MNI ASIA OPEN: Risk-Rally Amid UK Political Turmoil

EXECUTIVE SUMMARY

• MNI: LIZ TRUSS ISN'T RESIGNING AS PRIME MINISTER: SPOKESMAN BLAIN
• MNI POLICY: BOE To Examine Gilt Sales Plan In Wake Of Turmoil
• MNI: BOC Polls Show Record CPI Expectations And Recession Fear
• US-UK: To Deepen Sanctions On Russia As Iranian Involvement In War Increases

UK

BOE: UK: Spox Says Truss Not Resigning As Fourth Conservative MP Calls For PM To Go: Comments from UK PM Liz Truss' spokesman Max Blain hitting wires. Says that PM Truss is not resigning and that there are 'no plans' to change the windfall tax on energy. Comes as four Conservative MPs have now openly called for Truss to go:

• Spox: We believe economic stability is important, that's why we've made changes...the PM and chancellor still believe in the need to focus on economic growth...it is right to acknowledge the circumstances and to change course, no single factor prompted it.

BOE: Recent market turmoil means the Bank of England’s five-member Executive will need to consider pushing back the start of active gilt sales from Oct 31, though the initially positive reaction to government U-turns on tax cuts and fiscal support for higher energy prices may ease concerns over further delays to the plans.

• Members of the Executive, comprised of Governor Andrew Bailey and four deputy governors, must take an operational decision on whether to proceed with the sales, which were always contingent on market conditions and whose initial planned start date was postponed for a month on Sept 28. (See MNI INSIGHT: BOE's QT Pace Known, Terminal Point Unknowable)
  
• The BOE’s nine-member Monetary Policy Committee, in which all of the executive also sit, has already given the green light for gilt sales of around GBP10 billion a quarter. It is not involved in operational activities, though it was informed of the Sept 28 decisions, when the Bank was forced to intervene in gilt markets to assist distressed pension funds in the wake of Sept 23’s mini-budget fiscal giveaways. For more see MNI Policy main wire at 1212ET.

• Livestream: https://www.youtube.com/watch?v=jDtfioiaBMU
• Hunt: 'We are a country that funds our promises and pays our debts'.
• Hunt: 'We must take decisions of eye-watering difficulty if needed'.
• Hunt: "We need to do more, more quickly to give markets certainty'.
• Hunt: "UK economic volatility due to a lack of an OBR forecast related to the mini-budget, inflation, and interest pressures around the world'.
• Treasury tweets: "The repeals of the 2017 and 2021 reforms to the off-payroll working rules known as IR35 from April 2023 will no longer take place. This is worth around £2 billion a year."

CANADA

BOC: Bank of Canada surveys published Monday show consumers and executives see record high inflation even as they also predict a recession is coming in the next year, firming up the case for Governor Tiff Macklem to hike interest rates by at least another half percentage point next week.

• Inflation will be 7.1% a year from now, a record high in the Bank's quarterly survey of consumers, and close to the current rate of 7%. The current inflation rate was seen at 8%, in line with the four-decade high reached earlier this year. Households also said borrowing costs will be about 5.1% a year from now, versus the Bank's overnight policy rate of 3.25%. Survey results were gathered in August and September.
• Nearly four in five households also said the odds of a recession in the next year is at least 50%, citing wages that are lagging inflation and higher interest rates. Business owners also held similar views but about three-quarters of them said the recession would be caused by interest-rate hikes. For more see MNI Policy main wire at 1030ET.

US/UK

The US and the UK are set to announce a deepening on sanctions on Russia and countries seen as helping Moscow evade sanctions.

• According to the FT, a joint statement expected to be released today taking "colabortation to a new level."
• The statement reads: “We will identify opportunities to pool expertise, [...] to align the way we implement sanctions, and to assist our stakeholders...

US TSYS: Bonds Reverse Early UK-Tied Support

Tsy yield curves running steeper after the bell, short end outperforming, long end finishing near late session lows on modest volumes (TYZ2<1M). Market continues to weigh impact of reversal nearly all measures from UK 23 September mini-budget this morning.

