MNI US MARKETS ANALYSIS - Michigan Watched for Inflation Expectations

US TSYS: Bull Flattening Amid Safe Haven Move

Treasuries have rallied in risk-off trade overnight Friday, with futures regaining more than half the ground lost following Thursday's post-CPI selloff and weak 30Y auction.

• The curve has bull flattened, with TY futures around session highs alongside dollar strength, equity weakness, and a jump in oil prices.
• These moves are consistent with a flight to safe havens ahead of the weekend amid conflict in the Middle East. Softer than expected China inflation data also helped.
• The 2-Yr Tsy yield is down 4.5bps at 5.0241%, 5-Yr is down 7.1bps at 4.621%, 10-Yr is down 8.2bps at 4.6145%, and 30-Yr is down 7.4bps at 4.7799%. Dec 10-Yr futures (TY) are up 18.5/32 at 107-26 (L: 107-09 / H: 107-26.5)
• Following Thursday's strong core CPI reading, today's data slate looks less impactful, with prelim October UMichigan sentiment taking most focus; we also get import/export prices.
• The lone scheduled speaker is Philly Fed's Harker speaking on the economic outlook.

OI Data Suggests Short Setting Dominated On Thursday

The combination of yesterday’s outright cheapening (driven by the September CPI metrics and the third soft round of Tsy coupon supply this week) and preliminary open interest data point to short setting in TU, UXY, US & WN contracts on Thursday. Meanwhile, FV & TY futures seemingly saw longs cover in net terms.

• The apparent short setting outweighed the apparent long cover in DV01 equivalent net terms, with a net ~$2mn of DV01 equivalent added across the futures curve on the day.

SOFR: OI Points To CPI Driving SOFR Short Setting On Thursday, Pockets Of Long Cover Seen

The combination of preliminary open interest readings and yesterday’s CPI-induced cheapening in SOFR futures points to short setting as the dominant positioning factor through the blues on Thursday.

• SOFR whites, reds and blues seemingly saw shorts set on net in pack terms (pockets of long cover were seen on a contract-by-contract basis), although the greens seemingly saw long cover in net terms

Macro Takeaways From Bank Earnings So Far:

JP Morgan:

• Average loans up 17%, while average deposits down 4%.
• Consumers and businesses "generally remain healthy", although, consumers are spending down their excess cash buffers. […] "This may be the most dangerous time the world has seen in decades."
• Home Lending net revenue was up 36% overall, but down 2% when excluding acquisition of First Republic. The decline was driven by lower net interest income largely due to tighter loan spreads.

Wells Fargo:

• Average loans down $2.3bln on the year driven by lower auto loans, residential mortgages and commercial real estate loans. Partially offset by higher credit card loans and commercial & industrial loans.
• Average deposits down 5%, with allowance for credit losses for loans up $1.8bln to $15.1bln. Deposit drop reflects consumer deposit outflows on consumer spending as well as customer migration to “higher yielding alternatives”.
• Allowance for credit losses for loans primarily for commercial real estate office loans, as well as higher credit card loan balances.
• Home lending down 14% on the year due to lower originations, lower servicing income.

RATINGS: Friday’s Slate

Potential rating reviews of note scheduled for after hours on Friday include:

• Moody’s on the European Union (current rating: Aaa; Outlook Stable)
• S&P on the Czech Republic (current rating: AA-; Outlook Stable)
• DBRS Morningstar on Malta (current rating: A (high), Stable Trend)

FOREX: Stubborn USD/JPY Sellers Keep Lid on USD Index

• Following the USD's corrective bounce into the Thursday close, the greenback is holding the bulk of gains, however EUR/USD and GBP/USD have drifted off lows. The USD/JPY rate has found persistent resistance layered just above Y149.80, with selling pressure preventing a broader break higher in the pair. The longer this holds, the more likely a further recovery in USD pairs ahead of the NY crossover.
• Elsewhere the SEK trades firmly, higher against all others in G10 as the Riksbank disclose the details of the first week of their FX hedging programme. The bank sold $390mln, but declined to sell any EUR across the period, helping pressure EUR/SEK and USD/SEK to pullback lows ahead of the NY crossover. EUR/SEK touched pullback lows of 11.5244 before stabilising. EUR/SEK support undercuts at 11.5172 ahead of the 200-dma of 11.4914.
• Chinese inflation data overnight came in below expected, at 0.0% Y/Y for CPI and -2.5% for PPI, a release that's been followed by further communications from the PBOC, who stressed that they expect the external pressure on the currency to ease going forward as the US-China yield differential normalizes.
• Focus ahead turns to the UMich sentiment survey, at which markets expect inflation expectations to stick at 3.2% over the 1-year, and 2.8% for the 5-10y horizon.

