MNI ASIA OPEN: PPI Gain, Tue CPI Focus Ahead Wed FOMC

EXECUTIVE SUMMARY

• MNI Fed Preview - December 2022: Forecasting The End
• MNI INTERVIEW: Real Rate To Climb In 2023 Even As Fed Cuts
• MNI INTERVIEW: Bellwether Canada Exporters Are Gloomy Again
• MNI SOURCES: Rates/QT Trade-Off Central To Next ECB Decision

US

FED: The FOMC will hike rates by 50bp at the Dec 13-14 meeting, with Chair Powell having cemented the stepdown from a 75bp hike pace in his Nov 30 speech (“the time for moderating the pace of rate increases may come as soon as the December meeting”). This puts attention squarely on December’s updated Summary of Economic Projections/Dot Plot, and in particular the 2023 rate hike outlook. Link: MNI Fed Preview - December 2022: Forecasting The End

FED: Slowing inflation will allow the Federal Reserve to cut interest rates next year without taking monetary policy out of restrictive territory, according to Marc Giannoni, who recently served as the Dallas Fed's research director.

• The fed funds rate will likely peak around 5.1% early next year while core CPI slows from 6.3% to 3% by the end of 2023, said Giannoni, now chief U.S. economist for Barclays. That inflation slowdown means an even bigger rise in the "real" interest rate, he said. With tighter policy biting and demand cooling, the FOMC will likely find it appropriate to deliver a couple of quarter-point cuts by the end of next year, he said.
• "A year from now, it’ll be very painful for them to maintain a target range of 5% to 5.25%, because if things go according to our forecast, you’ll have a mild recession, some increase in unemployment, inflation quite a bit lower than now and the real rate notably higher," Giannoni said. "In that set-up, it’ll be difficult for them to maintain their rate where it is." For more see MNI Policy main wire at 1126ET.

CANADA

CANADA: Sentiment among exporters in Canada -- one of the most trade-dependent industrialized economies -- is dropping back to the lowest since Covid or the global financial crisis, the chief economist of the country's trade finance bank told MNI.

• Business leaders see rapid inflation persisting through 2023, dangers to global trade from war in Ukraine, and the potential for a global recession, according to Stuart Bergman at Export Development Canada.
• Firms across almost every industry are reporting more negative conditions, suggesting exports won't pull Canada out of a slump at a time when higher interest rates are shrinking domestic demand, he said. Many firms also see the global economy on the edge of a recession. For more see MNI Policy main wire at 1405ET.

EUROPE

ECB: The size of the European Central Bank’s rate hike next week will feed into talks on the timing of quantitative tightening, with hawks likely to press for a faster start to the ECB’s balance-sheet unwind in return for agreeing to an increase of no more than 50 basis points, Eurosystem officials told MNI.

• While officials agreed it was difficult to calculate any equivalence between the tightening effects of rate hikes and of ceasing to reinvest a portion of maturing Asset Purchase Programme securities, several told MNI that the two issues were bound to be linked, with some hawks looking for a 75-basis-point hike.
• “Of course there is a tradeoff. Adjusting the balance sheet and raising or lowering rates are two actions that have monetary policy implications,” one official said. “We have to set a pace for QT and somehow, we have to measure it and keep pace with the rate hikes. If we go up faster or down faster we have to adjust the QT rhythm.” For more see MNI Policy main wire at 0947ET.

US TSYS: 10YY Crests 3.57% Post-PPI

Tsys remain weaker, gradually extending session lows since midmorning after some initial volatility post PPI. Tsy futures gapped lower after PPI comes out little higher than expected (MoM +0.3% vs. 0.2% est; ex F&E +0.4% vs. +0.2% est); U. of Mich. Sentiment (59.1 vs. 56.8 prior).

• Futures rebounded over half the initial move before selling off/extending lows again a half hour later, desks noted two-way positioning/unwinds ahead next week's CPI and FOMC. Notably, yield curves had considerably bear steepened off wk's 40Y lows: 2s10s tapped -74.466 high (+8.523).
• Trading desks eyed short end support in the face of next Monday's staggered auctions: 26W bills and 3Y Notes at 1130ET, 13W bills and 10Y Notes at 1300ET in order to maintains 2 day gap between last auction and settle.
• Focus turns to CPI for Nov next Tue (MoM 0.3% est, 7.3% YoY) and final FOMC of 2022 Wed afternoon.
• FOMC will step down the pace of rate hikes to 50bp at the December meeting. But it will likely signal via the Dot Plot that it intends to tighten by a further 75bp to a terminal rate above 5% in 2023.

