MNI ASIA OPEN: No Pivot in Hawkish Sep FOMC Minutes

EXECUTIVE SUMMARY

• MNI: Hawkish FOMC Shows No Sign Of Pivot--Minutes
• MNI: Fed Needs Measured Rate Hikes As Economy Slips-OECD
• MNI INTERVIEW: BOC Is Sounding Like Volcker- Ex-Volcker Aide
• MNI INTERVIEW: ECB To Hike More Than Expected, Rattle Markets
• MNI: EU Looks At Collateral, Holds Course On Clearing-Sources
• MNI BRIEF: Significant BOE Hike Still Needed In Nov - Pill

US

FED: Federal Reserve officials agreed inflation remains far too high and interest rates must keep rising to more restrictive levels and stay there for a while, showing little hint of a near-term shift in the course of policy, according to minutes from the FOMC’s September meeting released on Wednesday.

• The minutes also did not mention financial stability concerns, which are top of mind for investors worried about possible spillovers from the UK's pension crisis.
• "In light of the broad-based and unacceptably high level of inflation, the intermeeting news of higher-than-expected inflation, and upside risks to the inflation outlook, participants remarked that purposefully moving to a restrictive policy stance in the near term was consistent with risk-management considerations," the minutes said. For more see MNI Policy main wire at 1402ET.

FED: The Fed needs to keep hiking interest rates but the pace must be measured against tighter global markets and the Ukraine war's impact on supply chains, the OECD said, striking a less hawkish tone than FOMC officials.

• “The persistence and broadening of inflationary pressures mean that further increases in the federal funds fate are necessary," through early 2023, according the annual review of the U.S. economy published Wednesday. "Nonetheless, considerable flexibility is warranted.”
• The Paris-based OECD also predicted a more severe U.S. economic slowdown than the IMF or the Fed, calling for GDP growth of just 0.5% next year. Unemployment is also seen rising next year to 4.3% from 3.7% and core inflation exceeding 3% through 2023. For more see MNI Policy main wire at 0930ET.

CANADA

BOC: Investors are underestimating Bank of Canada Governor Tiff Macklem's resolve to tackle stubborn inflation the way Paul Volcker did, and to keep up with current Fed Chair Jerome Powell's tightening, former Volcker aide Sherry Cooper told MNI.

• Macklem will raise interest rates more than investors predict towards 5% and hold until it's clear that core inflation is coming back under control, according to Cooper. The Fed will take a similar path, said Cooper, who has also worked at Fannie Mae and is chief economist at Dominion Lending Centres, a Canadian mortgage and leasing company.
  
• “Tiff Macklem, what he’s saying is very reminiscent of what Volcker said, and same thing with Jay Powell, because they are both from the same mindset, which is the number one job of the central bank is to ensure price stability,” she said. “I’m heartened by the fact that both of the central bank chiefs are doing what I think is the right thing to break the back of inflation.” For more see MNI Policy main wire at 0946ET.

EUROPE

ECB: The European Central Bank may need to raise rates further and faster than even policymakers realise to control inflation, a European Parliament advisor told MNI, warning of “blood” as investors and borrowers who have underestimated the scale of likely tightening are caught out.

• While markets are pricing in an ECB deposit rate of about 3% by September 2023, this is still well below the 4.6% peak anticipated by the Federal Reserve in its summary of economic projections dot plot, noted Charles Wyplosz, professor emeritus at the Graduate Institute, Geneva, adding that the ECB itself appears not to recognise that rates will have to go up “much further”.
• Policymakers raised rates by 75 basis points in September, but while they have indicated they will continue to frontload tightening, they are unlikely to be able to slow the pace of increases soon, Wyplosz said in an interview. For more see MNI Policy main wire at 0751ET.

US TSYS: Sep FOMC Minutes As Expected: Hawkish

• Fed officials agreed inflation remains far too high and interest rates must keep rising to more restrictive levels and stay there for a while, showing little hint of a near-term shift in the course of policy.
• Earlier, MN Fed President Neel Kashkari speaks at town hall: downplays suggestion the Fed "not moving aggressively .. 75bp increments is very aggressive" after noting there "may be a housing downturn, but not necessarily a hard crash."
• Meanwhile, Tsy futures paring gains after $32B 10Y note auction re-open (91282CFF3) tails yet again w/ 3.930% high yield vs. 3.915% WI; 2.34x bid-to-cover vs. last month's 2.37x.
• Focus turns to CPI early Thursday: MoM (0.1%, 0.2%); YoY (8.3%, 8.1%).

