MNI ASIA OPEN - OPEC+ Agrees 2mbpd Output Cut

NEWS

US

FED (MNI): Fed To Press Ahead With QT Amid Liquidity Concerns
Record investment in the Federal Reserve’s reverse repo facility is amplifying the effect of quantitative tightening in draining cash from the banking system and renewing concerns over Treasury market functioning, but the threat of dwindling reserves is unlikely to derail Fed QT, current and former senior Fed staffers told MNI.

US (MNI): OPEC Cuts A Headwind To Services - ISM
Institute for Supply Management services chair Anthony Nieves told MNI OPEC production cuts present a fresh headwind to the sector but he continues to expect moderate growth through the end of the year, while closely watching manufacturing as a lead indicator of a contraction.

FED (BBG): Daly Says Futures Market Wrong in Seeing 2023 Rate Cuts
Federal Reserve Bank of San Francisco President Mary Daly said market anticipation of interest-rate cuts next year is misplaced, as the central bank aims to keep policy tight to secure 2% inflation. “I don’t see that happening at all,” Daly said Wednesday in an interview with Michael McKee on Bloomberg Television when asked about the trajectory in futures pricing that suggests rate hikes followed by reductions.

FED (MNI): NY Fed Offers Tool To Measure Reserves 'Ampleness'
Interest rate spreads alone are not reliable indicators of when the level of reserves in the banking system are too low to the point when it may cause money market rates to jump like in late 2019, New York Fed President John Williams said in a blog post along with coauthors, instead highlighting the need to estimate changing demand sensitivity from banks for reserves.

EQUITIES (BBG): Wells Fargo Says One Big Option Trade Fueled S&P 500 Midday Jump
One giant options transaction may have sparked the S&P 500’s bounce on Wednesday, according to Wells Fargo & Co. The trade, which involved buying and selling call options tied to the index at a cost of around $31 million, probably helped fuel a recovery that saw the benchmark gauge erase a 1.8% decline, says Chris Harvey, the firm’s head of equity strategy.

Europe

BOE (MNI): Functioning Market Allows BOE Gilt Buying Exit
The Bank of England's buying of long-dated UK gilts looks set to end as scheduled on Oct 14 as debt markets return to relative calm with yields higher than in the days leading up to the bout of undefined “dysfunction” which prompted the announcement of emergency purchases on Sept 28, but no sign that such extreme conditions persist.

ECB (MNI): ECB Must Be 'Nimble' Amid Stagflation Threat - BdF
The ECB should move rapidly to adopt at least a neutral stance on interest rates, Denis Beau, first deputy governor of the Banque de France said in a speech Monday in which he echoed Tuesday’s remarks from governor Villeroy, while adding an additional note of caution. The war in Ukraine and the lockdown in China have fuelled a “slow-flationary” shock which is now threatening to morph into a “stagflationary” one, Denis Beau said. Yet with euro area inflation averaging 10%, the ECB has to act “for sure, in a determined but orderly way, and we should be there by the end of the year.

Energy

OIL (BBG): OPEC+ Agrees on 2 Million-Barrel-a-Day Cut to Output Limit
OPEC+ agreed to cut its collective output limit by 2 million barrels day as it seeks to halt a slide in oil prices caused by the weakening global economy. It’s the biggest reduction by the Organization of Petroleum Exporting Countries and its allies since 2020, but will have a smaller impact on global supply than the headline number suggests. Several member countries are already pumping well below their quotas, meaning they would already be in compliance with their new limits without having to reduce production.

OIL (BBG): Russia Says Oil-Price Cap May Cause Temporary Output Cut
Moves to cap the price of Russian oil exports will backfire and could lead to a temporary cut in the country’s production, its top energy official said. Speaking in Vienna after OPEC+ announced a 2 million barrel-a-day supply reduction, Russian Deputy Prime Minister Alexander Novak reiterated a warning that his country won’t sell oil to any countries that adopt such a cap.

SAUDI (BBG): Saudi Wealth Fund to Raise $3 Billion From Debut Green Bonds
Saudi Arabia’s sovereign wealth fund is raising $3 billion with its debut bond deal in the currency that also marks its first foray into ethical finance. The Public Investment Fund or PIF, as it is known, will raise the debt in three tranches, according to people familiar with the matter, who aren’t authorized to speak publicly and asked not to be identified. It includes a world-first dollar century green bond.

DATA

• SERVICES BUSINESS INDEX 59.1
• SERVICES NEW ORDERS 60.6
• SERVICES PRICES 68.7
• SERVICES EMPLOYMENT INDEX 53

US DATA: No Sign Of Slowdown In Surprisingly Resilient ISM Services

• Overall index dips from 56.9 to 56.7 (cons 56.0) in contrast to Monday’s more pronounced slowdown in manufacturing activity (-1.9pts to 50.9).
• Mfg does tend to lead services ahead of slowdowns but the report more strongly pushes back on recession fears for now.
• Employment of 53.0 is the highest since March and sees a further recovery off Jun-Jul contractions whilst prices paid are technically the lowest since Jan’21 but it’s a slow decline, easing from 71.5 to 68.7 vs 2019 av of 57.5.
• Tsys see a sizeable further cheapening, led by 5Y and 10Y of the major benchmarks for +14bps on the day.

