MNI US MARKETS ANALYSIS - NOK on Top as CPI Argues in Favour of Dec Hike

US TSYS: Bear Steeper With TYZ3 Near Support, U.Mich and Fedspeak Ahead

• Cash Treasuries trade 1-3bp cheaper, bear steepening as 30s lead the sell-off in a continuation of pressure from yesterday’s very weak auction. 2s10s is at the lower end of the past month’s range at -39bps.
• The front end meanwhile consolidates the sell-off seen after Chair Powell yesterday which has seen 2024 cut pricing trimmed from 88bp to 82bp despite a broadly similar message to the Nov 1 FOMC press conference.
• TYZ3 at 107-13+ trades close to late yesterday lows of 107-10+ amidst strong volumes of 460k. It has come close to testing support at the 20-day EMA of 107-08+, clearance of which could pave way for a notable push lower to 105-27+ (Nov 1 low).
• Data: U.Mich Nov prelim (1000ET) after a surprisingly large upward revision to 1Y inflation expectations in the Oct final.
• Fedspeak: Logan (’23 voter), Bostic (’24) and Daly (’24), with Daly speaking for the first time in a month – see the STIR bullet for details.

STIR: Fed Rate Path Consolidates Powell Shift Higher

• Fed Funds implied rates consolidate yesterday’s shift higher after a hawkish reaction to Powell yesterday mostly maintained similar comments to his Nov 1 FOMC appearance.
• Additional tightening is seen peaking with a cumulative 5.5bp over the next two meetings.
• The first cut from current levels is seen in July (cumulative 34bp) having shifted back from June pre-Powell.
• Cumulative cuts from peak to end-2024 stand at 82bp vs 88bp pre Powell and 87bp pre payrolls.

• Today’s Fedspeak schedule, Daly for the first time in a month:
• 0730ET Logan (’23) at ECB money markets conference (text, no Q&A) – last heard Nov 7 (inflation readings look like trending toward 3% not 2%, must stay focused on curbing inflation in timely way).
• 0900ET Bostic (’24) on economic mobility (no text, Q&A) – last heard Nov 11 (policy likely sufficiently restrictive, will stay restrictive until sure about 2% inflation)
• 1300ET Daly (’24) on CNBC - last heard Oct 10 (need more improvement for nonhousing services inflation, tight conditions could be equivalent to another rate hike)

OI Points To Short Setting Dominating On The SOFR Strip Post-Powell

The combination of the bear steepening of the SOFR strip and preliminary open interest data points to short setting as the dominant positioning factor across the SOFR strip on Thursday, with Fed Chair Powell’s latest appearance and the poorly received 30-Year Tsy auction providing the most notable drivers for the space.

• The whites appeared to see the most pronounced round of short setting on a pack basis, with the net pack OI swings then operating on a sliding scale through the blues.
• Pockets of apparent long cover were noted in all packs.

OI Suggests Long Cover Dominated On Thursday As Supply & Powell Weighed

The combination of Thursday’s 30-Year Tsy supply/Powell-induced cheapening and preliminary open interest data points to a mix of short setting and long cover on Thursday.

• TU, UXY and WN futures seemed to see fresh shorts added, while FV, TY and US futures seemingly saw longs cover.
• TY futures saw the largest DV01 adjusted OI swing on the day.
• The impact of the aforementioned rounds of apparent long cover comfortably outweighed the rounds of apparent long setting in net terms, with total Tsy futures OI comfortably lower on the day as a result.

RATINGS: Friday’s Ratings Slate

Rating reviews of note scheduled for after hours on Friday include:

• Fitch on Italy (current rating: BBB; Outlook Stable) & Poland (current rating: A-; Outlook Stable)
• Moody’s on Croatia (current rating: Baa2; Outlook Stable) & Lithuania (current rating: A2; Outlook Stable)
• DBRS Morningstar on the European Union (current rating: AAA, Stable Trend), Luxembourg (current rating: AAA, Stable Trend) & Poland (current rating: A, Stable Trend)

EUROPE ISSUANCE UPDATE:

Italy Auction Results:

• E3bln of the 3.85% Sep-26 BTP. Avg yield 3.75% (bid-to-cover 1.54x).
• E1.5bln of the 3.50% Mar-30 BTP. Avg yield 4.07% (bid-to-cover 1.63x).
• E2bln of the 4.00% Nov-30 BTP. Avg yield 4.21% (bid-to-cover 1.5x).
• E1.5bln of the 3.25% Mar-38 BTP. Avg yield 4.84% (bid-to-cover 1.45x).
• E1bln of the 4.50% Oct-53 BTP. Avg yield 5.05% (bid-to-cover 1.78x).

GBP: Options dynamics make for a calmer balance of risks through year-end

• Front-end GBP vols are seen inching higher Friday, with one-week implied capturing both the UK and US CPI releases, as well as Friday retail sales.
• The front-end of the risk reversals curve has improved in tandem - with the one-week contract touching 0.00 (i.e. No vol skew in favour of either puts or calls) for the first time in three years.
• This sentiment is reflecting in the notable flattening of the GBPUSD SMILE, which traded sharply skewed in favour of OTM puts at the beginning of October, but now sits close to symmetrical thanks to the recovery in 1w GBP/USD call vol over the same period.
• This makes for a far more balanced near-term outlook for the pair, evident in the multi-year low print for 10d 3m butterfly vol this week.
• The more sizeable strikes rolling off at the tail-end of next week suggest an element of upside risk in the pair, with cumulative strikes of over Gbp2.0bln rolling off between $1.2250-1.2345 across the Weds - Friday NY cuts.

