MNI US MARKETS ANALYSIS - GBP Fails to Benefit from Higher CPI

US TSYS: Twist Steeper As Front End Pares Some Of Retail Sales Losses

• Cash Tsys trade twist steeper, ranging from 4bp richer to 2bp cheaper with the pivot after 10s.
• The front-end chips away at yesterday’s shunt higher in Fed rate expectations after strong retail sales, but the longer-end is less willing to move give up the steepening theme seen in recent weeks. There is also further 20Y supply ahead today plus a stacked earnings docket including Tesla, Procter & Gamble, Morgan Stanley, Netflix, Abbot Laboratories & Elevance Health.
• It’s a move that pushes 2s10s back up to -35bps, the higher end of yesterday’s wide range of -32bps to -40bps.
• TYZ3 has lifted to session highs of 106-14 (+7), helped by latest flow including a suggested block buyer for 4k at 106-11. It earlier extended recent lows with 106-03 to push through support at 106-03+ (Oct 4/17 low) after which sits the round 106-00 before 105-05+ (2% 10-dma envelope).
• Ahead sees housing data but with the second half of the session providing a greater focal point with six different Fedspeakers including four permanent voters (all before Powell speaks tomorrow), which likely take precedence over the Fed’s Beige Book.
• Note/bond issuance: US Tsy $13B 20Y bond re-open (1300ET)
• Bill issuance: US Tsy $56B 17-week bills (1130ET)

STIR: Fed Rates Only Modestly Trim Retail Sales Boost

• Fed Funds implied rates have given back a small part of yesterday’s latest sizeable shift higher spurred by stronger than expected retail sales data.
• Cumulative hikes from 5.33% effective: +2.5bp Nov (-0.5bp on the day), +11bp Dec (-1bp) and +13.5bp Jan to a terminal 5.465% (-1.5bp).
• Cuts from terminal: 24bp to Jun’24 and 71bp to Dec’24, the latter putting back marginally from 70bps at yesterday’s close and at levels touched after the hawkish FOMC dot plot on Sep 20.
• Housing data aside, the session is backloaded with a plethora of Fedspeak including permanent voters Waller, Williams, Bowman and, after the close, Cook for the first time since the Sep FOMC. We also hear from Harker ('23 voter) and Barkin ('24) today. Chair Powell is firmly on the radar though with tomorrow’s appearance at the Economic Club of NY.

STIR: OI Points To Mix Of SOFR Short Setting & Long Cover On Tuesday

The combination of yesterday's sell off on the SOFR strip and preliminary open interest data point to a mix of short setting and long cover on Tuesday.

• Short setting was seen in net terms in the whites, reds and blues, while the greens saw light long cover on net.

STIR: UK CPI Steepens BoE OIS, Moves Contained

BoE-dated OIS sees some light twist steepening, with contracts -0.5bp to +3.0bp on the day.

• The strip is off hawkish session extremes, which came on the back of firmer than expected UK CPI data.
• While the data was a touch firmer than expected for September it wasn’t seen as a meaningful game changer for the BoE, given the major drivers of the firmer than expected prints were seemingly of a transient nature, representing a bit of a reversal after promoting last month’s softer than expected readings.
• ~7bp of tightening is now showing for next month’s MPC decision, while terminal policy rate pricing sits ~17.5bp above prevailing levels, ~1bp off hawkish session extremes.
• The move away from session highs in core global FI yields has helped BoE-dated OIS contracts to move off their own session highs.

EUROPE ISSUANCE UPDATE: 

ITALY EXCHANGE AUCTION RESULTS:

• MEF sells E1.492bln of the 6.00% May-31 BTP. Avg yield 4.61%
• E1.508bln of the 4.00% Feb-37 BTP. Avg yield 5.11%.
• MEF buys E396mln of the 0% Jan-24 BTP Short Term at 98.94
• E1.674bln of the 1.75% May-24 BTP Short Term at 98.67
• E319mln of the 0% Aug-24 BTP at 96.93
• E147mln of the 0.35% Oct-24 BTP Italia at 98.15
• E319mln of the 1.40% May-25 BTP Italia at 98.68

• E150mln of the 3.875% Jun-28 GGB. Avg yield 3.85% (bid-to-cover 3.61x)
• E250mln of the 4.25% Jun-33 GGB. Avg yield 4.34% (bid-to-cover 3.79x).

