MNI ASIA OPEN: BOC Hike Effect Becoming Evident

EXECUTIVE SUMMARY

• MNI BOC WATCH: Macklem Goes Less THan Forecast 50 As GDP Stalls
• MNI BRIEF: BOC Approaching End Of Tightening Cycle
• MNI BRIEF: UK Gilt Market Stressed - DMO Head

CANADA

BOC: Bank of Canada Governor Tiff Macklem raised his key lending rate a less-than-expected 50bps Wednesday and said while borrowing costs will keep rising amid the growing risk of entrenched inflation, the drag of past rate hikes is already working in an economy now seen stalling out through the middle of next year.

• The overnight lending rate climbed to the highest since 2008 at 3.75% while most economists predicted it would rise to 4%. The statement didn't offer guidance on a terminal rate while saying future moves will be shaped by slowing demand in an overheated economy, improvements in supply chains and inflation expectations.
• "The effects of recent policy rate increases by the Bank are becoming evident in interest-sensitive areas of the economy: housing activity has retreated sharply, and spending by households and businesses is softening," Governing Council led by Macklem said in a statement from Ottawa. "The policy interest rate will need to rise further," and "we are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target." For more see MNI Policy main wire at 1001ET.

BOC: Bank of Canada Governor Tiff Macklem told reporters Wednesday he's approaching the end of rate hikes for this cycle as inflation and growth moderate, a slowdown that led him to opt for a smaller-than-expected 50bp rate increase.

• That opens up the prospect of returning to more standard 25bp changes following moves of 100bps and 75bps earlier this year. “Coming into this meeting, interest rates were already considerably higher," he said. "Combine that with the fact that there are now clear signs that the economy is slowing, we judged that it was appropriate to slow the pace of increase in our policy rates from very big steps to a big step.”

EUROPE

UK: The UK gilt market "is stressed and I don't think we should pretend otherwise," Debt Management Office head Robert Stheeman told the Treasury Select Committee on Wednesday. Stheeman told the TSC that there was no doubt that the spike in gilt rates following the Sep 23 mini-budget was a UK specific event but that, encouragingly, 10 year yields were now back to pre mini-budget levels.

• The DMO is set to receive a new funding requirement on Nov 17 when the Autumn statement and new Office for Budget Responsibility forecasts are published, with the funding requirement likely to be cut.
• Nevertheless, Stheeman said that "It will be challenging for the rest of the financial year" even though concerns over UK credit worthiness had eased and there was more confidence in the market than a few weeks ago.

US TSYS: Hawks Eat Crow After BOC Hikes Less Than Expected

Tsys holding strong gains after the close. Tsys had gapped to new session highs early Wed after the BOC hiked less than expected: 50bp to 3.75% vs. 75bp to 4.0% as "hikes beginning to weigh on growth" BOC Gov Macklem. Tsy yields were already extending lows as softer data cools expectations of more hawkish year end policy expectations - before 30YY fell to 4.1401% low on the annc.

• Tsy futures scaled back support slightly in the minutes post-BOC, see-sawed near highs amid debate over exogenous factor will really have on influencing the Fed's policy making over the next two meetings.
• Despite a 0.075 rally to 94.98 in Dec Eurodollar futures, expectations of a 75bp hike on Nov 2 remains intact, chances of another 75bp in Dec continue to cool.
• While last Fri's WSJ/Timiraos + Fed Daly comments over hiking too much have helped take the pressure off year end expectations, some pundits see risks swinging back towards hawkish again as Fed Chairman Powell likely to push back on less hawkish rate hike optimism and reiterate Sep messaging/DOT plot guidance.
• Reminder, the next employment report (covering October) is on November 4 - after the FOMC. An in-line read will likely tip the scales back toward 75bp hike in Dec.

OVERNIGHT DATA

• US SEP NEW HOME SALES -10.9% TO 0.603M SAAR
  
• US AUG NEW HOME SALES REVISED TO 0.677M SAAR

• U.S. ADVANCE SEPT WHOLESALE INVENTORIES +0.8 PCT
• U.S. ADVANCE SEPT RETAIL INVENTORIES EXCLUDING AUTOS -0.1 PCT

• U.S. trade deficit in goods rises 5.7% to $92.2 billion in September -DJ

• US MBA: MARKET COMPOSITE -1.7% SA THRU OCT 21 WK
• |US MBA: REFIS +0.1% SA; PURCH INDEX -2% SA THRU OCT 21 WK
• US MBA: UNADJ PURCHASE INDEX -42% VS YEAR-EARLIER LEVEL
• US MBA: 30-YR CONFORMING MORTGAGE RATE 7.16% VS 6.94% PREV

MARKETS SNAPSHOT

Key late session market levels:

