MNI US MARKETS ANALYSIS - Resilient Consumer Seen Propping Up Q3 GDP

US TSYS: Consolidating Yesterday’s Bear Steepening, Important Docket Ahead

• Treasuries have held relatively narrow ranges overnight compared to the sizeable bear steepening seen through yesterday in a move helped by very strong new home sales. Benchmark tenors ranging from back unchanged to just 0.5bp richer on the day. 2s10s sits at -16.5bps.
• TYZ3 trades at 105-20+ in the middle of the day’s range off a low of 105-15+, again on decent volumes of 360k. The trend needle points south with support at the bear trigger of 105-10+ (Oct 19 low), whilst resistance is seen at 106-31 (20-day EMA).
• As for Fed pricing, there is almost nothing priced for next week’s FOMC decision, whilst the terminal is still seen with almost 10bp of hikes to Jan’24 followed by 73bp of cuts to end-2024.
• Data is firmly in focus today, including the first estimate for Q3 national accounts covering real GDP and core PCE (the latter giving a rough estimate for tomorrow’s September core PCE deflator), jobless claims and durable goods as well as various other monthly releases.
• Issuance shouldn’t be ignored either with a 7Y coming after yesterday’s 5Y tailed by almost 2bps, along with heavy bill issuance with $95B and $85B of 4-week and 8-week bills respectively.

US DATA: Consumption Expected to Prop Up Bumper Q3 GDP

Ahead of this Thursday's advance Q3 GDP release, sell-side broadly see the consumer solidly supporting growth across the quarter, drawing further from excess savings to do so. There are a handful of out-of-consensus calls (Danske at the lower-end, RBC at the upper-end), but most look for growth to weaken into year-end and through 2024:

• Bank of America expect growth to come in at 4.5%, with consumer spending increasing by 4.0% in 3Q. Strength in 3Q GDP is likely to be broad and not attributable to special factors, meaning the economy is beating expectations. By a long way.
• Citi see a "very strong" 4.7% figure, with consumption the strongest element of Q3 activity. They also expect a solid increase in most components of business equipment investment, while core PCE inflation should rise at the softest rate since 2020, but still above-target 2.5%.
• Danske Bank look for a below-consensus 3.3% q/q AR reading, and still foresee weakening towards the winter not least amid tightening financial conditions, and think the Fed is done with hiking rates.
• RBC flag the importance of this week’s advance US GDP release, for which they expect an above-consensus +5.0% read (consensus: 4.3%). They write that consumption will be the primary driver of growth this quarter, with the drawdown of excess savings countering normalizing incomes.
• Scotiabank write that the US economy is likely to continue to grow much faster than the non-inflationary speed limit, with consumer spending expected to figure prominently as a key driver ahead of the holiday shopping season.
• SEB see GDP growth accelerating to well above trend, citing the Atlanta Fed GDP Now indicating a +5.4% read. They expect to upwardly revise their 2023 GDP estimate of 2.0% but continue to see a slowdown in Q4 and during the first half of next year.
• TD Economics write that September consumer spending data could give a more important look at momentum into Q4 relative to the Q3 growth figure, and write that a moderation in both metrics would be welcome news for the Fed. They still expect one last hike, but recent tightening in financial conditions makes it a close call.

MNI ECB Preview - Hawks Back Down, ECB On Hold

• The ECB is not expected to deliver any material policy changes at the October meeting. In addition to clearly indicating in September that policy rates are at (or least very near) peak levels, the ECB will remain on hold given the recent downside inflation surprise, weak growth, delayed impact of previous tightening and notable dilution of hawkish pressure on the GC.
• Focus will now shift to the outlook for PEPP, reserve remuneration and the first rate cut. The ECB will indicate that the first of these is being discussed, the second may be addressed at a later date, while the third is not even up discussion at this juncture.
• Full preview including summary of sell-side views here: https://roar-assets-auto.rbl.ms/files/56338/ECB%20...