GERMAN AUCTION RESULTS:

• E4bln (E3.269bln allotted) of the 2.60% Aug-33 Bund. Avg yield 2.9% (bid-to-cover 1.62x).

FOREX: GBP Fails to Materially Benefit From Firmer CPI

• GBP is among the strongest performers early Wednesday, rising on the back of a higher-than-expected CPI release. GBP/USD tested, but failed to break, Tuesday NY highs of 1.2212 as markets shrug off transient factors as being behind the stubbornness of CPI across September. OIS-implied market pricing further suggests that an unchanged decision from the BoE at their November meeting is the most likely outcome.
• AUD and NZD populate the top-end of the G10 table, however short-term gains are considered corrective and the trend outlook remains bearish. Attention is on 0.6286, the Oct 3 / 13 low. A clear break of this support, would confirm a resumption of the trend and open 0.6215, a Fibonacci projection.
• The USD Index trades lower for a third consecutive session, however pullbacks are limited at present at the shaky geopolitical backdrop and inconsistent equity performance prevents any more protracted weakness.
• JPY is mid-table after volatility earlier in the week, with USD/JPY still running into cluster resistance layered between 149.83-85. Clearance here would be a bullish development, opening levels last seen on Oct3. This makes US/JN yield differentials and any BoJ communications the focus going forward.
• US housing data is in focus going forward, with housing starts and building permits top of the docket. Canadian housing data also crosses as well as speeches from Fed's Waller, Williams, Bowman, Barkin, Harker and Cook. Their appearances should be more informative relative to the Fed's Beige Book.

FX OPTIONS: Expiries for Oct18 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0500(E1.7bln), $1.0570-75(E626mln), $1.0593-00(E1.3bln)
• USD/JPY: Y149.45-50($625mln), Y150.00($568mln), Y150.50($769mln), Y151.00($762mln)
• GBP/USD: $1.2400-05(Gbp621mln)
• AUD/USD: $0.6190(A$1.5bln), $0.6440(A$1.3bln)
• USD/CAD: C$1.3600-10($866mln)
• USD/CNY: Cny7.2500($650mln), Cny7.3200($501mln), Cny7.3500($611mln)

EQUITIES: Bearish Theme in Eurostoxx 50 Futures In Play Following Last Week's Reversal

• A bearish theme in Eurostoxx 50 futures remains in play and last week’s reversal from 4256.00, the Oct 12 high, signals the end of the recent corrective cycle. Note too that resistance at the 50-day EMA, at 4246.50, remains intact. A clear break of this average is required to signal scope for a stronger correction. The bear trigger lies at 4082.00, the Oct 4 low. Clearance of this level would confirm a resumption of the downtrend.
• S&P e-minis found resistance last week at 4430.50 (Oct 12 high). The pullback means that - for now - resistance at the 50-day EMA, at 4425.45, remains intact, and this reinforces a bearish theme. A clear breach of the average is required to strengthen bullish conditions and this would open 4489.50, trendline resistance drawn from the Jul 27 high. On the downside, a deeper pullback would open 4235.50, the Oct 4 low and bear trigger.

COMMODITIES: WTI Futures Extend Latest Recovery

• WTI futures traded higher Friday and the contract has moved higher this week. The latest recovery has highlighted a key support at $81.50, the Oct 6 low. The medium-term trend condition remains bullish and an extension higher would expose the bull trigger at $95.03, the Sep 28 high. Clearance of this hurdle would confirm a resumption of the uptrend. For bears, a move through $81.50, would instead highlight potential for a stronger bear cycle.
• Gold traded sharply higher last Friday, clearing the 20- and 50-day EMAs. The yellow metal is firmer today. The rally strengthens the recent reversal and exposes the next key resistance at $1953.0, the Sep 1 high. Clearance of this level would further strengthen a bullish theme. Note that moving average studies still highlight a broader bear trend condition, however, prices would need to trade below Friday's low of $1868.8 to signal a reversal.