OVERNIGHT DATA

• US SEP FINAL DEMAND PPI +0.4%, EX FOOD, ENERGY +0.3%
  
• US SEP FINAL DEMAND PPI EX FOOD, ENERGY, TRADE SERVICES +0.4%
• US SEP FINAL DEMAND PPI Y/Y +8.5%, EX FOOD, ENERGY Y/Y +7.2%
• US SEP PPI: FOOD +1.2%; ENERGY +0.7%
• US SEP PPI: GOODS +0.4%; SERVICES +0.4%; TRADE SERVICES +0.1%

MARKETS SNAPSHOT

Key late session market levels:

• DJIA up 70.89 points (0.24%) at 29304.92
• S&P E-Mini Future up 2 points (0.06%) at 3601
• Nasdaq up 23.6 points (0.2%) at 10448.41
• US 10-Yr yield is down 4.3 bps at 3.9044%
• US Dec 10Y are up 9/32 at 111-13.5
• EURUSD down 0.0007 (-0.07%) at 0.9701
• USDJPY up 1.01 (0.69%) at 146.88
• WTI Crude Oil (front-month) down $2.07 (-2.32%) at $87.28
• Gold is up $7.68 (0.46%) at $1673.95

US TSY FUTURES CLOSE

• 3M10Y -22.465, 26.268 (L: 24.692 / H: 46.514)
• 2Y10Y -2.171, -38.465 (L: -39.874 / H: -33.772)
• 2Y30Y -2.013, -40.563 (L: -41.678 / H: -35.079)
• 5Y30Y +1.553, -23.429 (L: -25.979 / H: -21.375)
• Current futures levels:
• Dec 2Y up 1.875/32 at 102-18 (L: 102-15.625 / H: 102-19.75)
• Dec 5Y up 7.25/32 at 107-4.75 (L: 106-26 / H: 107-08.5)
• Dec 10Y up 9.5/32 at 111-14 (L: 110-30 / H: 111-20.5)
• Dec 30Y up 14/32 at 125-3 (L: 123-28 / H: 125-11)
• Dec Ultra 30Y up 15/32 at 134-6 (L: 132-15 / H: 134-14)

US 10Y FUTURE TECHS: (Z2)‌‌ Trend Needle Still Points South

• RES 4: 116-11 50.0% retracement of the Aug 2 - Sep 28 bear leg
• RES 3: 115-13+ Low Sep 7
• RES 2: 114-31+ 38.2% retracement of the Aug 2 - Sep 28 bear leg
• RES 1: 112-30/30 20-day EMA / High Oct 4 and the bull trigger
• PRICE: 111-13 @ 19:07 BST Oct 12
• SUP 1: 110-19 Low Sep 28 and the bear trigger
• SUP 2: 110-00 Psychological Support
• SUP 3: 109-23+ Low Nov 30 2007 (cont)
• SUP 4: 108.27+ 3.0% 10-dma envelope

Treasuries are consolidating but the outlook remains bearish and gains are considered corrective. The reversal last week from 113-30, Oct 4 high, marked the end of the Sep 28 - Oct 4 correction. MA studies are in a bear mode position and attention is on the key support and bear trigger at 110-19, Sep 28 low. A break would confirm a resumption of the primary downtrend. Price needs to break above 113-30 to reinstate a short-term bullish theme.

US EURODOLLAR FUTURES CLOSE

• Dec 22 -0.030 at 95.115
• Mar 23 +0.005 at 95.090
• Jun 23 +0.015 at 95.145
• Sep 23 +0.040 at 95.280
• Red Pack (Dec 23-Sep 24) +0.055 to +0.080
• Green Pack (Dec 24-Sep 25) +0.055 to +0.070
• Blue Pack (Dec 25-Sep 26) +0.030 to +0.045
• Gold Pack (Dec 26-Sep 27) +0.025 to +0.030

SHORT TERM RATES

US DOLLAR LIBOR: Latest settlements:

• O/N +0.00514 to 3.06457% (-0.01200/wk)
• 1M -0.00686 to 3.33871% (+0.02514/wk)
• 3M +0.07015 to 4.01086% (+0.10215/wk) * / **
• 6M +0.03671 to 4.49000% (+0.10529/wk)
• 12M -0.03072 to 5.06771% (+0.07142/wk)
• * Record Low 0.11413% on 9/12/21; ** New 14Y high: 3.94071% on 10/11/22

• Daily Effective Fed Funds Rate: 3.08% volume: $104B
• Daily Overnight Bank Funding Rate: 3.07% volume: $282B

• Secured Overnight Financing Rate (SOFR): 3.05%, $993B
• Broad General Collateral Rate (BGCR): 3.00%, $407B
• Tri-Party General Collateral Rate (TGCR): 3.00%, $377B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

NY Fed reverse repo usage recedes to $2,247.206B w/ 103 counterparties vs. $2,222.479B in the prior session. Prior record high stands at $2,425.910B on Friday, September 30.