• DJIA up 5.93 points (0.02%) at 31841.2
• S&P E-Mini Future down 26 points (-0.67%) at 3844.25
• Nasdaq down 211.9 points (-1.9%) at 10987.75
• US 10-Yr yield is down 7.5 bps at 4.0276%
• US Dec 10Y are up 13/32 at 110-31
• EURUSD up 0.0112 (1.12%) at 1.0078
• USDJPY down 1.62 (-1.1%) at 146.32
• WTI Crude Oil (front-month) up $2.71 (3.18%) at $88.03
• Gold is up $11.52 (0.7%) at $1664.49

US TSY FUTURES CLOSE

• 3M10Y -3.005, -0.989 (L: -7.812 / H: 2.901)
• 2Y10Y -2.382, -40.308 (L: -42.995 / H: -36.571)
• 2Y30Y -3.688, -26.072 (L: -28.386 / H: -22.521)
• 5Y30Y -3.423, -3.951 (L: -5.932 / H: -0.385)
• Current futures levels:
• Dec 2Y up 2.625/32 at 102-11.625 (L: 102-08.25 / H: 102-15)
• Dec 5Y up 7/32 at 106-25.5 (L: 106-16 / H: 106-31.75)
• Dec 10Y up 13/32 at 110-31 (L: 110-16 / H: 111-08.5)
• Dec 30Y up 1-09/32 at 121-11 (L: 120-01 / H: 121-23)
• Dec Ultra 30Y up 2-01/32 at 128-28 (L: 126-21 / H: 129-20)

‌‌‌‌US 10YR FUTURE TECH: (Z2)‌‌ Corrective Bounce Extends

• RES 4: 113-18 50-day EMA
• RES 3: 112-22+ High Oct 6
• RES 2: 111-28+ High Oct 13 and key near-term resistance
• RES 1: 111-11 20-day EMA
• PRICE: 110-30 @ 15:25 BST Oct 26
• SUP 1: 108-26+ Low Oct 21 and the bear trigger
• SUP 2: 108-06+ Low Oct 2007 (cont)
• SUP 3: 107.05 3.0% 10-dma envelope
• SUP 4: 106-20+ Low Aug 2007 (cont)

Treasuries have extended the rally further off the Friday low. Despite the bounce, the primary trend remains lower following the move lower last week. Weakness to 108-26+ confirmed a break of support at 110.02, Oct 13 low and the psychological 110.00 handle. This resumes the price sequence of lower lows and lower highs. The focus is on 108-20, a Fibonacci projection. Initial firm resistance has been defined at 111-28+, the Oct 13 high.

US EURODOLLAR FUTURES CLOSE

• Dec 22 +0.070 at 94.975
• Mar 23 +0.070 at 94.885
• Jun 23 +0.085 at 94.950
• Sep 23 +0.075 at 95.105
• Red Pack (Dec 23-Sep 24) +0.055 to +0.070
• Green Pack (Dec 24-Sep 25) +0.050 to +0.055
• Blue Pack (Dec 25-Sep 26) +0.060 to +0.060
• Gold Pack (Dec 26-Sep 27) +0.060 to +0.070

SHORT TERM RATES

US DOLLAR LIBOR: Latest settlements:

• O/N -0.00185 to 3.06086% (-0.001600/wk)
• 1M +0.03586 to 3.63229% (+0.04672/wk)
• 3M +0.01586 to 4.37386% (+0.01543/wk) * / **
• 6M +0.01629 to 4.93186% (+0.05686/wk)
• 12M -0.00628 to 5.39343% (-0.08214/wk)
• * Record Low 0.11413% on 9/12/21; ** New 14Y high: 4.37386% on 10/26/22

• Daily Effective Fed Funds Rate: 3.08% volume: $103B
• Daily Overnight Bank Funding Rate: 3.07% volume: $283B

• Secured Overnight Financing Rate (SOFR): 3.02%, $961B
• Broad General Collateral Rate (BGCR): 3.00%, $395B
• Tri-Party General Collateral Rate (TGCR): 3.00%, $379B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

NY Fed reverse repo usage recedes to $2,186.856B w/ 101 counterparties vs. $2,195.616B in the prior session. Prior record high stands at $2,425.910B on Friday, September 30.

PIPELINE: Waiting for Truist Financial to Launch

At least $11.55B to price Wednesday, HSB leads, waiting on Truist

• Date $MM Issuer (Priced *, Launch #)
• 10/26 $6B #HSBC $1.75B 4NC3 +295, $2.25B 6NC5 +320, $2B 11NC10 +410
• 10/26 $2B *AfDB 5Y SOFR+50
• 10/26 $1.8B #Elevance Health $400M 3Y +95, $650M 10Y +155, $750M 30Y +190
• 10/26 $1B #Northern Trust 10Y +215
• 10/26 $750M #Micron 7Y +265
• 10/26 $Benchmark Truist Financial 4NC3 +165a, 11NC10 +225a
• Expected Thursday:
• 10/27 $Benchmark FHLB 2Y +165a

EGBs-GILTS CASH CLOSE: Canadian Surprise Seals Pre-ECB Gains

European yields erased an intraday rise to finish lower Wednesday, with one eye on Thursday's ECB decision.

