MNI ASIA OPEN - "Substantial" Majority Of FOMC Saw Stepdown Soon

NEWS

FED (MNI): Fed Officials See Slowdown In Hike Pace 'Soon'
Fed officials at their November meeting supported slowing the pace of interest rate hikes "soon" to give them time to observe the effects of higher rates on the economy and inflation, according to the minutes of the meeting released Wednesday, signaling a 50 basis point increase was likely next month. At the same time, the FOMC also stressed that rates are likely to peak at a level "somewhat higher" than they had earlier expected due to stronger-than-expected inflationary pressures.

EU (MNI): EU Fiscal Reform Proposal Seen As Lax By Hawks-Officials
European Commission proposals for reforming the European Union’s fiscal rules have met with scepticism from Germany and other fiscally hawkish states, which want more concrete details of its assessment procedures and more aggressive timetables for pushing over-indebted governments towards sustainable financial positions, EU officials told MNI.

OIL (BBG): Oil Sinks as EU Discusses a Softer Russian Price Cap at $65-$70
The European Union’s proposed range would be well above Russia’s cost of production and higher than some countries have been paying for its oil. As Russia is already selling its crude at discounts of $20 a barrel in recent months, a high cap may have minimal impact on trading, keeping the nation’s supplies flowing into the global market.

GAS (MNI): Germany Set To Accept Gas Price Cap Tweaks - Officials
Germany looks like accepting European Commission tweaks to a proposed gas price cap to ease concerns that it might cause LNG exporters to divert cargoes to Asia in search of higher prices, with an agreement on the mechanism likely by the end of the year, EU sources told MNI.

CHINA (BBG): China’s iPhone City to Restrict Resident Movement
China’s Zhengzhou, home to the world’s largest iPhone factory, will implement mobility controls in eight districts in its main urban areas from Nov. 25 to Nov. 29 due to the rising Covid cases, according to a statement from the local authorities issued on its WeChat page on Wednesday evening.

ECB (BBG): Vasle Wants ‘Current Tempo’ of ECB Hikes to Continue Next Month
European Central Bank Governing Council member Bostjan Vasle signaled he backs another large increase in interest rates at the Dec. 15 meeting. Given price levels and inflation expectations for coming quarters, the current tempo of hikes “is adequate and will continue at the next meeting,” Vasle told Bloomberg Adria in a television interview published Wednesday. He didn’t specify if that was 50 or 75 basis points -- the two increments by which the ECB has hiked this year.

BOE (BBG): BOE To Auction Bonds In Emergency Portfolio Three Times A Week
The Bank of England plans to offload the £19 billion ($23 billion) of UK government bonds it bought to stem a market rout earlier this year in “demand-led” sales held three times each week. Starting Nov. 29, the central bank will hold a series of so-called reverse inquiry windows that will typically be open on Tuesdays, Wednesdays and Fridays, it said in a statement. There will be no minimum or maximum allocation of a particular gilt.

US (BBG): SEC to Push Bond and Option Brokers for Better Prices on Trades
The US Securities and Exchange Commission’s draft plans to overhaul rules for the stock market would also expand its oversight of bond and options trading. A proposal being circulated inside Wall Street’s main regulator would require that brokers in fixed-income and some derivatives -- as well as those handling equities -- get their clients the best deal, according to people familiar with the matter. Brokerages already face a similar “best execution” rule from the industry-backed Financial Industry Regulatory Authority, but a regulation directly from the SEC could lead to tougher enforcement.

DATA

**MNI: US OCT NEW HOME SALES +7.5% TO 0.632M SAAR
US SEP NEW HOME SALES REVISED TO 0.588M SAAR

US NOV FLASH COMPOSITE PMI 46.3 (FCST 48.0), OCT 48.2
US NOV FLASH SERVICES PMI 46.1 (FCST 48.0), OCT 47.8
US NOV FLASH MANUF. PMI 47.6 (FCST 50.0), OCT 50.4

US JOBLESS CLAIMS +17K TO 240K IN NOV 19 WK
US CONTINUING CLAIMS +0.048M to 1.551M IN NOV 12 WK

US DATA: PMIs Suggest Broad-Based Accelerated Decline In Activity

• The PMIs were much weaker than expected in the preliminary Nov release, with manufacturing at 47.6 (cons. 50.0) after 50.4 and the much more heavily weighted services at 46.1 (cons. 48.0) from 47.8.
• “The overall fall in activity was the second-fastest since May 2020 as inflation, rising borrowing costs and economic uncertainty weighed on demand".
• Notably on the price side, input cost inflation softened for the sixth month running, increasing at the slowest rate since Dec’20, whilst firms raised their selling prices at the slowest rate for just over two years. “Some firms stated that concessions and discounts were made to entice customers to place orders amid the weak demand environment."
• The service PMI has already seen weaker this cycle, with a low of 43.7 in Aug, but this latest print goes against hope of a bounce despite continued consumer rotation back from goods to services, in the process adding renewed downside to the ISM Services index which to date has been far more resilient (Nov released Dec 5) - second chart.