OVERNIGHT DATA

• US NOV FINAL DEMAND PPI +0.3%, EX FOOD, ENERGY +0.4%
  
• US NOV FINAL DEMAND PPI EX FOOD, ENERGY, TRADE SERVICES +0.3%
• US NOV FINAL DEMAND PPI Y/Y +7.4%, EX FOOD, ENERGY Y/Y +6.2%
• US NOV PPI: FOOD +3.3%; ENERGY -3.3%
• US NOV PPI: GOODS +0.1%; SERVICES +0.4%; TRADE SERVICES +0.7%

• U. of Mich. Sentiment (59.1 vs. 56.8 prior)
• U. of Mich. Current Conditions (60.2 vs. 58.8 prior)
• U. of Mich. Expectations (58.4 vs. 55.6 prior)
• U. of Mich 1Y Inflation (4.6% vs. 4.9% prior); 5-10Y (3.0% vs. 3.0% prior)

• Wholesale Trade Sales MoM (0.4% vs. 0.4% prior)
• Wholesale Inventories MoM (0.5% vs. 0.8% prior)

• CANADA Q3 INDUSTRIAL CAPACITY UTILIZATION RATE 82.6%
• CANADA FACTORY CAPACITY UTILIZATION RATE 76.6%

US DATA: PPI Inflation Sees Clear Beat Plus Upward Revision

• Final demand ex food & energy PPI inflation increased +0.38% M/M (cons 0.2) from an upward revised 0.12 (initial 0.01). There were also some tiny upward revisions to Aug-Sep data.
• The net result is that what was thought to have been a 3-month run rate of 2.3% annualized in October is 2.9%, and this only slowed to 2.7% in November.
• There was a similar beat in the final demand ex food, energy & trade services measure, rising 0.27% M/M (cons 0.1) after 0.19. There were smaller upward revisions here whilst the same 3-month trend rate accelerated from 2.9% to 3.2%.
• Coming ahead of US CPI on Tuesday, it questions whether core goods CPI inflation continued to trend lower, having turned negative for the first time since March on the back of a a sharper fall in used vehicle prices or close to declining when stripping out used cars with 0.08% M/M.
• Coincidentally, this trend in monthly rates matches the GSCPI index also edging higher over the past two months.

MARKETS SNAPSHOT

• DJIA down 86.41 points (-0.26%) at 33694.07
• S&P E-Mini Future down 3.25 points (-0.08%) at 3962.5
• Nasdaq up 5.8 points (0.1%) at 11087.32
• US 10-Yr yield is up 8.2 bps at 3.5636%
• US Mar 10Y are down 11/32 at 114-3.5
• EURUSD down 0.0009 (-0.09%) at 1.0546
• USDJPY down 0.19 (-0.14%) at 136.48
• WTI Crude Oil (front-month) up $0.17 (0.24%) at $71.63
• Gold is up $10.05 (0.56%) at $1799.16

• EuroStoxx 50 up 21.35 points (0.54%) at 3942.62
• FTSE 100 up 4.46 points (0.06%) at 7476.63
• German DAX up 106.16 points (0.74%) at 14370.72
• French CAC 40 up 30.33 points (0.46%) at 6677.64

US TSY FUTURES CLOSE

• 3M10Y +4.698, -74.355 (L: -84.984 / H: -72.36)
• 2Y10Y +6.385, -76.604 (L: -84.181 / H: -74.466)
• 2Y30Y +9.489, -78.524 (L: -89.162 / H: -76.052)
• 5Y30Y +7.056, -20.861 (L: -27.854 / H: -19.866)
• Current futures levels:
• Mar 2Y down 0.875/32 at 102-25 (L: 102-23.625 / H: 102-29.75)
• Mar 5Y down 5.5/32 at 108-28.25 (L: 108-26.5 / H: 109-09.75)
• Mar 10Y down 11/32 at 114-3.5 (L: 114-02.5 / H: 114-24.5)
• Mar 30Y down 1-3/32 at 129-29 (L: 129-25 / H: 131-22)
• Mar Ultra 30Y down 2-18/32 at 142-25 (L: 142-21 / H: 146-14)

‌‌‌‌US 10YR FUTURES TECH: (H3)‌‌ Uptrend Falters

• RES 4: 116-05+ 2.0% 10-dma envelope
• RES 3: 115-26 2.00 proj of the Oct 21 - 27 - Nov 3 price swing
• RES 2: 115-14 50% Aug - Oct Downleg
• RES 1: 115-06+ High Dec 7
• PRICE: 114-05 @ 1500ET Dec 9
• SUP 1: 113-21+/113-04+ Low Dec 2 / 50-day EMA
• SUP 2: 112-11+ Low Nov 21 and a key short-term support
• SUP 3: 112-05+ Low Nov 14
• SUP 4: 110-22 Low Nov 10

Treasury futures traded lower Friday to remain below this week’s high of 115-06+. Wednesday gains resulted in a break of resistance at 114-28+, the Dec 2 high and this tilts the outlook higher. 115-14 marks key resistance going forward, 50% of the Aug - Oct downleg on the continuation contract. A break would open 115-26, a Fibonacci projection. Any pullbacks will need to dip below the 50-day EMA at 113-04+ to expose key trend support at 112-11+, Nov 21 low.

