MNI ASIA MARKETS ANALYSIS - Treasury Yield Surge Not Fully Reflected Cross Asset

US TSYS: Off Fresh Multi-Year Lows But Still A Sizeable Belly-Led Cheapening

• Cash Treasuries have pared some of the day’s sizeable belly-led losses in the second half of the session, with some risk-off flows most recently seen with Israel advising its citizens to leave Turkey.
• Nevertheless, 5Y yields are still 14bps higher today, currently at 4.858% off an earlier high of 4.892% that marked fresh highs since 2007, of which 12.5bps comes from real yields.
• TYZ3 trades at 106-11 (-27+) off earlier lows of 106-03+ which tested support at the Oct 4 low after which lies the round 106-00 before ultimately 105-06+ (2.0% 10-dma envelope). Volumes are elevated at a cumulative 1.9M.
• At the front end, the Fed terminal is seen with a cumulative +15bp of hikes to 5.48% effective in January followed by 70bps of rate cuts to year-end, pushing below the 71bps seen after the hawkish FOMC dot plot on Sep 20.
• Kashkari (’23 voter) still to come late on at 1700ET, whilst tomorrow sees a plethora of Fedspeak including permanent voters Waller, Williams and Bowman, along with the Fed’s Beige Book and housing data.

• Recap of the day’s drivers: Early trading started with a more outright bear steepening. It came from an extension of yesterday’s move linked to US efforts to prevent a widening of the Israeli-Hamas conflict through the broader region, as well as a heavy supply burden in both Asia-Pac and European markets along with the hawkish combination of touted wage demands from Japan's largest wage union re: Spring '24 wage talks and BBG sources pointing to adjustments higher in the BoJ's upcoming updated CPI projections.
• The day’s moves then morphed into the belly-led sell-off seen at present after strong retail sales data, with the strength of domestic data later reinforced by an upward revision to the Atlanta Fed’s GDPNow to 5.4% annualized for Q3. There was minimal reaction to the NAHB housing index dropping to its lowest since January. There is also further political uncertainty after Jim Jordan failed to secure the speaker's gavel in a first roll call in the House.

FOREX: Volatile Equities Prompt Two-Way USD Flow, NZD Remains G10 Underperformer

• Despite the firmer US data and higher US yields on Tuesday, two-way swings for major equity benchmarks left the USD index close to unchanged for the session.
• Initially, the higher-than-expected retail sales figures from the US prompted some greenback strength, however, the subsequent bounce for US equities following the soft-landing thesis sapped the greenback momentum and saw the USD index fall to session lows.
• Amid the volatile swings, EURUSD traded from as low as 1.0539 to highs of 1.0595 but was unable to consolidate these gains ahead of the close as equities once again fell back into mid-range.
• NZD remains the weakest performer in G10, with NZD/USD looking set to close below the 0.5900 handle following the below-forecast NZ CPI, which saw the Q3 Y/Y rate slow to 5.6% from 5.9% previously. Initial focus for the pair is on 0.5859, the September low and lowest since November of last year.
• Similar weakness has been felt for GBP, which trades poorly following this morning's pay data: average weekly earnings for August came in below expectations at +8.1% vs. exp. +8.3%. Although, the focus quickly shifts to Wednesday's inflation release. 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.
• Kicking off Wednesday’s APAC schedule is DRBA Governor Bullock, due to participate in a fireside chat about the current economic climate at the Australian Financial Security Authority Inaugural Summit. Chinese GDP and activity data then takes focus before the aforementioned UK September inflation release.