• Officials say that PM Truss is not resigning and that there are 'no plans' to change the windfall tax on energy. Comes as four Conservative MPs have now openly called for Truss to go.
• Bonds lead the reversal off early session highs - no obvious headline driver. Any react to weaker-than-expected headline Empire number (-9.1 vs -4.3 survey and -1.5 prior) lost in the early morning shuffle.
• Data focus turns to IP/Cap-U, Net TIC flows on tap Tuesday.
• US Tsy auctions: No supply Tuesday.
• Fed speakers resume Tuesday:
  • Atlanta Fed Bostic, mediated virtual discussion, no text at 1400ET
  • MN Fed Kashkari on economy, moderated Q&A at 1730ET

OVERNIGHT DATA

NY FED'S EMPIRE STATE CURRENT BUSINESS CONDITIONS INDEX -9.1 IN OCTOBER VS -1.5 IN SEPTEMBER

NY Fed Data: Weaker-than-expected headline Empire number (-9.1 vs -4.3 survey and -1.5 prior), with the main forward-looking indicators (6-month General Business Conditions and New Orders) ticking lower though Capex looked strong

• Current employment was mixed (longer workweek, fewer employees) with prices received basically flat but prices paid higher. That said, forward expectations for prices and employment indicators were pretty flat.

BOC OUTLOOK SURVEY: FUTURE SALES GROWTH BALANCE OF OPINION -18

• BANK OF CANADA BUSINESS OUTLOOK SURVEY OVERALL INDICATOR +1.69
• BOC: CONSUMERS SEE INFLATION AT 7.96% NOW, 7.11% IN 1 YEAR
• BOC: FIRMS SEEING +3% INFLATION IS 77% FROM RECORD 78%
  
• BOC: 76% OF FIRMS FACE CAPACITY CONSTRAINTS VS PRIOR 78%
• FUTURE SALES GROWTH BALANCE OF OPINION -18 VS PRIOR -26
• BOC: CONSUMER VIEW OF CURRENT CPI IS RECORD 8% FROM 6.1%
• BOC: CONSUMER VIEW OF INFLATION IN 1 YEAR 7.1% FROM 6.8%
• MAJORITY OF FIRMS SAY RECESSION LIKELY IN NEXT YEAR: BOC

MARKETS SNAPSHOT

Key late session market levels:

• DJIA up 536.05 points (1.81%) at 30173.91
• S&P E-Mini Future up 90.25 points (2.51%) at 3687.5
• Nasdaq up 342 points (3.3%) at 10664.32
• US 10-Yr yield is down 0.4 bps at 4.0145%
• US Dec 10Y are up 2.5/32 at 110-21.5
• EURUSD up 0.0116 (1.19%) at 0.9839
• USDJPY up 0.28 (0.19%) at 148.94
• WTI Crude Oil (front-month) down $0.07 (-0.08%) at $85.52
• Gold is up $5.35 (0.33%) at $1649.94

US TSY FUTURES CLOSE

• 3M10Y -5.246, 22.969 (L: 16.896 / H: 25.947)
• 2Y10Y +3.615, -44.355 (L: -52.082 / H: -44.132)
• 2Y30Y +6.364, -44.287 (L: -51.547 / H: -43.755)
• 5Y30Y +5.019, -22.77 (L: -27.703 / H: -21.377)
• Current futures levels:
• Dec 2Y up 3.75/32 at 102-8.625 (L: 102-04.125 / H: 102-11.875)
• Dec 5Y up 4.5/32 at 106-17.5 (L: 106-12.5 / H: 107-00)
• Dec 10Y up 2.5/32 at 110-21.5 (L: 110-18 / H: 111-13)
• Dec 30Y down 12/32 at 123-11 (L: 123-10 / H: 124-28)
• Dec Ultra 30Y down 25/32 at 131-9 (L: 131-07 / H: 133-10)

US 10Y FUTURE TECHS: : (Z2)‌‌ Trend Conditions Remain Bearish

• RES 4: 115-13+ Low Sep 7
• RES 3: 114-31+ 38.2% retracement of the Aug 2 - Sep 28 bear leg
• RES 2: 112-14/113-30 20-day EMA / High Oct 4 and the bull trigger
• RES 1: 111-28+ High Oct 12
• PRICE: 110-24 @ 19:42 BST Oct 20
• SUP 1: 110-00 Psychological Support
• SUP 2: 109-23+ Low Nov 30 2007 (cont)
• SUP 3: 108-18+ 1.00 projection of the Oct 4 - 11 - 13 price swing
• SUP 4: 108.14 3.0% 10-dma envelope

Treasuries remain vulnerable. Last week, the contract breached 110-19, the Sep 28 low and bear trigger. This resulted in a break out of the recent consolidative range and highlights a resumption of the downtrend plus maintains the price sequence of lower and lower highs. The focus is on 110.00, a break would strengthen bearish conditions. Initial key resistance is at 112-14, the 20-day EMA. Gains would be considered corrective.

