian CPI and US retail sales figures will highlight Tuesday’s economic calendar.

US DATA: Empire Manufacturing 6-Month Outlook Still Much Stronger Than Current

• The Empire manufacturing survey was slightly stronger than expected in October at -4.6 (cons -6), a modest 6.5pt decline for a series with a standard deviation of monthly moves since 2021 of 22.
• It’s at a level similar to that implied by the September ISM mfg survey after it surprisingly increased from 47.6 to 49.0 back on Oct 2.
• Notably, a smaller decline in the Empire six-months ahead outlook from 26.3 to 23.1 kept it close to levels seen shortly before the pandemic and clearly elevated relative to current conditions – see chart. At the margin it’s a release that can support those arguing for at least a softer landing view.

INVITATION: MNI Webcast with Fed's Tom Barkin On Nov 9

You are invited to listen to a speech and Q&A in real-time by Thomas Barkin, President & CEO of the Federal Reserve Bank of Richmond.

• Tom Barkin joins us to discuss the Outlook for the US Economy & Fed Policy.
• Date: Thursday, 9 Nov 2023
• Time: 16:00 - 17:15 GMT
• This event is on the record and will run as a Zoom Webinar

To register please go to: MNI Webcast Registration

EUR/PLN: Options Price In Further Losses for EUR/PLN

• No surprise to see a surge in options volumes following the elections results, with markets rushing to price in a firmer PLN than expected into year-end.
• Markets now price a 27% implied probability of EUR/PLN trading below the year's lows (4.3986) on Dec31, up from 15.3% pre-election.
• The rally in spot PLN has put EUR/PLN well below analyst consensus for Q4 (consensus: 4.60, current spot ref: 4.4672), while implied vols have taken a marked leg lower post-election to price-out the near-term election risk.
• Front-end risk reversals have also been pressed lower throughout, with 1m RR touching 0.9 points in favour of calls today, the lowest level since February last year. This finally erases the war premium priced in at the beginning of the Russian invasion of Ukraine.
• Technically, the cross is now approaching oversold territory, with the RSI touching 30 and the lowest level since May at typing. Nonetheless, markets have taken out key support at 4.4690 Monday, and a close below this mark would be a bearish development.

FX OPTIONS: Expiries for Oct17 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0500(E899mln), $1.0525-30(E560mln) $1.0665-80(E1.4bln)
• USD/JPY: Y148.00($1.1bln), Y148.25($520mln), Y150.00($1.0bln), Y151.00($656mln)
• GBP/USD: $1.2395-00(Gbp1.1bln), $1.2430-50(Gbp1.1bln)
• USD/CAD: C$1.3505-20($660mln), C$1.3800($1.1bln)
• USD/CNY: Cny7.3000($532mln), Cny7.3500($1.2bln)

US STOCKS: Equities Retrace Large Part Of CPI Hit

• The S&P e-mini holds onto sizeable gains today at 4410 (+1.2%), sitting close to earlier highs of 4414.25 whilst more than unwinding Friday’s decline and going some way to retracing the hit from Thursday’s US CPI. Resistance is seen at 4427.45 (50-day EMA).
• ESZ3 swiftly reversed an earlier move lower that followed a few large sell programs rolling through including the largest of the day with 1044 names at 1319ET before some large buy programs helped limit the move.
• Gains have been helped by softer oil prices as well as limited new news from the Israel-Hamas conflict, coming despite a sizeable shift higher in real yields on the day (10Y real +6bps). Some larger individual movers have included Charles Schwab (post-earnings) and Pfizer (cutting Paxlovid cost base).
• There are some key earnings later this week: BofA, J&J, Goldman Sachs, Procter & Gamble, Tesla, Netflix among others (with the first three all tomorrow).
• The Russell outperforms (+1.6%), followed by Nasdaq (+1.4%), SPX (+1.2%) and Dow (+1.1%).