NZD: Hedging Activity Points to Two-Way Interest in NZD

• Solid session for NZD hedging activity following the lower-than-expected NZ CPI. The release and subsequent pullback in spot has helped boost FX options volumes across both NZD/USD and AUD/NZD. Two-way hedging interest is evident, with upside favoured in NZD against USD via calls, while demand for AUD/NZD calls detail the downside NZD interest.
• Demand for NZD/USD calls layered between 0.5900-75 is the key driver, but interest is noted at strikes as high as 0.6100, at which just over $280mln notional has traded. The trades largely expire in mid-Dec and target a strike a point higher than consensus for year-end (0.6000).
• This contrasts with interest in AUD/NZD calls, with the most sizeable trades targeting a move north of resistance at both the September and July highs - with close to $500mln in 1.0950 strikes looking for the best levels since June in the cross. Trades capture the next RBNZ rate decision on November 29th.

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)

SCOTLAND: First Minister-Devolved Scottish Gov't To Issue Bonds On Int. Markets

In his speech to the Scottish National Party (SNP) conference, First Minister Humza Yousaf has claimed that the devolved Scottish gov't intends to seek to raise money on international bond markets “in our own right" for the first time. Claims that the "Scottish gov't bond issue will be subject to market testing and due diligence", with the bond issuance set to fund infrastructure projects according to the FM.

• Such an issuance will be seen as a test of the fiscal credibility of the Scottish gov't amid the SNP's push for independence from the United Kingdom.
• Data from August showed that, "...the Government Expenditure and Revenue Scotland (Gers) figures show the country had a £19.1bn deficit - the equivalent of 9% of GDP. The UK had a deficit of 5.2% of GDP." It should be noted that the Gers report remains a controversial political topicin Scotland.

EQUITIES: Takeaways From This Morning's Bank Earnings

• Bank of America: Highest YTD sales and trading revenues in over a decade, with record Q3 for equities.
• Average loans up 9% Y/Y to $131bln, a record level, while consumer net charge-offs were driven by higher credit card losses. Consumer net charge-off levels now 0.7% vs. post-pandemic average of 0.5%.
• Moynihan says US consumer spending continuing to slow, describes Q3 as “healthy but slowing” economy.
• Residential mortgage originations down to $5.6bln in Q3 vs. $8.7bln a year prior. Average FICO has improved to 772 from 771, 768 in Q2 and Q1.

• Goldman Sachs: strong performances in FICC, which included record quarterly net revenues in financing, and Equities.
• Solomon sees a continuing recovery across capital markets if the backdrop remains conducive.

US STOCKS: Equities Reverse Gains But Relatively Resilient To Yield Squeeze

• Equities have seen a quick but limited step lower with Israel advising its citizens to leave Turkey in a sign of regional spillover. It adds to reversal of earlier gains, hindered by the second wind of the sell-off in the belly of the Treasury curve that started around 1230ET.
• Despite moving back lower on the day, they hold up well with 5Y yields hitting fresh highs since 2007 and currently +15.5bps despite having rallied 2bps off yield highs.
• ESZ3 trades at 4388.8 (-0.3%) off a high of 4423.25 having stopped just short of resistance at 4426.42 (50-day EMA).
• The Nasdaq 100 (-0.6%) e-mini underperforms in light of the real yields squeeze, and notably weighed by Nvidia which has pared losses but to a still heavy -4.5%, whilst the Russell 2000 (+1.2%) benefits from the strength in today’s US retail sales data helping support the soft-landing view.
• Broad beats for today’s pre-market earnings: Johnson & Johnson (adj EPS $2.66 vs est $2.52), Lockheed (adj EPS 6.77 vs est 6.67), GS (net rev $11.82B vs est $11.13B), BofA (trading revenue ex DVA $4.42B vs est $4.16B)
• A few smaller names to come after the close but greater focus is on tomorrow’s earnings slate, which includes Tesla, Procter & Gamble, Morgan Stanley, Netflix, Abbot Laboratories & Elevance Health.

