MNI US MARKETS ANALYSIS - PPI To Complete US Inflation Picture
Highlights:
- PPI set to complete US inflation picture
- A UK spending stimulus from tax free pension lump sums?
- USD/CAD extends winning streak to six consecutive sessions
- Treasuries have pared some of yesterday’s firming amidst low volumes ahead of a notable session, only modestly outperforming EGBs.
- Bank earnings are in focus early on, with JPMorgan and Wells Fargo to report shortly. Focus is then firmly on inflation matters (PPI before U.Mich expectations) before some potentially hawkish Fedspeak that could draw headlines on any November skip talk.
- PPI will be important after yesterday's CPI beat saw large contributions from some CPI-specific categories. We currently track analyst unrounded core PCE estimates at around 0.23% M/M.
- Cash yields are 2-3bp higher on the day, led by the long end.
- 2s10s at 11.6bps (+0.6bp) hold yesterday’s CPI/jobless claims driven steepening but is within last month’s ytd highs of 24bps.
- TYZ4 has seen session lows of 112-02 on soft cumulative volumes of 225k. It remains within yesterday’s wide range, with volatility around data sparking a low of 111-22 for fresh support after which lies 111-14 (50% retrace of the Apr-Sep bull cycle).
- Data: PPI Sep (0830ET), U.Mich consumer survey Oct prelim (1000ET)
- Fedspeak: Goolsbee opening remarks (0945ET), Logan panel discussion (1045ET), Bowman (1310ET, text + Q&A) - see separate STIR bullet.
Fed Rates Awaiting PPI Before A Hawkish Bowman
- Fed Funds implied rates hold within yesterday’s ranges ahead of PPI, giving back some of the hawkish reaction to Bostic’s openness to skipping in November (admittedly per his dot plot) but still easily off post-data lows.
- Cumulative cuts from 4.83% effective: 21.5bp Nov, 46bp Dec, 65bp Jan and 118bp June.
- Today’s Fedspeak sees focus on two of the most hawkish members with Gov. Bowman and possibly Logan. Bowman of course dissented against last month’s 50bp cut, preferring to cut by 25bp, and we haven’t heard from her since the stronger than expected payrolls and CPI reports.
- Logan said on Wed (day before CPI) that she favored a “more gradual path” back to normal for rates as she saw “meaningful risk” that inflation could stick above 2%.
- A dovish Goolsbee has already spoken on two separate occasions since CPI yesterday, saying the Fed must focus on both sides of the dual mandate with him not seeing convincing evidence the economy is overheating.
- 0945ET – Goolsbee (’25) gives opening remarks.
- 1045ET – Logan (non-voter) in panel discussion on Women in Financial Services conf (just Q&A)
- 1310ET – Gov. Bowman (voter) speaks on community banking (text + Q&A)
- Further ahead, Gov. Waller (voter) will be worth watching with a speech on the economic outlook at 1500ET on Monday.
US TSY FUTURES: OI Suggests Mix Of Positioning Swings During Thursday Twist
OI points to a mix of net long setting, short setting and long cover during Thursday’s twist steepening on the futures curve, with net short setting across FV, US & WN futures leading in terms of overall net DV01 impact.
| 10-Oct-24 | 09-Oct-24 | Daily OI Change | OI DV01 Equivalent Change ($) |
TU | 4,436,796 | 4,435,612 | +1,184 | +44,653 |
FV | 6,279,542 | 6,240,200 | +39,342 | +1,688,489 |
TY | 4,739,197 | 4,761,625 | -22,428 | -1,456,795 |
UXY | 2,195,296 | 2,220,081 | -24,785 | -2,230,644 |
US | 1,777,489 | 1,768,204 | +9,285 | +1,228,045 |
WN | 1,710,754 | 1,701,441 | +9,313 | +1,942,359 |
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| Total | +11,911 | +1,216,107 |
STIR: OI Suggests Cover Dominated In SOFR Futures On Thursday
OI suggests that a mix of short and long cover dominated in SOFR futures on Thursday, as markets digested the latest round of CPI data and the continuing geopolitical tension in the Middle East.