COMMODITIES: Crude Eases Back on Venezuela Sanction Talks

• WTI has fallen during US hours and has sunk below $87/b, amid hopes that the US could relax sanctions on Venezuela oil in exchange for competitive and international monitored presidential elections next year.
• Separately, the US has been holding back-channel talks with Iranian officials to warn them against escalating the conflict in Israel according to White House National Security Advisor Jake Sullivan.
• The amount of crude oil held around the world on tankers that have been stationary for at least 7 days fell by 389,000 bbl to 74.1m bbl as of 13 October, the lowest since December, Vortexa data show.
• WTI is -1.0% at $86.79 but only chips away at Friday’s strong push higher to remain easily off support at $81.50 (Oct 6 low)
• Brent is -1.1% at $89.85 but remains easily off support at $87.40 (50-day EMA).
• Gold is -0.65% at $1920.04 with relatively little boost from a softer US dollar. It’s particularly strong circa $60 increase on Friday leaves spot prices elevated compared to support at $1898.3 (50-day EMA).

MNI UK Data Preview - October 2023 Release: Inflation / Wage Data

• This week will see the partial release of labour market data as well as the release of September CPI. These data are both their last respective readings ahead of the November Monetary Policy Report.
• In our view, MPC speakers (particularly Huw Pill) have recently been trying to reduce the market impact to individual data releases by pointing to a greater array of data as being of importance for monetary policy and noting that the short-term focus of monetary policy will hopefully be coming to an end as inflation starts to fall back and the labour market becomes less tight.
• Based on the previews that we have read, headline inflation is expected to fall to 6.6%Y/Y (from 6.7% in August) with core CPI falling two tenths to 6.0%Y/Y while services CPI stays steady at 6.8%Y/Y.
• The balance of risks to the September inflation print seems to be towards a higher print given the weakness in airfares and accommodation prices seen in the August data.
• We will still receive the wage data and the PAYE data this week. The Bank of England had previously emphasised the importance of private sector regular pay (i.e. ex-bonuses). However, the September MPC report started to point towards other wage measures and other measures of labour tightness.

CANADA: Analysts Stick To BoC Calls After Q3 Surveys, CPI Tomorrow

• Desjardins: Desjardins note an intensification of the “tug-of-war” between employers and workers in Q3, with firms believing “the labour market had eased further and that labour shortages were less of an issue” but with workers “pushing their wage expectations to record levels for the survey”. For the BoC, “consumers’ sticky inflation expectations are problematic. However, given that both businesses and households expect the economic environment to weaken, we don’t think there’s enough evidence to suggest that the economy requires higher interest rates” and expect a hawkish hold later this month.
• RBC: RBC note that “the contrast between slowing economic activity and more persistent price pressures in Canada was apparent again” in the Q3 BoC surveys. “Elevated inflation expectations on the part of consumers and persistently abnormal price-setting behaviour reported by businesses will be concerning” for the BoC but it will be aware that inflation lags the economic cycle. “Our own base-case assumption is that the BoC will not need to hike the overnight rate further.”
• TD: TD expect the BoC to stay at 5%, allowing past hikes to work through the economy “barring a significant upward surprise from the CPI release tomorrow”. Two-sided aspects of today’s BoC surveys. “One concern is that some businesses continue passing along the uncommonly large cost increases from earlier in the pandemic through to customers, potentially exerting upward pressure on consumer prices. On the other hand, according to the Bank's own research, the extent of the passthrough depends on the competitive pressures in the marketplace and the strength of consumer demand, both of which are becoming less favourable.”

FED: RRP Usage Continues To Fall Swiftly

• RRP usage fell further to $1,109B today, a $43B decline from Friday to continue its marked reduction with usage down $132B last week and almost $350B lower than this time a month ago. It's the lowest since Sep 15, 2021.
• The 95 counterparties ties for the lowest since Oct 6 having last been lower on Sep 12.
• The figure is close to Wrightson ICAP’s estimate of a circa $40B drop today as mid-month Treasury coupon auction settlements and an October tax deadline pulled cash out of the Fed.