MNI US MARKETS ANALYSIS - Treasury Curve Inching Higher to Kick Off Fed Week

US TSYS: Under Pressure, FOMC Focus As Much on December as November

• With 75bp expected, as much focus on year end guidance as current annc:
  • A step-down to a 50bp hike at the following meeting looks like the path of least resistance for now – the question is, how strongly does the FOMC seek to express that view.
  • In a close call, we expect only limited changes to the Statement – but anticipate that Chair Powell will signal that the Committee is currently eyeing either 50bp or 75bp in December, with the decision to be data-dependent.
• In the meantime, Monday data on tap:
  • Oct-31 0945 MNI Chicago PMI (45.7, 47.0) at 0945ET
  • Oct-31 1030 Dallas Fed Manf. Activity (-17.2, -18.5), 1030ET
• Bill auctions kick off limited Tsy supply this week: US Tsy $57B 13W, $45B 26W bill auctions at 1130ET

STIRS: "Step-Down" To 50bp In Dec Not A Done Deal As Fed Week Begins

US rate futures are lower to open Federal Reserve decision week.

• The OIS curve shows end-2022 hike pricing at 135bp, up a couple of basis points vs Friday and suggesting that the "step down" from a 75bp pace to 50bp at December's FOMC (which would be signalled by a 125bp pricing) remains a matter of debate. MNI's FOMC preview was published Friday and is available here.
• Terminal Fed hike pricing creeping a little higher on OIS - peak seen in May 2023 at 4.945%, getting closer to the highest levels seen on Oct 25 just above 5%.
• Weakness in Eurodollars is focused in reds, off 9-9.5 ticks and close to session lows. Late-2023 contracts are printing the weakest levels since Oct 25, with Dec '23 30bp below Friday's peak.
• Attention later this morning turns to MNI Chicago PMI and Dallas Fed Manufacturing.

BRAZIL: Lula edges Bolsonaro

• Left-wing challenger Lula has won Brazil's Presidential election race in the tightest election in modern history: Lula won 50.9% of the popular vote vs. Bolsonaro's 49.1%.
• Analysts see the tight outcome as limiting Lula's agenda considerably, but the results should be market-positive, with little sign of domestic unrest just yet. Brazilian ETFs have surged ahead of the open later today, suggesting some Brazilian outperformance later Monday.
• Incumbent Bolsonaro will not contest the outcome, according to Antagonista. However, Bolsonaro will not call Lula to congratulate him either.
• Globo reported that lawmakers and ministers who wanted to speak with Bolsonaro after the result was announced were told that the President would not be meeting anyone, including his closest aides.
• Supreme Electoral Court chief Alexandre de Moraes has also played down the potential for election outcome being challenged, based on the conversations he had with both candidates before announcing the official result.

FOREX: Greenback Makes Modest Gains, But Markets Lack Conviction

• The greenback is making modest gains early Monday, with markets gearing a positioning for the Fed rate decision on Wednesday. GBP is at the other end of the table, falling against all others to further unwind some of the recent outperformance to put GBP/USD either side of 1.1550.
• All-in-all, currencies lack conviction or direction ahead of a particularly busy week, with rate decisions due from the Australia, US, UK and Norwegian central banks - all of which are seen tightening policy further.
• Weakness across both onshore and offshore Chinese currencies persists, with the latest wave of pressure following overnight reports from BBG, who cite sources in reporting that the US has raised the idea of export control regimes for China with their European partners - mimicking the patterns and techniques used with Russia. More detail could follow in December, as EU and US officials look to draw up a roadmap for their high-level trade forum.
• Focus turns to the MNI Chicago PMI for October, seen rising to 47.0 from 45.7 previously. The prelim Eurozone CPI estimate is also due as well as speeches from ECB's Visco and Lane. The Fed remain in their pre-decision media blackout period.

FX OPTIONS: Expiries for Oct31 NY cut 1000ET (Source DTCC)

• EUR/USD: $0.9750(E1.4bln), $1.0000(E2.4bln)
• EUR/JPY: Y140.00($825mln)
• USD/CAD: C$1.3900($630mln)