US TSYS: Late Rally Doesn’t Materially Change Sizeable Re-Cheapening

• Cash Tsys see some late unwinding of the day’s cheapening, extending as SPX reversed a nearly 2% intraday drop.
• Moves help more than unwind the additional sell-off after ISM services strength but front end yields are still +5.5bps with solid increases in 2023 Fed rate expectations, especially in 2H23 with terminal at 4.5% and Dec’23 at 4.2%.
• Largest increases are seen in 10YY, currently +11.5bps and with strong increases in real yields seeing a notable retracement of Monday’s rally with breakevens modestly dipping and remaining relatively close to YTD lows.
• TYZ2 trades -29 at 112-19, off lows of 112-08+ that didn’t trouble support at 111-20+ (Sep 21 low).
• Multiple Fed speakers headline tomorrow’s docket including Governors Cook and Waller.

FOREX: Greenback Stages Strong Recovery Amid Rising US Yields

• The US Dollar staged a significant recovery on Wednesday, with the USD Index paring the majority of Tuesday’s losses, rising 1.10% as we approach the APAC crossover. The bounce came amid the yields on US 10-year rising roughly 15 basis points back to 3.76%.
• G10 losses were concentrated in GBP and EUR. After briefly printing a fresh high of 1.1495 on the London open, cable came under consistent pressure, reaching an intra-day low of 1.1227 and continuing the string of multi-big figure intra-day ranges for the pair. This works against the week's bullish tone, but still keeps prices comfortably off the recent multi-decade low at 1.0350, Sep 26 low. Initial firm support is seen at 1.1025, the Sep 30 low.
• Additionally, and perhaps more significantly from a technical standpoint, EURUSD faded off the bear channel top Wednesday (intersecting at 0.9998), erasing much of the Tuesday strength into the close. Note too that the 50-day EMA intersects just above, at 1.0004. A break of these resistance points would strengthen bullish conditions and highlight a more significant reversal. Initial support to watch is 0.9806, Tuesday's low.
• Relative outperformance was seen in NZD following a hawkish turnout from the RBNZ decision. The bank raised rates by 50bps - as expected - but confirmed the bank also examined a 75bps step to tackle stubborn inflation. Similar relative strength was seen in AUD (-0.30%) as the firm intra-day bounce in major equity indices underpinned more constructive price action in antipodean fx.
• Labour market data may determine the longevity of the greenback recovery, with the release of September NFP this Friday. For tomorrow, we have BOJ Gov Kuroda and BOC Gov Macklem scheduled, along with multiple Fed speakers on the docket. The minutes of the latest ECB meeting will also be released.

COMMODITIES: Oil Sees Further Gains As OPEC+ Plans 2mbpd Output Cut

• Crude oil sees further sizeable gains after OPEC+ agreed to cut 2mbpd from current output limits – its largest cut since 2020 - and Russia warned it may reduce its own output even further. The White House has pushed back, with Biden calling the move “unnecessary” whilst Saudi Oil Minister says policy is not a ‘one-way street’ with uncertainties going either way whilst they wait to see how markets react to the price cap.
• Goldman view the OPEC+ decision as sufficiently bullish to raise its 4Q oil price forecast $10 to $110/bbl.
• WTI is +1.5% at $87.78 for a circa 10% gain on the week to date. It clears the 50-day EMA of $87.09 and opens $89.99 (Sep 6 high).
• Brent is +1.7% at $93.40, clearing resistance at $92.4 (Oct 4 high) and opening $95.54 (Sep 5 high).
• Gold meanwhile dips -0.5% to $1717.47 as a reversion to higher US yields take the edge off the yellow metal. Support is seen at $1695.2 (former trendline resistance) whilst resistance is still nearby at $1729.5 (Oct 4 high).

BONDS: EGBs-GILTS CASH CLOSE: BTPs Underperform

While UK long-end weakness stood out again in Wednesday's core Europe FI sell-off, Italian BTPs were the overall underperformer.

• A strong US Services ISM reading, coming slightly after another zero-takeup BoE long-dated purchase operation, pushed yields to session highs in mid-afternoon European trade.
• 10Y BTP yields saw the biggest daily increase since March 2020, up just under 30bp, and now up 42bp from Tuesday's low.
• Multiple factors at play: Moody's warning the new Italian coalition's policies could lead to a ratings downgrade; some traders also pointed to the ECB's latest financial disclosure showing limited recent bond-buying support for the periphery.
• 30Y UK yields closed 12p below the low, but still posted the highest close in a week.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany:

• Germany: The 2-Yr yield is up 12.1bps at 1.691%, 5-Yr is up 16.3bps at 1.87%, 10-Yr is up 16.3bps at 2.034%, and 30-Yr is up 12.2bps at 2.029%.
• UK: The 2-Yr yield is up 11.6bps at 4.036%, 5-Yr is up 14.2bps at 4.253%, 10-Yr is up 16bps at 4.035%, and 30-Yr is up 16.6bps at 4.204%.
• Italian BTP spread up 13.3bps at 244bps / Spanish bond spread up 4.5bps at 120.5bps

OPTIONS: Bund Outrights

Wednesday's Europe rates / bond options flow included:

• RXX2 134.50p, bought for 26.5 in 4k
• RXZ2 147.00 call bought for 82 in 10k