| 10-Oct-24 | 09-Oct-24 | Daily OI Change |
| Daily OI Change In Packs |
SFRU4 | 1,236,361 | 1,232,222 | +4,139 | Whites | -9,411 |
SFRZ4 | 1,082,126 | 1,092,290 | -10,164 | Reds | -18,951 |
SFRH5 | 993,378 | 989,789 | +3,589 | Greens | -10,422 |
SFRM5 | 851,503 | 858,478 | -6,975 | Blues | -12,775 |
SFRU5 | 679,474 | 686,597 | -7,123 |
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SFRZ5 | 932,646 | 946,334 | -13,688 |
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SFRH6 | 603,522 | 608,337 | -4,815 |
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SFRM6 | 603,024 | 596,349 | +6,675 |
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SFRU6 | 551,851 | 550,252 | +1,599 |
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SFRZ6 | 613,082 | 624,855 | -11,773 |
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SFRH7 | 365,529 | 361,929 | +3,600 |
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SFRM7 | 301,887 | 305,735 | -3,848 |
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SFRU7 | 250,117 | 258,988 | -8,871 |
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SFRZ7 | 254,692 | 252,606 | +2,086 |
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SFRH8 | 182,108 | 187,570 | -5,462 |
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SFRM8 | 156,326 | 156,854 | -528 |
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EQUITIES: Macro Takeaways From US Bank Earnings So Far:
Markets/FICC:
- JP Morgan: Markets revenue was $7.2 billion, up 8%. Fixed Income Markets revenue was $4.5 billion, flat to the prior year, including outperformance in Currencies & Emerging Markets and lower revenue in Rates.
- Wells Fargo: Markets was up 6% driven by higher revenue in rates products, structured products, and municipals, partially offset by lower revenue in equities
Net interest margins:
- JP Morgan: Net interest income was $23.5 billion, up 3%.
- BNY Mellon: Net Interest Income of 1.0bln, up 3% Y/Y, and up 2% Q/Q. Net interest margin of 1.16%, down 2bps Y/Y, up 1bps Q/Q.
- Well Fargo: Net interest income decreased 11%, due to higher funding costs reflecting customer migration to higher yielding deposit products, and deposit mix and pricing changes, including increased pricing on sweep deposits in advisory brokerage accounts, as well as lower loan balances, partially offset by higher yields on earning assets. Expects net interest income to 9% lower than 2023 for the full year.
The consumer:
- JP Morgan: Home Lending net revenue was $1.3 billion, up 3%, driven by higher net interest income, partially offset by lower servicing and production revenue.
- Wells Fargo: Retail mortgage loan originations of $5.5bln, up from $5.3bln in Q2, but down from $6.4bln this quarter last year. 20% of originations were refinances, the highest rate since Q4 last year and above the 16% seen in this quarter of 2023.
Macro:
- JP Morgan: “Recent events show that conditions are treacherous and getting worse. There is significant human suffering, and the outcome of these situations could have far-reaching effects on both short-term economic outcomes. While inflation is slowing and the U.S. economy remains resilient, several critical issues remain, including large fiscal deficits, infrastructure needs, restructuring of trade and remilitarization of the world."
UK FISCAL: A spending stimulus from tax free pension lump sums?
- In the Budget on 30 October there there is a lot of speculation surrounding changes to pension regulation / taxation. The most likely changes to pension in the upcoming Budget surround two aspects:
- The most significant is potential changes to the tax free lump sum limit. At present retirees over the age of 55 can withdraw up to GBP268k tax free from their pension pot as a lump sum (with any withdrawals from their pension pot above this lump sum to income tax). There is a lot of speculation that the cap on this tax free lump sum could be reduced to GBP100k. Anecdotal evidence suggests that demand to withdraw tax free lump sums from pension pots have increased as people look to front run the potential policy introduction. Some of this money may be used to pay off existing debts (e.g. mortgages, credit cards etc) but some of this money may be spent faster than had previously been anticipated, possibly leading to an increase in consumption in coming quarters. If this is the case, this could offset some of the other expected fiscal tightening.
- Second, changes to how inheritance tax treats pensions. At present if you die before claiming your pension or under the age of 75, your pension pot can be passed on to your beneficiaries without being eligible for inheritance tax. There seems to be a high probability that this loophole will be changed and pension pots will be eligible for inheritance tax in the future. There is very little that can be done for prior contributions, and although some HNW individuals may contribute less to pensions, they are unlikely to reduce their savings rate - instead diverting savings into other investments.
- Speculation had originally surrounded making changes to pension contributions are paid in "tax free" so higher rate tax payers are able to pay into a pension and avoid paying 40% tax - there had been some talk this might be reduced down to e.g. 30%, but the latest reports suggest that the Chancellor has rejected this proposal as it would be too hard to implement for public sector workers on final salary pension - potentially triggering 5 figure tax bills. As the speculation has died down, we don't think there will have been substantial extra pension contributions ahead of the Budget.