COMMODITIES: Crude Futures Reverse Losses With Some Middle East Regional Spillover

• Crude prices are finishing the session having edged higher, lifting off the intraday low of $85.60/b for WTI with an added boost coming from Israel advising its citizens leave Turkey as the market continues to monitor the ongoing situation in the Middle East.
• Ahead, US crude oil inventories are expected to rise by 0.4m bbl on the week when the EIA releases its weekly summary Oct. 18, according to a Wall Street Journal survey.
• Saudi Aramco’s CEO Amin Nasser said that global oil demand for H2 2023 is likely to be 103m b/d with the company’s spare capacity at 3m b/d. Peak demand is forecast at around 105mb/d in 2029 according to Energy Intelligence although with growth narrowing to around 100k-200kb/d annually from 2027.
• Vitol’s CEO Russell Hardy expects Brent crude oil prices to be trading at around $85/bbl next year, he said during the annual Energy Intelligence Forum in London.
• WTI is +0.5% at $87.11 with resistance remaining at $89.59 (Oct 4 high).
• Brent is +0.6% at $90.19 with resistance remaining at $91.56 (Oct 3 high).
• Gold is +0.2% at $1924.06 as geopolitical concerns and on balance a softer USD offset a strong push higher in Treasury yields. A high of $1931.58 came close to a key resistance at $1932.9 (Oct 13 high).

CANADA DATA: A Better CPI Report From The BoC's Perspective

• It’s a good CPI report from the BoC’s perspective, with some of last month’s surprise strength in core measures revised away and then moderating in today’s latest September data.
• Specifically, the average of trim and median measures slowed to 0.17% M/M in Sep from 0.39% in Aug (revised down from 0.44).
• It meant the three-month trend rate, a rate the BoC has put a lot of emphasis on, dropped back to 3.7% annualized from 4.3% (initial 4.5%), back into its 3.5-4% range seen since Aug’22 in all but two months now. See charts for revisions below.
• It’s still clearly higher than the BoC would like, with the BoC previously showing some frustration that inflation wasn’t moving further below that range (and part of the reason for coming off the sidelines with 2x25bp hikes in June and July), but it’s a step in the right direction compared to the August report.
• Other core 3-month measures sit at 3.3% annualized for ex food & energy and 2.4% annualized for ex 8 most volatile & indirect taxes.
• Reuters reported shortly after the release that money markets now see a 26% chance of a hike next week from 43% before the data.

CANADA RATES: CPI Drives Large Outperformance To US Rates

• Softer than expected CPI has driven significant outperformance of CAD rates to their US counterparts today.
• 3M CORRA futures are broadly 4.5-6bps richer since CAD CPI in a move that without US retail sales strength would have likely been larger. It keeps to the day’s earlier steepening with the rally on the day led by the U3 and Z3 contracts 4.5bp richer before fading to unchanged for 2H24 contracts.
• It’s in firm contrast to the Dec’23 SOFR being 5.5bp cheaper, which widens to 16bp cheaper for the Dec’24.
• Near-term expectations have softened to only around ¼ chance of a hike next week from a bit below ½ pre-CPI according to BoC-dated CORRA OIS, whilst 3M CORRA implied yields peak at 5.20% in the Mar’24 before 33bp of cuts to the Dec'24.

UK STIR: BoE Pricing Biased Dovishly In Wake Of Labour Market Data

The direction of travel in the previously covered partial UK labour market and wage data has promoted some dovish movement in BoE-dated OIS today, although the general cheapening dynamic in wider core global FI markets has dragged the space off of dovish session extremes.

• Liquid contracts are last 1.5-3.0bp softer on the session, with the strip flattening.
• ~7bp of tightening is priced for next month’s BoE decision, with terminal policy rate pricing ~16bp above prevailing levels.
• While the data probably isn’t a gamechanger for the BoE, the market’s recent bias to price in more than even odds of one further 25bp rate hike, coupled with signs of continued loosening in the labour market, has resulted in a dovish market reaction.
• Elsewhere, we noted that BoE dove Dhingra stuck to her usual script.

FED: RRP Usage Extends Decline, New Lowest Since Sep 2021

• RRP usage fell a further $26B after yesterday’s $43B decline, to $1,082B for its lowest since Sep 15, 2021.
• It has declined $370B since a similar time a month ago.
• The 94 counterparties (-1) is the lowest since Sep 12.