US EURODOLLAR FUTURES CLOSE

• Dec 22 +0.023 at 95.250
• Mar 23 steady00 at 94.875
• Jun 23 -0.010 at 94.835
• Sep 23 -0.020 at 94.975
• Red Pack (Dec 23-Sep 24) -0.035 to -0.025
• Green Pack (Dec 24-Sep 25) -0.07 to -0.045
• Blue Pack (Dec 25-Sep 26) -0.08 to -0.075
• Gold Pack (Dec 26-Sep 27) -0.09 to -0.085

SHORT TERM RATES

US DOLLAR LIBOR: Latest settlements:

• O/N -0.00200 to 3.81800% (+0.00527/wk)
• 1M -0.00400 to 4.27029% (+0.08543/wk)
• 3M -0.00200 to 4.73314% (+0.00057/wk)*/**
• 6M -0.01900 to 5.13971% (-0.00943/wk)
• 12M -0.00100 to 5.49943% (+0.07000/wk)
• * Record Low 0.11413% on 9/12/21; ** New 14Y high: 4.77857% on 11/30/22

• Daily Effective Fed Funds Rate: 3.83% volume: $99B
• Daily Overnight Bank Funding Rate: 3.82% volume: $270B

• Secured Overnight Financing Rate (SOFR): 3.80%, $1.087T
• Broad General Collateral Rate (BGCR): 3.76%, $418B
• Tri-Party General Collateral Rate (TGCR): 3.76%, $392B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

NY Fed reverse repo usage recedes to $2,146.748B w/ 96 counterparties vs. $2,175.973B in the prior session. Prior record high stands at $2,425.910B on Friday, September 30.

EGBs-GILTS CASH CLOSE: Bunds Cheapen Vs Swaps On High TLTRO Repayments

European yields rose continuously for most of Friday's session, with core FI erasing most of the week's rally.

• The German curve weakened in parallel, while the UK curve was mixed.
• ECB TLTRO repayments came in higher than expected at E447.5bln
• Asset swap spreads tightened as German yields rose, with collateral seen coming back to market, thereby easing shortages.
• The biggest single move of the day, though, came after US producer price data came in higher than expected - 10Y Bund and Gilt yields rose over 4bp.
• Attention turns to next week's heavy central bank schedule, with decisions among others by the ECB, BoE, and Federal Reserve.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 9.1bps at 2.16%, 5-Yr is up 11bps at 1.943%, 10-Yr is up 11.3bps at 1.933%, and 30-Yr is up 10.7bps at 1.746%.
• UK: The 2-Yr yield is up 8.8bps at 3.426%, 5-Yr is up 5.2bps at 3.254%, 10-Yr is up 9.2bps at 3.181%, and 30-Yr is up 5.5bps at 3.57%.
• Italian BTP spread up 3.1bps at 190.6bps / Spanish up 1.9bps at 102.4bps

FOREX: Post-PPI USD Strength Reverses, Eyes On Upcoming Event Risk

• US PPI data surprised to the upside on Friday, prompting a quick spike in the greenback amid pressure on equity indices. The move was most notable in USDJPY which rallied over 100 pips to fresh intra-day highs of 1.3690.
• Despite the initial USD surge, momentum faded thereafter, and the greenback slowly reversed lower throughout the course of the afternoon, aided by a softer inflation component within the UMich survey and as markets turn their focus to next week’s CPI and major central bank decisions.
• With equities trading back into positive territory, the likes of GBP, AUD and NZD erased the entirety of the post-data weakness and all look set to post gains of above 0.5% on Friday.
• GBPUSD’s trend condition remains bullish. Price has traded through the 200-dma and maintains a bullish sequence of higher highs and higher lows. Note that moving averages studies remain in a bull-mode position. A resumption of gains places the focus on 1.2406, the Jun 16 high.
• EURGBP edged toward the bottom-end of the week's range into the Friday close - with support layered between 0.8556-62 but seen stronger into the 200-dma/Dec 1 low, both of which cross at 0.8547. Weakness through here would be the cross at the lowest levels since late August.
• Attention turns to Tuesday’s US CPI report followed by a host of major central bank decisions next week including the Fed and the ECB.

MONDAY DATA CALENDAR

Date	GMT/Local	Impact	Flag	Country	Event
12/12/2022	0001/0001			UK	Rightmove House Prices
12/12/2022	0700/0700	**		UK	UK Monthly GDP
12/12/2022	0700/0700	**		UK	Trade Balance
12/12/2022	0700/0700	***		UK	Index of Production
12/12/2022	0700/0700	**		UK	Index of Services
12/12/2022	0700/0700	**		UK	Output in the Construction Industry
12/12/2022	1330/0830	*		CA	Household debt-to-disposable income
12/12/2022	1600/1100	**		US	NY Fed survey of consumer expectations
12/12/2022	1630/1130	*		US	US Treasury Auction Result for 26 Week Bill
12/12/2022	1630/1130	***		US	US Note 03 Year Treasury Auction Result
12/12/2022	1800/1300	**		US	US Note 10 Year Treasury Auction Result
12/12/2022	1800/1300	*		US	US Treasury Auction Result for 13 Week Bill
12/12/2022	1900/1400	**		US	Treasury Budget
12/12/2022	2025/1525			CA	Governor Macklem speech in Vancouver
12/12/2022	2200/1700			CA	BOC Governor Macklem press conference