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MNI US MARKETS ANALYSIS - Sizeable Strikes Dictate Pull Lower in USD/JPY

Highlights:

  • Sizeable USD/JPY strikes dictate pull lower in spot
  • Early Brandenburg CPI details decelerating German inflation
  • Curve sits bear steeper ahead of PCE, final UMich

US TSYS: Mild Bear Steepening Ahead Of PCE, Final U.Mich

  • Treasuries for the most part maintain yesterday’s post-data rally, ranging unchanged to 2.5bp cheaper across major benchmarks for a mild bear steepening on the day.
  • 2s10s at -18.5bp (+1bp) are off yesterday’s pre-data high of -13bps and last week’s -10.5bps which marked highs since July 2022.
  • TYZ3 at 106-08 (-03) trades at the high end of the day’s narrow range in consolidation of yesterday’s push to 106-13. Resistance is seen at 106-29 (20-day EMA). Volumes at 280k have eased back from particularly heavy overnight sessions seen this past week.
  • Data: Core PCE/personal incomes/spending, Sep (0830ET), U.Mich, Oct final (1000ET), Kansas City Fed services Oct (1100ET)
  • Fedspeak: VC Supervision Barr opening remarks at Fed payment conference – shouldn’t touch on mon pol in FOMC blackout (0900ET)

STIR: Fed Rate Path Consolidates Decline, Monthly PCE Ahead

  • Fed Funds implied rates have consolidated yesterday’s slide as a strong increase in weekly continuing claims and slightly softer than expected core PCE offset GDP exceeding expectations.
  • Ahead sees the monthly PCE report with focus on the latest monthly profile of core PCE, as well as to what extent consumers ran down their savings rate into the end of the Q3 to have helped drive personal consumption growth of 4.0% annualized in Q3.
  • Cumulative hikes from 5.33% effective: +0.5bp Nov (unch), +4.5bp Dec (unch), +7.5bp Jan (+0.5bp) for terminal 5.41%.
  • Cuts from terminal: 27bp to Jun’24, 79.5bp to Dec’24 (unch), the latter back at the high end of the rough 65-85bp range seen since US CPI on Oct 12 with its strong supercore print.

Brandenburg / Berlin Oct CPI Consistent With National Disinflation

The Brandenburg / Berlin CPI release today came well ahead of expectations - German state (and national) Oct flash CPI is due out Monday. The state release is here.
  • The 4.6% Y/Y reported by Brandenburg is a deceleration from 5.6% in Sept, led by energy prices (-3.2% Y/Y). CPI was 5.2% ex-food and energy (5.6% Y/Y prior). Berlin came in at 4.2%, vs 5.1% prior (3.8% ex-food and energy vs 4.1% prior).
  • Services were negative M/M in both, including in categories in closely eyed areas in the national print such as package holidays and transport, though positive Y/Y.
  • The M/M figures were -0.2% headline/ 0.0% core for Berlin, 0.0% headline / +0.1% for Brandenburg.
  • Berlin makes up around 6% of the national German weighting, with Brandenburg a further 3%. The figures are in line with expectations for the national print to soften vs September. German headline CPI consensus is 4.0% Y/Y vs last month's 4.5% with core 4.6%.
  • We would caution about reading too much into this data - Berlin and Brandenburg both heavily overstated the case on national headline in September, with Berlin undershooting on core and Brandenburg overshooting. Other similar sized states were much closer to the mark (Rhineland-Palatinate, Lower Saxony).

JPY: Demand for Low Delta Options Shows Markets Wary of JPY Fallout

  • A fourth consecutive session of gains for one-week implied vols in USD/JPY, rising from 6 points on Tuesday to near 11 points this morning. Moves come as the contract is beginning to capture several tier one risk events - most notably Tuesday's BoJ decision and FX reserves update (confirming any October FX intervention, or lack thereof), the Fed decision on Wednesday and now Friday's Nonfarm payrolls release.
  • The move in vols pushes the breakeven on a 1w USD/JPY straddle to ~180 pips from ~100 pips earlier in the week. Demand for lower delta options strategies is also evident: 10-Delta 1m butterfly option vols have risen from 0.9 points at the beginning of October, to YTD highs of 1.6 points this week.
  • Analyst consensus looks for the pair to moderate to Y145.00 at year-end, but options markets are pricing in greater implied odds of the pair ending the year above Y150: up to 41% this morning from 37% last Friday, and 35% one month ago.