US DATA: U.Mich 1Y Inflation Expectations Reverse Preliminary Climb, 5-10Y Steady But With Survey Uncertainty

• U.Mich consumer sentiment saw a smaller than first thought hit in the final November print, down from 59.9 to 56.8 (first thought 54.7).
• Inflation expectation components continued their run of preliminary-final revisions, with the 1Y ahead now dipping a tenth to 4.9% vs the initial increase to 5.1%, leaving a 20bp rather than 40bp climb from most recent lows of 4.7% in Sep.
• No change in the 5-10Y ahead though, which at 3.0% remains in the tight 2.9-3.1% range seen in all but one month since Aug’21.
• However, within this, and it's something that NY Fed's Williams has pointed out with the NY Fed's expectations equivalent, "Uncertainty over these expectations remained at an elevated level, indicating that the general stability of these expectations may not necessarily endure."

US DATA: Downward Revision Takes Gloss Of Durable Goods Beat

• The preliminary durable goods report for October was stronger than expected across the board although negative downward revisions to September took off some of the gloss.
• The story is one of improved recent momentum but a more mixed outlook: shipments were outright stronger than expected (+1.3 vs 0.2 cons, after smaller than first thought -0.1) whilst orders bounced 0.7% M/M (cons 0.0) after a larger than first thought -0.8% (initial -0.4) leaving little momentum.
• It leaves a (nominal) trend growth rate for core orders continuing to cool to 5.6% annualized at the softest since Jul’20 in 3M/3M terms, with previously released industrial production growing at an equally relatively tepid 1.5% annualized.

US DATA: Initial Claims Highest Since Aug

• Initial jobless claims saw the largest weekly increase in eight weeks to leave them at the highest level since mid-Aug, at 240k (cons 225k) from 223k.
• In doing so it’s the first more notable move above levels near the 2019 average since the rise over the summer (see chart) but being just one week, average levels only nudge higher at similarly low levels.
• Also of note were unusually large contributions from California and in particular Illinois in the NSA data, worthy of further investigation.

US DATA: New Home Sales Surprisingly Jump As Volatility Remains

• New home sales continued their volatile streak in October, surprisingly bouncing 7.5% (cons -5.5%) after falling -11% in Sep - green line in chart.
• Particularly large swings across the four regions leave some question marks for the beat, book-ended by the North-East up 46% and the West down -1%.
• Nevertheless, there has been a broad plateauing in new home sales in recent months.
• This is contrary to the continued decline in both existing home sales and building permits, with existing/pending sales particularly of note after giving a better steer at the bottom of the last housing downturn.

US TSYS: PMI Miss and FOMC Minutes Help Support TY Bullish Outlook

• Cash Tsys have seen a mixed session, but ultimately rally on a combination of notably weak PMI data and somewhat dovish FOMC minutes. The latter pointed to a “substantial” majority of participants judging a slowing in the pace of hikes would likely soon be appropriate with only “various” participants expecting the terminal rate to be “somewhat higher than they had previously expected”.
• The net result is 2YY -3.1bps at 4.483%, 5YY -5.0bps at 3.896%, 10YY -4.7bps at 3.709% and 30YY -8.0bps at 3.744%, with all majors tenors except the 30Y remaining within pre-FOMC session ranges.
• TYZ2 couldn’t exceed its earlier post-PMI peak of 113-00+ on the minutes, touching 112-31+ before retreating to 112-29 at typing. The technical bullish outlook remains intact, with resistance seen at 113-11 (Nov 16 high).
• Thanksgiving tomorrow sees data/Fedspeak resume on Monday all with an eye on Powell speaking on the economic outlook and labour market on Nov 30.