- Still likely to be under consideration is paying national insurance on pension contributions. Or even more likely employers having to pay national insurance on pension contributions - which could be equivalent to more than a 1ppt increase in the employer national insurance rate. If this is changed, it could cause some employers to make their pension schemes less generous, but we don't think there will have been a huge increase in employees trying to maximise their contributions in anticipation of this.
EGB FUNDING UPDATE: Debt Brake 2025 Net Issuance Allowance To Raise by E5.2bln
Net issuance in Germany is likely to increase above the previous E51.3bln plan in 2025 according to multiple media sources which are citing a government paper.
- However, lower economic activity also implies lower tax revenue, and hence the increase in net issuance is unlikely to allow any additional spending measures, but will mean that the German government is borrowing more to deliver the same spending.
- The figures come on the back of the German government's recent downward revisions of their GDP estimates (2024 -0.2% now vs +0.3% prior, 2025 1.1% now vs 1.0% prior).
- Specifically, they see a total net issuance allowance of E56.5bln in 2025, E5.2bln higher than planned in the preliminary 2025 budget.
- 2025 budget parliamentary discussions are yet to be finished, the budget is scheduled to be passed by December and changes are possible until then. Even after the initial budget is finalised, a supplementary budget may be introduced, as was the case this year.
- We've flagged upside risks to 2025 net issuance plans previously (2024-2025 Budget Details Appear Optimistic For Debt Issuance - MNI, July 17).
EGB FUNDING UPDATE: France 2025 Issuance Plan and 2024 Update
- France plans to issue E300bln of MT/LT OATs net of buybacks in 2025 up from E285bln this year and E270bln last year. We think that this is broadly in line with expectations. For 2024 there is no change to the OAT issuance target.
- However, there is a notable increase in bill issuance for 2024 now with a net E35.3bln planned (up from the Budget estimate of a E5.2bln increase). This higher stock of bills will only be marginally reduced next year in the plans (by E1.5bln).
- The 2025 figures include a financing requirement of E306.7bln and budget deficit of E135.6bln, which the AFT notes takes into account E6.5bln of amendments that the "that the Government intends to submit to Parliament during the parliamentary debates." Without these amendments, the bill issuance target for 2025 would be a E5.0bln increase in the planned stock.
- The 2024 figures include an increase of E19.7bln in the deficit to be financed and a reduction in E7.4bln from "other cash sources" which the AFT notes is "mainly as a result of discounts at issuance." Between them these two factors contribute E29.6bln to the additional E30.1bln of planned bill issuance relative to the original 2024 Budget.
- The chart below shows that weekly BTF auction sizes are already notably higher than they were in 2023 with the average amount sold in the first round E886mln higher than last year. As can also be seen, auction sizes from mid-July 2024 onwards have been higher than the average through the first half of the year. So the higher bill issuance target off the back of the wider deficit estimate (which itself has shown up in the monthly budget numbers) is also unlikely to be a surprise to the market.
EGB ISSUANCE UPDATE:
Italy auction results
- E2bln of the 3.45% Jul-27 BTP. Avg yield 2.68% (bid-to-cover 1.70x).
- E1.5bln of the 2.65% Dec-27 BTP. Avg yield 2.67% (bid-to-cover 1.79x).
- E3.5bln of the 3.45% Jul-31 BTP. Avg yield 3.19% (bid-to-cover 1.61x).
- E1.25bln of the 4.15% Oct-39 BTP. Avg yield 3.88% (bid-to-cover 1.87x).
- E1.25bln of the 3.45% Mar-48 BTP. Avg yield 4.04% (bid-to-cover 1.90x).
FOREX: USD/CAD Extends Winning Streak to Six Consecutive Sessions
- JPY sits very modestly weaker against most others in G10, keeping the bull trend posted off the 139.58 lows intact, and the Y150.00 handle a key psychological target. Gains are perhaps more notable in EUR/JPY, which sits just below the intersection of horizontal resistance layered between 163.49-61 and the 200-dma of 164.37.
- Newsflow and currency-relevant headlines have been few and far between early Friday, keeping focus on the digestion of yesterday's US data as well as the upcoming policy briefing from the Chinese Ministry of Finance over the weekend. As a result, risk sentiment is mixed, evident in equity futures markets sitting in modest negative territory while the US 10y yield holds firmer - albeit well off yesterday's extremes.
