MNI US MARKETS ANALYSIS - Markets Sanguine, But Conscious of CPI Risks

US TSYS: Nascent Overnight Gains Fade With Focus On Inflation Data

Treasuries are a little stronger in overnight trade Thursday ahead of the September CPI report.

• Yields are little changed (+0.2bp to -0.9bp) across the curve, with 10Y (TY) futures off session highs and trading within Wednesday's ranges. The 2-Yr yield is up 0.2bps at 4.9841%, 5-Yr is down 0.9bps at 4.5678%, 10-Yr is down 0.2bps at 4.5563%, and 30-Yr is up 0.8bps at 4.7026%.
• Nascent gains in early European morning trade faded as oil prices and equities edged higher, with focus turning quickly to the latest inflation reading and jobless claims data.
• Analysts expect core CPI to print 0.3% M/M in September for the 2nd month in a row, with headline likewise 0.3% M/M, a deceleration from the energy-led jump up to 0.6% in August.
• Our full CPI preview is here.
• Attention will then turn to supply, with $20B 30-Yr Bond reopen, and potential for an announced upsizing of 6-/13-/26-week bills in keeping with increases earlier this week.
• Fed speakers include Dallas' Logan, Atlanta's Bostic, and Boston's Collins.

US TSYS: OI Points To Steepener Unwinds And Short Cover In Long End

The mix of preliminary open interest data and Wednesday's twist flattening of the futures curve point to an unwind of steepener positions, in addition to short cover in the long end.

STIR: OI Indicates Mix Of SOFR Positioning Swings On Wednesday

The combination of preliminary open interest data and yesterday’s price action point to the following positioning swings on the SOFR strip on Wednesday:

• Whites: Apparent short cover in SFRU3, with an apparent mix of long cover and short setting elsewhere.
• Reds: An apparent mix of short setting and long cover.
• Greens: SFRU5 seemingly saw modest short setting, with longs seemingly set elsewhere.
• Blues: An apparent mix of long setting and short cover.

EGB ISSUANCE UPDATE:

Italy 3/7/20-Year BTP and 12-Year BTP Green Auction Results:

• E2.75bln 3.85% Sep-26 BTP. Avg Yield 3.93% (Bid-to-cover 1.58x)
• E2.75bln 4.00% Nov-30 BTP. Avg Yield 4.37% (Bid-to-cover 1.48x)
• E1bln 4.45% Sep-43 BTP. Avg Yield 5.03% (Bid-to-cover 1.65x)
• E1.5bln 4.00% Apr-35 BTP Green. Avg. Yield 4.74% (Bid-to-cover 1.52x)

FOREX: Markets More Sanguine, Awaiting CPI Risk

• Currency markets are more sanguine early Thursday, with markets awaiting the key releases later today, with US CPI due, as well as the unofficial beginning of US earnings season. Delta Airlines, Walgreens and Fastenal are among the key reports due today.
• NZD sits softer against all others, with NZD/USD offered for a second session. The price has faded after a failed test of the 100-dma earlier this week at 0.6060, opening lower levels into the 0.5955 50-dma. Event risk includes the general election due this weekend, at which expectations are for the main parties to struggle to form a government without help from other parties.
• Oil prices have steadied after yesterday's rout, but hold close to the week's lower levels. There remains a small premium on the week following the beginning of the Israeli conflict, but the price action over the past few sessions has confirmed oil prices will be two-way for now. This keeps the likes of USD/CAD off the week's best levels, but unable to follow through with a test of key support at the 1.3546 50-dma.
• US CPI data takes focus going forward, with markets wary over the potential for another higher-than-expected reading after the Wednesday PPI release. Both the Y/Y and core Y/Y headlines are seen posting sequential declines, dropping to 3.6% and 4.1% respectively.
• The speaker slate is busy with an economic forum in Marrakech dominating the headlines. ECB members are out in full force, with Villeroy, Holzmann, Knot, Vujcic, Vasle, Panetta all making appearances today, as well as Fed's Logan, Bostic and Collins.

FX OPTIONS: Expiries for Oct12 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0500-20(E1.2bln), $1.0550(E935mln), $1.0575-90(E1.7bln), $1.0750-55(E2.8bln)
• USD/JPY: Y148.00($505mln), Y148.80-00($1.4bln), Y149.50-70($1.0bln)
• AUD/USD: $0.6425(A$659mln)
• GBP/USD: $1.2130-50(Gbp1.0bln)
• USD/CNY: Cny7.2700($1.5bln)

BONDS: Curve Bear Flattens, Futures Move Lower After Technical Resistance Holds

Gilt futures run 25 ticks cheaper on the day, after the early data-aided rally (which was driven by soft monthly production metrics) unwound.

• Technical resistance in gilt futures capped the rally, before a move away from best levels in wider core global FI and an uptick in crude oil prices helped apply pressure.
• Cash gilts are 2-5bp cheaper, bear flattening.
• BoE dove Dhingra provided familiar tones in a BBC interview overnight.
• More recently, comments from BoE chief economist Pill stressed that inflation remains too high, although he noted the debate re: the need for further tightening is “finely balanced,” with a lot of already enacted policy tightening still to work through the system.
• The BoE’s credit survey pointed to familiar areas of worry re: the domestic housing market.
• SONIA futures sit unchanged to 3bp cheaper through the blues, with the early bid more than unwound alongside the move in gilts.
• BoE-dated OIS is essentially unchanged across the curve.

EQUITIES: Bear Cycle in E-Mini S&P Still in Play, Despite Recent Recovery

• Eurostoxx 50 futures continue to push back against the recent bearish trend condition. Friday’s rally and the follow through early this week is, for now, deemed corrective in nature. Signs of further strength and a bottoming of prices would follow a break back above the 50-day EMA - a key level on Thursday at 4257.70. A break of this average would signal a possible short-term base, opening levels last seen in mid-September.
• The E-mini S&P trades higher for a fifth consecutive session, with the index holding just below the week’s highs ahead of the Wednesday cash open. Overall, a bear cycle remains in play, however downside momentum has paused in favour of a corrective rally. Pivot resistance remains above at the 50-day EMA at 4432.24, with the medium-term outlook remaining bearish the longer price holds below this level.

COMMODITIES: Bearish Theme in Gold Remains on Pause

• The stronger start to the week for WTI futures has faded into the Wednesday close. Recent bearish price action resulted in a break of support at $88.19, the Sep 26 low. The contract has also cleared support at the 50-day EMA, at $84.46. This signals scope for a deeper retracement towards the $80.00 handle and $79.57, a Fibonacci retracement point. Initial firm resistance is at $87.71, the 20-day EMA.
• A bearish theme in Gold was put on pause Monday after a second session of gains. Monday’s bounce put prices back above $1850. Nonetheless, the recent sell-off resulted in a break of support at $1901.1 and this was followed by a breach of $1884.9, the Aug 21 low. This confirmed a resumption of the downtrend that started early May. The focus is on $1804.9, the Feb 28 low and a key support. On the upside, firm resistance is at $1878.2, the 20-day EMA.