EGBs-GILTS CASH CLOSE: BoE Operation Spurs Long-End Rally

Gilt yields came down sharply from session highs to outperform Bunds across the curve by Wednesday's close - both the UK and German curves twist steepened.

• There was attention on both ends of the UK yield curve Wednesday: the long-end as usual eyed after last night's comments from BoE Gov Bailey confirming the end of emergency bond buys this Friday,. An FT article cited sources that purchases would be extended (helping boost global FI), but the BoE later refuted (pushing yields to session highs).
• With yields from 20Y on above 5%, the BoE's long-dated purchase op sparked a strong rally after good takeup and zero rejected offers. 2Y yields fell for most of the session, with no obvious catalyst, apart from general risk-off (BoE hike pricing didn't move much).
• EGB trading was not as active but several points of interest, including ECB hawk Holzman pulling down cumulative hike pricing to end-2022 by 4bp to 132bp, saying a 100bp hike was unnecessary and 75bp in Oct and 50bp in Dec would bring policy close to neutral.
• Attention turns back to the US, with the Fed meeting minutes later Wednesday, and CPI data Thursday.

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

• Germany: The 2-Yr yield is down 1.4bps at 1.827%, 5-Yr is down 0.7bps at 2.051%, 10-Yr is up 1.6bps at 2.314%, and 30-Yr is up 5.5bps at 2.356%.
• UK: The 2-Yr yield is down 27.4bps at 4.017%, 5-Yr is down 8.7bps at 4.473%, 10-Yr is down 0.7bps at 4.436%, and 30-Yr is up 1.9bps at 4.818%.
• Italian BTP spread up 4.2bps at 242.3bps / Greek up 3.3bps at 267.2bps

FX: US Dollar Unwinds Modest Dip On FOMC Minutes, USDJPY Eyeing 147 Again

• US real yields initially drove the bulk of the rally in Treasuries on the FOMC minutes, before breakevens broke lower as 10Y real yields climbed back.
• That helped see DXY briefly at the day’s lows before retracing a large part of the move, although the moves are lost when looking at the bigger picture in recent weeks as DXY moves back to circa 1.5% below cycle highs seen in days after the Sep 21 FOMC.
• Similarly, USDJPY fell -0.15% on the minutes but has clawed most of this back, closing in again on 147.00 (currently 146.89) with the pair maintaining a recent bullish tone as it crossed above the previous intervention zone during APAC trade, registering a fresh multi-decade high in the process.
• Comments earlier from BOJ Governor Kuroda repeated his pledge to continue with his easing policy because the Japanese economy is still recovering from the impact of the Covid-19 pandemic, and inflation is expected to moderate over the following year.

Thursday Data Calendar

Date	GMT/Local	Impact	Flag	Country	Event
13/10/2022	2301/0001	*		UK	RICS House Prices
13/10/2022	0600/0800	***		DE	HICP (f)
13/10/2022	0600/0800	***		SE	Inflation report
13/10/2022	0730/0930			EU	ECB de Guindos Speech at (M&A) España y Europa Event
13/10/2022	-			EU	ECB Lagarde & Panetta IMF/World Bank Annual Meetings
13/10/2022	1230/0830	**		US	Jobless Claims
13/10/2022	1230/0830	***		US	CPI
13/10/2022	1300/1400			UK	BOE Mann Speech at Peterson Institute for Internat. Economics
13/10/2022	1430/1030	**		US	Natural Gas Stocks
13/10/2022	1500/1100	**		US	DOE weekly crude oil stocks
13/10/2022	1530/1130	**		US	US Bill 04 Week Treasury Auction Result
13/10/2022	1530/1130	*		US	US Bill 08 Week Treasury Auction Result
13/10/2022	1700/1300	***		US	US Treasury Auction Result for 30 Year Bond
13/10/2022	1700/1300			US	Atlanta Fed Raphael Bostic
13/10/2022	1800/1400	**		US	Treasury Budget