- The winning streak in USD/CAD continues, with Thursday trade confirming six consecutive sessions of higher highs and higher lows - keeping the bull trend intact and recovery highs of 1.3775 as the first target, before 1.3800 and 1.3846, the mid-April highs.
- The focus on US inflationary pressures are likely to remain the focus Friday, with PPI data set to cross as well as the prelim UMich sentiment survey. Canadian jobs data for September is also due, with the unemployment rate set to rise to 6.7% from 6.6% - a shift that should keep the BoC on a firm easing bias ahead.
INR: USD/INR Hits Fresh Record High Amid Rising Equity Outflows, Dovish RBI
USD/INR has finally breached 84.00 following ongoing RBI intervention over the past ~2 months to protect further rupee downside beyond this level.
- Rising crude prices and Middle East tensions have underpinned the rally in USD/INR from the September lows, while the RBI rate decision earlier this week – which is seen to have opened the door to the start of rate cuts later in the year – will have added to the pressure on the local currency.
- In addition, foreign outflows from local stocks and bonds have worsened the near-term outlook - Indian equities saw outflows of -$438m yesterday, with outflows over the past 5 sessions totalling -$5.04bn. Meanwhile, data compiled by Bloomberg shows bonds have seen $125m of outflows this month.
- According to a VP at a local bank who spoke to Bloomberg, “There were interventions at 83.98 and 83.99 levels today as well but the outflows from assets have been very strong, especially from equities.”
COMMODITIES: WTI Futures Holding Onto Bulk of Thursday's Gains
- WTI futures traded higher Monday as the pair extended the rally that started Oct 1. Tuesday’s reversal is for now, considered corrective. Recent gains suggest potential for a continuation higher near-term. Attention is on $77.40, the 76.4% retracement of the Jul 5 - Sep 10 bear leg. This level has been pierced, a clear break of it would strengthen a bullish condition. On the downside, initial firm support to watch is $71.99, the 20-day EMA.
- The latest short-term retracement in Gold is considered corrective. The trend condition is unchanged and bulls remain in the driver’s seat. Moving average studies are in a bull-mode set-up too, highlighting a clear uptrend and positive market sentiment. A resumption of gains would refocus attention on $2690.2, a Fibonacci projection. Firm support lies at $2616.3, the 20-day EMA. It has been pierced, a clear break would signal scope for a deeper retracement.
EQUITIES: Next Resistance for Eurostoxx 50 Futures Remains Out of Reach for Now
- Eurostoxx 50 futures finished Wednesday trade well, but next resistance remains out of reach for now at the September highs. Key short-term support to watch is 4934.85, the 50-day EMA. A clear break of this EMA would signal scope for a deeper retracement. Recently, the contract breached resistance at 5024.00, the Sep 3 high. This confirmed a resumption of the bull leg that started Aug 5 and cancels a recent bearish theme. Key resistance and bull trigger is 5106.00, the Sep 30 high.
- A bull cycle in S&P E-Minis remains intact and the latest shallow pullback still appears to be a correction. Price is trading closer to its recent highs. MA studies are in a bull-mode setup, highlighting a dominant uptrend and positive market sentiment. Sights are on 5868.50, a Fibonacci projection, and 5900.00 further out. Initial support to watch is 5759.36, the 20-day EMA. It has been pierced. Key support lies at 5686.59 the 50-day EMA.
Date | GMT/Local | Impact | Country | Event |
11/10/2024 | 1230/0830 | *** | US | PPI |
11/10/2024 | 1230/0830 | * | CA | Building Permits |
11/10/2024 | 1230/0830 | *** | CA | Labour Force Survey |
11/10/2024 | 1345/0945 | US | Chicago Fed's Austan Goolsbee | |
11/10/2024 | 1400/1000 | ** | US | U. Mich. Survey of Consumers |
11/10/2024 | 1430/1030 | ** | CA | BOC Business Outlook Survey |
11/10/2024 | 1445/1045 | US | Dallas Fed's Lorie Logan | |
11/10/2024 | 1600/1200 | *** | US | USDA Crop Estimates - WASDE |
11/10/2024 | 1710/1310 | US | Fed Governor Michelle Bowman | |
12/10/2024 | - | *** | CN | Money Supply |
12/10/2024 | - | *** | CN | New Loans |
12/10/2024 | - | *** | CN | Social Financing |