US EURODOLLAR FUTURES CLOSE

• Dec 22 +0.015 at 94.910
• Mar 23 +0.030 at 94.790
• Jun 23 +0.045 at 94.855
• Sep 23 +0.050 at 95.020
• Red Pack (Dec 23-Sep 24) +0.055 to +0.060
• Green Pack (Dec 24-Sep 25) +0.030 to +0.045
• Blue Pack (Dec 25-Sep 26) +0.010 to +0.025
• Gold Pack (Dec 26-Sep 27) -0.005 to +0.010

SHORT TERM RATES

US DOLLAR LIBOR: Latest settlements:

• O/N -0.00528 to 3.06086% (-0.01043 total last wk)
• 1M +0.03686 to 3.47986% (+0.12943 total last wk)
• 3M +0.03286 to 4.22657% (+0.28814 total last wk) * / **
• 6M -0.01158 to 4.67371% (+0.30058 total last wk)
• 12M +0.02930 to 5.31244% (+0.28685 total last wk)
• * Record Low 0.11413% on 9/12/21; ** New 14Y high: 4.19371% on 10/14/22

• Daily Effective Fed Funds Rate: 3.08% volume: $110B
• Daily Overnight Bank Funding Rate: 3.07% volume: $287B

• Secured Overnight Financing Rate (SOFR): 3.04%, $958B
• Broad General Collateral Rate (BGCR): 3.00%, $387B
• Tri-Party General Collateral Rate (TGCR): 3.00%, $370B
• (rate, volume levels reflect prior session)

FED Reverse Repo Operation

NY Fed reverse repo usage recedes to $2,172.301B w/ 98 counterparties vs. $2,222.052B in the prior session. Prior record high stands at $2,425.910B on Friday, September 30.

PIPELINE: $3.85B To Price Monday

• Still waiting on Kommunalbanken (KBN) to launch, however:
• Date $MM Issuer (Priced *, Launch #)
• 10/17 $1.1B #Diamondback Energy (FANG) +10Y +230
• 10/17 $1B Kommunalbanken (KBN) 3Y SPOFR+43a
• 10/17 $750M #Bank of Nova Scotia 60NC5 8.625%
• 10/17 $400M #Nevada Power 30Y +190
• 10/17 $600M #BAT Capital 10Y +380
• 10/17 $Benchmark OPEC Fund investor call
• 10/?? $1B Export Finance Australia 5Y this week

EGBs-GILTS CASH CLOSE: Rally As UK Gov't Follows Through With U-Turn

The UK curve saw massive bull flattening Monday, with Gilts easily outperforming their global counterparts as the government followed through with the anticipated "U-turn" on its fiscal programme.

• 10Y Gilt yields saw the 2nd biggest drop since 1992 (only September 28th's 49bp drop surpassed it).
• Terminal BoE pricing fell by over 50bp (now seen around 5.1-5.2% in mid-2023, vs 100bp above that as recently as late September).
• German yields saw a solid drop with bull flattening as well, but unremarkable in comparison with the UK move.
• Periphery EGB spreads mostly narrowed in a risk-on session.
• ECB's Nagel speaks after the market close.

Tuesday Data Calendar

Date	GMT/Local	Impact	Flag	Country	Event
18/10/2022	0030/1130			AU	RBA policy meeting minutes
18/10/2022	0800/1000			IT	Trade Balance
18/10/2022	0900/1000	**		UK	Gilt Outright Auction Result
18/10/2022	0900/1100	***		DE	ZEW Current Conditions Index
18/10/2022	0900/1100	***		DE	ZEW Current Expectations Index
18/10/2022	1215/0815	**		CA	CMHC Housing Starts
18/10/2022	1255/0855	**		US	Redbook Retail Sales Index
18/10/2022	1315/0915	***		US	Industrial Production
18/10/2022	1400/1000	**		US	NAHB Home Builder Index
18/10/2022	1600/1800			EU	ECB Schnabel Alumni Event at Uni Mannheim
18/10/2022	1800/1400			US	Atlanta Fed's Raphael Bostic
18/10/2022	2000/1600	**		US	TICS
18/10/2022	2130/1730			US	Minneapolis Fed's Neel Kashkari