FOREX: NOK on Top as CPI-ATE Re-Accelerates, Raising Likelihood of Dec Hike

• NOK comfortably outperforms, rising against all others in G10 and working against the weakness in the currency across the first half of the week. EUR/NOK has reversed off the week's highs of 12.0062 on the back of the higher-than-expected inflation release that put CPI-ATE - the key input for Norges Bank policymaking - back to 6.0% vs. Exp. 5.6%. On the margins, the inflation release should work in favour of a 25bps rate hike from the Norges Bank at the December meeting, a view that's become more popular among sell-side analysts.
• Elsewhere, the USD Index is respecting recent ranges, with the 50-dma providing a solid short-term anchor at 105.854. Resultingly, EUR/USD holds close to the week's lower levels, with 1.0656 and 1.0623 marking the next downside levels.
• AUD is the poorest performer, with risk proxies and high beta currencies slipping alongside weaker core equity markets. US futures are indicating a mixed open on Wall Street Friday, led lower by tech names.
• Preliminary UMich sentiment data takes focus Friday, with markets expecting the uptick in the one-year ahead inflation expectation evident in the October read to moderate back down to 4.0%. The central bank speaker slate should prove to be of more interest., as ECB's Lagarde and Nagel make appearances as well as Fed's Logan, Bostic and Daly.

FX OPTIONS: Expiries for Nov10 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0630-50(E1.1bln), $1.0850(E813mln)
• USD/JPY: Y150.00($1.4bln), Y151.00($979mln)
• GBP/USD: $1.2190-95(Gbp686mln)
• AUD/USD: $0.6425-30(A$685mln)
• USD/CAD: C$1.3590-10($1.2bln), C$1.3640-50($1.1bln), C$1.3800($543mln)
• USD/CNY: Cny7.2700($1.2bln), Cny7.3000($1.2bln)

EGBS: Remain Softer Following Yesterday's US Moves

Core EGBs remain softer with curves bear steepening following events in the US post-close, with futures sitting close to intraday lows at typing.

• Catalysts in the US were the weak 30Y auction and hawkishly perceived remarks from Fed Chair Powell (though, as MNI noted at the time, Powell's remarks were broadly in line with the latest FOMC presser). Domestic headline flow has been light otherwise with little on the data docket.
• Bund futures are down -0.84 today at 129.60 with 10y Bund yields up 8.4bp at 2.729% and Schatz yields up 4.7bp at 3.048%. OATs sit similarly at mid-long tenors but 2Y yields are only up 3.0bps at present.
• In the periphery space, spreads to Bunds are a touch tighter. The 10-Yr BTP/Bund spread is currently 1.0bps tighter at 185.4bps. This morning saw Italian supply, industrial production data and news that the ECB have accepted Scope Ratings in the Eurosystem framework - none of which weighed significantly on BTPs.
• ECB-speak once again highlights the agenda today, with Lagarde speaking at 1230 GMT and Nagel at 1520GMT.

GILTS: Remaining Under Pressure, Curve Steeper

Gilt futures extended the early sell off to print as low as 94.80, with spill over from weakness in U.S. Tsys and EGBs the most obvious drivers in early Friday trade. A light uptick in oil may also be providing some pressure.

• Futures traded as low as 94.80 before moving back to around 94.85, ~130 ticks off yesterday’s multi-week high and -70 or so on the day last.
• Technically, the contract still maintains a short-term bullish tone. Firm support to watch is 92.63, the Nov 1 low, while initial support is seen at 94.03, the 50-day EMA.
• Cash gilt yields run 1.5-7.0bp higher as the curve steepens, with 2s10s and 5s30s ticking away from month-to-date lows.
• SONIA futures last show +1.0 to -8.5 through the blues, twist steepening, but sitting a touch above worst levels of the day.
• BoE-dated OIS shows flat to 5.5bp firmer across the liquid contracts.
• As we have noted on several occasions, domestic data failed to provide any tangible impetus for the space.
• Expect wider market inputs to remain at the fore given the lack of slated UK event risk evident ahead of the weekend.

EQUITIES: E-Mini S&P Close to Recent Lows Following Thursday's Late Sell-Off

• A short-term bull cycle in Eurostoxx 50 futures remains intact and the contract traded higher Thursday, resuming the current uptrend. Price has recently traded through resistance at both the 20- and 50-day EMAs. The clear break of the 50-day EMA, at 4185.90, signals scope for a stronger bull cycle and opens 4256.00, the Oct 12 high. On the downside, key support and the bear trigger lies at 4001.0, the Oct 27 low.
• S&P e-minis maintains a firmer short-term tone and the contract is trading higher today. The latest recovery still appears to be a correction, however, price has cleared the 20- and 50-day EMAs. The break of the 50-day average - a key short-term pivot level - has strengthened bullish conditions. Sights are on 4430.50, the Oct 12 high and 4435.50, trendline resistance drawn from the Jul 27 high. Key support and the bear trigger is at 4122.25, the Oct 27 low.

COMMODITIES: Bearish Theme in WTI Futures Remains in Play

• A bearish theme in WTI futures remains in play and the contract has traded sharply lower this week. The move down has resulted in a break of support at $80.20, the Oct 6 low. The breach highlights a stronger short-term reversal and a continuation lower would pave the way for a move towards $74.26, the 76.4% retracement of the May 4 - Sep 28 bull run. On the upside, initial firm resistance has been defined at $83.60.
• The latest pullback in Gold appears to be a correction - for now - and the trend condition remains bullish. Moving average studies are in a bull-mode set-up, highlighting a rising trend. A resumption of gains would open $2022.20 next, the May 15 high. Initial firm pivot support lies at $1938.1, the 50-day EMA. Clearance of this level is required to signal a short-term top and the potential for a deeper retracement.