FX OPTIONS: Expiries for Oct13 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0450(E1.2bln), $1.0470-75(E4.5bln), $1.0515(E2.7bln), $1.0565-75(E2.6bln), $1.0625-35(E3.4bln), $1.0650(E1.3bln), $1.0700-20(E1.6bln)
• USD/JPY: Y146.00($628mln), Y146.50($850mln), Y148.00($705mln) Y148.95-15($1.2bln)
• EUR/JPY: Y158.25(E769mln)
• GBP/USD: $1.2145-50(Gbp602mln), $1.2245-55(Gbp572mln)
• USD/CAD: C$1.3490-00($595mln)
• USD/CNY: Cny7.3500($3.1bln)

EGBS: Bunds Flatter, Spreads Generally Wider

Bund futures print a little shy of best levels of the day after the previously alluded to headline mix, Asia-Pac equity weakness & geopolitical worry allowed the space to firm early on.

• The contract last shows +35, with German cash benchmarks 2-4bp richer as the curve flattens.
• EGB spreads to Bunds are generally wider on the day, with the geopolitical jitters playing a large part there.
• Greek paper is the exception to that rule, narrowing by ~2bp vs. Bunds.
• Headline flow out of Italy has been seen. Firstly, outgoing BoI Governor Visco played down the likelihood of BTP spreads reaching levels that would trigger ECB action, while pointing to the need for fiscal prudence. Meanwhile, the country’s Finance Minister noted that he cannot rule anything out re: ratings agency action after discussions with those bodies, although he noted that he does not fear a ratings downgrade.
• ECB speak saw Governing Council member Kazaks reaffirm that he is happy with current interest rate settings, while he left the door open to further hikes, if required.

GILTS: Off Best Levels, Light Bull Steepening Seen

Gilt futures are shy of best levels of the day, last showing +15.

• Cash gilts are 1-3bp richer, bull steepening.
• The early bid followed a similar move in wider core global FI markets, with a negative lead from Asia-Pac equities, perceptions re: Israeli-Palestinian tensions and softer than expected Chinese inflation data supporting.
• Comments from BoE Governor Bailey and UK Chancellor Hunt have been inconsequential for markets.
• The former pointed to more work to do re: inflation, while noting progress has been made. He also noted that policy settings are restrictive, which is a requirement at present.
• Hunt played down the likelihood of near-term tax cuts once again, while pointing to higher interest costs which have resulted in a deterioration in the UK’s financial position. As a result, he stressed that the Autumn Budget will be balanced, with caution re: the international situation set to be a factor.
• SONIA futures last show flat to 5.5bp richer through the blues, with the strip flattening.
• BoE-dated OIS is little changed to 2bp softer across the liquid contracts, with that strip also flattening.

EQUITIES: Eurostoxx Futures Continue to Push Back Against Bearish Trend

• 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 printed a higher high for a fifth consecutive session on Thursday before fading into the close. The index has narrowed in on the cluster of resistance at the 50/100-dmas for the Dec contract. 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 4431.80, with the medium-term outlook remaining bearish the longer price holds below this level.

COMMODITIES: Bearish Theme in Gold Reverses Further

• The stronger start to the week for WTI futures faded through the Wednesday close, although dips were put across the Thursday session. 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 $86.52, the 20-day EMA. A break would signal a possible reversal.
• The previously bearish theme in Gold reversed further Thursday, putting prices at the highest level since late September and printing five consecutive sessions of higher highs. The 50-day EMA sits above as key resistance at 1897.0, a break above would add to the evidence of a bullish reversal. To the downside, the focus is on $1804.9, the Feb 28 low and a key support.