MNI BoC Review, Oct'23: Higher Bar For Hikes But Can’t Rule Them Out

EXECUTIVE SUMMARY

• The BoC left its overnight rate unchanged at 5% as heavily expected, with willingness to hike further.
• The tone was mixed, with greater inflation risks but a softer growth outlook amid clearer signs that monetary policy is biting -- the latter won out for a relatively modest rally in front end GoCs and lift in USDCAD to clear a bull trigger.
• We feel the bar to additional hikes has lifted but markets will remain sensitive to important local data releases, starting with monthly GDP on Oct 31. The single CPI report for Oct on Nov 21 likely has the most impact, especially if 3-month annualized rates remain at the high end of recent ranges or accelerate.
• Markets price around ¼ odds of a 25bp hike at the next meeting on Dec 6 and still see almost a 50/50 chance of such a hike with the January meeting. There is a little under 50bps of cuts priced to end-2024 whilst there is some consensus amongst analysts reviewed below for cuts to start around mid-2024.

PLEASE FIND THE FULL REPORT INCLUDING MNI ANALYSIS HERE:

BOCReviewOct2023.pdf

Evolution of economic forecasts: stronger inflation despite weaker growth

FOREX: USD/JPY Volatility Continues to Stir Speculation of Intervention

• Volatility across JPY markets takes the early focus in FX, as the post-5y auction weakness in Treasury futures persists into Thursday morning. The resulting widening of the US/JN yield differential worked further in favour of USD/JPY, pushing the rate to a new recovery high of 150.78. Shortly following the print, a sharp spike in volumes saw the rate correct lower, prompting a ~75 pip slide to new lows before stabilising.
• The price action was very reminiscent of a similar move in markets on October 17th, however the total volumes traded were considerably smaller on today's move. Recall that Kanda confirmed that the Japanese authorities will continue not to confirm intervention on a day-to-day basis, raising focus on the October 31st BoJ reserves release, at which markets will gain official confirmation of any market intervention.
• The USD Index has gained alongside the run higher in yields. The Greenback has firmed through the Oct 13 highs, opening next resistance at the 76.4% retracement for the October downleg. The bull trigger is still someway off at 107.348, but today's strength makes a test in the coming weeks more likely.
• Focus Thursday turns to the US advance GDP print, at which markets expect a bumper print that's continued to firm across the year, with some sell-side estimates even topping 5% for the Q/Q annualized reading. The ECB rate decision also takes focus. While no change in rates is expected, any discussion of the balance sheet will be a focus, and in particular any tweaks to bank reserve requirements.

FX OPTIONS: Expiries for Oct26 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0525-40(E1.4bln)$1.0550(E640mln)$1.0585-00(E1.6bln)
• USD/JPY: Y150.00-20($1.8bln)
• EUR/JPY: Y158.00-20(E520mln)
• USD/CAD: C$1.3800-10($1.2bln)

EQUITIES: Recent Losses Reinforce Bearish Trend in Eurostoxx 50 Futures

• A bearish theme in Eurostoxx 50 futures remains in play and last week’s extension lower reinforces current conditions. Support at 4082.00, the Oct 4 low and a bear trigger, has been cleared. This confirms a resumption of the downtrend and maintains the bearish price sequence of lower lows and lower highs. The focus is on the 4000.00 handle. Initial firm resistance is at 4142.30, the 20-day EMA.
• S&P e-minis maintain a softer tone and the contract is trading lower today. This week’s breach of support at 4235.50, the Oct 4 low and bear trigger, confirms a resumption of the downtrend and maintains the bearish price sequence of lower lows and lower highs. Moving average studies are in a bear-mode position too. The focus is on 4166.25, a Fibonacci projection. Initial firm resistance is at 4328.94, the 20-day EMA.

COMMODITIES: Medium-Trend Condition in WTI Futures Still Bullish Despite This Week's Losses

• WTI futures have traded lower this week as the pullback from last Friday’s $89.85 high extends. The medium-term trend condition is bullish and the latest move lower appears to be a correction. A resumption of gains would expose the bull trigger at $92.48, the Sep 28 high. Clearance of this hurdle would confirm a resumption of the uptrend. For bears, a move through $80.20, the Oct 6 low, would instead highlight a short-term top.
• Gold remains firm and is holding on to the bulk of its recent gains. The yellow metal has breached key resistance at $1953.0, the Sep 1 high, and $1987.5, the Jul 20 high. The break strengthens a bullish theme and opens $2003.4, a Fibonacci retracement point. Initial firm pivot support lies at $1915.3, the 50-day EMA. Clearance of this level is required to signal a short-term top and a potential reversal.