• Bunds and Gilts traded with a bullish tone early in a carry-over from Tuesday's price action, though sank in late morning as UK uncertainty returned with news that the Gov't medium term fiscal statement would be delayed from Oct 31 to Nov 17.
• Later, Bunds and Gilts surged to session highs following a surprise 50bp hike by the Bank of Canada (vs the 75bp expected), which advanced the narrative that global rate hike expectations may be overdone for now.
• Periphery spreads round-tripped, tightening early, widening by early afternoon, then falling back toward opening levels again by the close as the BoC decision ignited a global risk-on rally.
• Thursday's ECB decision remains the week's key focus, with a 75bp hike still very much the expectation - our MNI Markets Team preview is here, while our Policy Team reports that the Governing Council is likely to retroactively modify the conditions of TLTRO loans to banks.

CLOSING YIELDS / 10-YR PERIPHERY EGB SPREADS TO GERMANY:

• Germany: The 2-Yr yield is down 2.7bps at 1.945%, 5-Yr is down 3.8bps at 1.997%, 10-Yr is down 5.9bps at 2.111%, and 30-Yr is down 3.5bps at 2.107%.
• UK: The 2-Yr yield is down 13.9bps at 3.278%, 5-Yr is down 9bps at 3.663%, 10-Yr is down 6.1bps at 3.576%, and 30-Yr is up 0.6bps at 3.678%.
• Italian BTP spread up 1.1bps at 221.8bps / Greek up 1.4bps at 252.9bps

FOREX: Broad Greenback Weakness Extends, EUR Surges Ahead Of ECB

• The US Dollar saw another wave of weakness in early European hours, with the price action reminiscent of the greenback dip after the US equity open on Tuesday. Weakness stretched into the remainder of Wednesday’s session with the USD index approximately 1.15% lower on the day.
• Chinese Yuan strength has been notable, with USDCNH over 2% below the day’s highs. The price action will raise suspicion of intervention via state-run banks as we've seen in recent weeks - particularly after the pair hit record highs this week and the Chinese authorities conducted a survey of banks to gauge both positioning and market sentiment toward the currency. Redback strength has filtered through to the likes of AUD and NZD with the latter rising to a one-month high against the USD.
• EURUSD has also extended its recovery following multiple breaches of resistance through parity and then 1.0051, the Sep 20 high, trading close to most recent highs of 1.0086 approaching the APAC crossover.
• Topside momentum has been gaining traction following the pair breaking above the notable 2022 channel resistance on Tuesday. Given the current price action and tomorrow’s ECB meeting in focus, it is worth noting the next level on the topside at 1.0198, the Sep 12 high and a key resistance. Short-term support now resides at October 4th’s high of 0.9999 that, as noted, was an acceleration point during European hours.
• CAD underperformed following a smaller than expected 50BP rate hike from the BoC, however, the broad-based USD weakness still weighed on the pair overall, 0.35% lower on the day.
• Following the ECB rate decision on Thursday, we also have the release of Advanced US GDP for Q3.

Thursday Data Calendar

Date	GMT/Local	Impact	Flag	Country	Event
27/10/2022	0030/1130	**		AU	Trade price indexes
27/10/2022	0600/0800	*		DE	GFK Consumer Climate
27/10/2022	0700/0900	**		SE	Economic Tendency Indicator
27/10/2022	0800/1000	**		IT	ISTAT Consumer Confidence
27/10/2022	0800/1000	**		IT	ISTAT Business Confidence
27/10/2022	1000/1100	**		UK	CBI Distributive Trades
27/10/2022	1215/1415	***		EU	ECB Main Refi Rate
27/10/2022	1215/1415	***		EU	ECB Deposit Rate
27/10/2022	1215/1415	***		EU	ECB Marginal Lending Rate
27/10/2022	1230/0830	*		CA	Payroll employment
27/10/2022	1230/0830	**		US	Jobless Claims
27/10/2022	1230/0830	**		US	durable goods new orders
27/10/2022	1230/0830	***		US	GDP (adv)
27/10/2022	1230/0830	**		US	WASDE Weekly Import/Export
27/10/2022	1245/1445			EU	ECB post-policy decision press conference
27/10/2022	1430/1030	**		US	Natural Gas Stocks
27/10/2022	1530/1130	**		US	US Bill 04 Week Treasury Auction Result
27/10/2022	1530/1130	*		US	US Bill 08 Week Treasury Auction Result
27/10/2022	1700/1300	**		US	US Treasury Auction Result for 7 Year Note