FOREX: Broad USD Weakness Extends Following FOMC Minutes

• Despite a firmer start for the greenback to start the week, the USD index extended Tuesday’s reversal lower and looks set to post a 1% decline on Wednesday as we approach the APAC crossover and the US Thanksgiving Holiday.
• Some highlighted the increase in initial jobless claims as well as weaker S&P PMI data as underpinning the USD weakness. Particularly, input cost inflation softening for the sixth month running, increasing at the slowest rate since December 2020 could be supporting the bid for US Treasuries.
• G10 FX strength was fairly broad based and substantial with GBP, NZD, SEK and NOK all rising in excess of 1.5% against the greenback. Both the AUD and JPY are also seen 1.25% firmer with a slightly less buoyant Euro that grinds back to the 1.0400 mark.
• A combination of lower oil prices as well as geographical proximity to the US sees the Canadian Dollar underperform across G10, with USDCAD close to unchanged on the session.
• Similarly, USDCNH is actually higher as the country is seeing near-record numbers of Covid cases, spurring major cities from Beijing to Shanghai to revert to broad restrictions on people’s movements and mass testing exercises to contain swelling outbreaks. Furthermore, reports of protests at China's iphone factory acted as an additional CNH headwind.
• In emerging markets EURHUF spiked substantially as German newspaper FAZ reported that the EU Commission are to recommend freezing EU7.5B of Hungary funds. EURHUF rallied from around 406 to 412 on the news, narrowing the gap with touted resistance at 416.03, the Oct 24 high.
• German IFO data and BoE Speakers precede the release of the ECB Monetary Policy Meeting Accounts on Thursday.

EGBs-GILTS CASH CLOSE: German Inversions Impress, BTP Spreads Tighten

UK and German long-end yields fell sharply Wednesday, with curves flattening as short-end yields remained buoyed by above-consensus PMI data.

• European flash Nov PMIs mostly beat expectations, and pointed to both a potentially milder recession and softening price pressures as demand pulls back.
• That said, concerns over weak global activity / disinflation appeared to persist: German curve inversion accelerated after poor US PMIs, hitting new cycle lows in multiple spreads (2s10s, 2s5s, 2s30s).
• Periphery spreads tightened as the Euro rose vs USD and equities sustained gains, with BTP/Bund just shy of the tightest closing level since April.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 3.1bps at 2.141%, 5-Yr is up 0.3bps at 1.966%, 10-Yr is down 4.8bps at 1.93%, and 30-Yr is down 1.4bps at 1.876%.
• UK: The 2-Yr yield is down 1.2bps at 3.13%, 5-Yr is down 3.7bps at 3.184%, 10-Yr is down 12.6bps at 3.011%, and 30-Yr is down 12bps at 3.196%.
• Italian BTP spread down 3.7bps at 189.8bps / Spanish down 1.2bps at 98.2bps

COMMODITIES: Oil Slides On China Covid Fears and Relaxed Russia Price Cap

• Crude oil has fallen heavily today on China covid-related demand fears and the EU discussing a softer Russian price cap of $65-70/bbl (up from 60-70/bbl the WSJ noted the G7 was considering yesterday, well above Russia’s cost of production and higher than some countries have been paying for its oil) , potentially having minimal impact on trading. EIA data were somewhat mixed, with a larger than expected draw in crude stocks but larger climbs in gasoline and distillate stocks.
• Losses were limited by Bloomberg reporting EU price cap talks have stalled according to those familiar with the matter before a light boost after the FOMC minutes.
• WTI is -4.0% at $77.75 as it begins to eye a key medium-term support at $74.96 (Sep 28 low).
• Brent is -3.7% at $85.13 compared to next support at $82.31 (Nov 21 low).
• Gold meanwhile is +0.6% at $1751.3, buoyed by a weaker USD post-FOMC minutes, but remains some way off the bull trigger at $1786.5 (Nov 15 high).

MNI NBH Review - November 2022: EU Funding Takes Primacy Over Rates

Executive Summary:

• The NBH kept rates unchanged at 13.0% once again as Deputy Governor Virag highlighted that the central bank needs to see a “significant improvement” in risk sentiment before reducing the spread between the base rate and the effective rate.
• Since there has been no marked improvement in either of these criteria, no change in the monetary policy setup was expected this month, and that will likely remain the case into year-end.
• Analysts are relatively uniform in seeing no change to headline policy rates in the near-future, with most pointing toward the pre-announced tools as carrying the load for monetary policy going forward.

MNI NBH Review - November 2022.pdf

In the post-decision press conference, Virag flagged the suitability of 13% base rates to achieve their medium-term inflation view, with CPI seen edging lower from their forecast of 13.5 – 14.5% for 2022. Virag also struck a somewhat positive tone for Hungary’s current account balance, stating that Hungary is “likely over the worst for the current account shortfall”.

Latest source reports in FAZ suggest that the European Union finance ministers could keep cohesion fund payments frozen, with Hungary failing to meet the judicial reform and anti-corruption criteria – as flagged in the European Parliament last week. The report suggested that EU are looking to tie together both funding lines from the cohesion funds (E7.5bln) as well as from the yet-to-be-approved COVID recovery fund (as much as E5.8bln).