FOREX: Sizeable USD/JPY Expiry Proves Magnetic

  • USD/JPY faded further off the week's cycle high of 150.78 across Asia-Pac hours, with prices narrowing in on the Y150.00 handle. A sizeable option strike at the handle ($4.4bln rolling off at Y150.00 - comprised of $2.95bln in calls and $1.4bln in puts).
  • Equity markets sit higher ahead of the Friday open, with US futures pointing to a positive open at the bell. A more reassuring set of corporate earnings after-market on Thursday have steadied sentiment, with Amazon's solid cloud unit results driving a 5.3% rally in the shares pre-market.
  • Firmer stock markets have provided a supportive backdrop for growth-proxies, putting AUD higher than all others in G10. AUD/USD has recouped around 80 pips off the cycle lows posted on Thursday, but markets need to top the 50-dma resistance of 0.6396 (a level that held on Sep29, Oct11 and Oct12).
  • The EUR shrugged off a sharp deceleration in Brandenburg CPI to 4.6% Y/Y from 5.6% prior, led by energy prices of -3.2%. EUR/USD is flat on the day, but remains at the lower-end of the week's range, leaving 1.0524 as intraday support and 1.0609 a near-term resistance - the 50% retracement for the pullback from 1.0694.
  • Data focus Friday rests on the September US personal income/spending release as well as the final University of Michigan sentiment survey for October. Fed's Barr is the sole central bank speaker, but the Fed's pre-decision media blackout period means he'll be steering clear of monetary policy.

FX OPTIONS: Sizeable Strike in USD/JPY Seizes Market Focus

More sizeable strikes rolling off at the Friday NY cut include a particularly notable $4.4bln rolling off at Y150.00 in USD/JPY - comprised of $2.95bln in calls and $1.4bln in puts. Other expiries include:
  • EUR/USD: $1.0500-10(E2.1bln)$1.0535-50(E2.4bln)$1.0575-80(E756mln)$1.0600(E1.3bln)
  • USD/JPY: Y149.00($749mln)Y150.00($4.4bln)Y150.50($534mln)
  • AUD/USD: $0.6325(A$544mln)
  • USD/CAD: C$1.3835($758mln)
  • USD/CNY: Cny7.3000($1.1bln)

BONDS: German Yields Lower Following Early Regional CPI Release

  • The earlier-than-expected releases of Brandenburg / Berlin CPI (German regional CPI data that had been expected to be released on Monday) looks to be the biggest driver of the German curve so far this morning. The numbers look lower than the early consensus for the national print would imply, but we caution against reading too much into these numbers as they haven't the strongest correlation with movements in the national print.
  • Nevertheless, over the past hour or so Schatz and Bund yields have been moving lower, with Schatz yields down over 2bp and below yesterday's intraday lows. At the time of writing, yields were around 2.2bp above the 9 October low of 3.030% while Euribor futures are also outperforming SONIA and SOFR futures on the day.
  • Gilts have moved higher this morning but the moves were generally before the German regional data and largely catching up with moves seen in USTs yesterday following the more-successful 5-year UST auction (relative to other recent UST auctions).
  • US Core PCE and US personal income / spending data remain the highlights for the rest of the day with Fed's Barr also due to speak (but in the blackout period so not on monpol).

EQUITIES: E-Mini S&P Remains Close to Thursday's Lows

  • A bearish theme in Eurostoxx 50 futures remains in play and price is trading closer to its recent lows. Support at 4082.00, the Oct 4 low and a bear trigger, has recently 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 4134.70, the 20-day EMA.
  • S&P e-minis maintain a softer tone and the contract traded lower Thursday. 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 4312.52, the 20-day EMA.

COMMODITIES: Gold Holds on to the Bulk of Recent Gains

  • WTI futures have traded lower this week as the pullback from $89.85, the Oct 20 high, extends. The medium-term trend condition is bullish and the recent 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 conditions are unchanged - the metal remains firm and is holding on to the bulk of its recent gains. Price 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.

DateGMT/LocalImpactFlagCountryEvent
27/10/2023-EU ECB's Lagarde Participates in Euro Summit
27/10/20231230/0830**US Personal Income and Consumption
27/10/20231300/0900US Fed's Michael Barr
27/10/20231400/1000**US U. Mich. Survey of Consumers
27/10/20231500/1100CA Finance Dept monthly Fiscal Monitor (expected)
30/10/20230030/1130**AU Retail Trade
30/10/20230630/0730***DE North Rhine Westphalia CPI
30/10/20230800/0900***ES HICP (p)
30/10/20230800/0900*CH KOF Economic Barometer
30/10/20230900/1000***DE Bavaria CPI
30/10/20230930/0930**UK BOE M4
30/10/20230930/0930**UK BOE Lending to Individuals
30/10/20230930/1030***DE Baden Wuerttemberg CPI
30/10/20231000/1100**EU EZ Economic Sentiment Indicator
30/10/20231000/1100***DE Saxony CPI
30/10/20231300/1400***DE HICP (p)
30/10/20231430/1030**US Dallas Fed manufacturing survey
31/10/20232330/0830*JP labor forcer survey
31/10/20232350/0850**JP Industrial production
MNI London Bureau | +44 203-865-3809 | edward.hardy@marketnews.com
MNI London Bureau | +44 203-865-3809 | edward.hardy@marketnews.com

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