MNI US MARKETS ANALYSIS - USD/JPY, US 10y Yields Hit New Highs

TSYS: Treasuries Rally After Setting Fresh Cycle Highs

• Cash Tsy yields have rallied off new cycle highs, initially seemingly on spillover from Gilts retracing before a broader bid most recently to leave them modestly richer across the curve. The front and very long ends underperform, the former coming as Fed Funds futures earlier priced a 5% terminal rate for the May’23 FOMC.
• 2YY +0.3bps at 4.559%, 5YY -2.5bps at 4.332%, 10YY -2.1bps at 4.113%, and 30YY -0.2bps at 4.123%.
• TYZ2 trades 3+ ticks higher at 110-03+ on solid volumes. It's off a session low of 109-19+ that forms new support having cleared the psychological 110-00 and 109-23+ (Nov 30, 2007 low, cont) after which lies 108-18+ (1.00 proj of Oct 4 -11-13 price swing).
• Data: Philly Fed for Oct, weekly jobless claims, existing home sales for Sep and the leading index for Sep.
• Fedspeak: Harker (’23 voter) then Governors Jefferson, Cook and Bowman
• Issuance: US Tsy $21B 5Y TIPS auction (91282CFR7) – 1300ET
• Bill issuance: US Tsy $65B 4W, $55B 8W bill auctions – 1130ET

STIR FUTURES: 5% Terminal Fed Rate

• Fed Funds implied hikes see a modest extension of yesterday’s large one directional increase through the US session especially further out into 2023.
• The 77.5bp for Nov 2 is little changed this week but beyond, showing 144.5bp to 4.53% for Dec’22, with a terminal 5% in May’23 (+7bp from 0600ET yesterday) and 4.70% for Dec’23 (+12bp).
• Ahead: Harker (’23 voter) discusses econ outlook with text at 1200ET whilst Governors Jefferson, Cook and Bowman are speaking at a careers event or giving opening remarks.
• Recap of latest from Bullard and Evans:
• Bullard (’22): Won’t prejudge what rate move he backs at Dec meeting but could opt to move 2023 tightening into 2022. Have to react if inflation doesn’t fall as forecast but also see possibility of good inflation dynamics in ’23. Fed shouldn’t react to declines in stock market.
• Evans (’23): Hopeful hikes shown in Fed Sept dot plot will be enough, Fed honing in on appropriate level of restrictiveness. Sees reasons inflation should improve before too long but risks to inflation are to the upside.

FOMC-dated Fed Funds implied rates Source: Bloomberg

BoE: Broadbent subtly hints at downside risks to market pricing

• Broadbent is describing the risks to market pricing as more to the downside here - but not directly saying market pricing isn't appropriate. So it's more on the dovish side - but I wouldn't say it's strongly dovish (although relative to most of this comments its more to the dovish side too). Some moves higher in gilts seem appropriate here, but we are already off the highs.
• "Whether official interest rates have to rise by quite as much as currently priced in financial markets remains to be seen."
• So overall he is pretty non-committal in terms of the appropriateness of market pricing here - but definitely pointing to the downside. Being non-committal is typical Broadbent - he often plays his cards close to his chest ahead of MPC decisions.
• He is still calling for higher rates: "The justification for tighter policy is clear. It remains the case that most of the overshoot in headline CPI inflation, relative to target, reflects the direct impact of higher import prices. It also remains likely that much of this is likely to fade as those prices stabilise."

EU: Summit Gets Underway This Afternoon; Energy Sec Issues To Dominate Talks

A European Council leaders summit (EUCO) gets underway this afternoon, with talks on reining in energy price rises and ensuring security of supply set to dominate.

• Leaders set to arrive from 1400CET (0800ET, 1300BST) onwards and deliver doorstep comments. After this, at around 1500CET the public roundtable will be shown ahead of the start of behind-closed-doors talks. Link to a livestream can be found here: https://audiovisual.ec.europa.eu/en/ebs/live/1
• Germany remains at odds with other major EU states including France and Italy over a price cap on Russian gas (with Germany opposed). The battle over energy supplies has spilled over into bilateral relations, with a Franco-German summit due next week postponed.
• Claims that the summit was moved to Jan to allow German ministers time for holidays has been dismissed by observers. Instead many claim divisions between Paris and Berlin on energy, as well as the war in Ukraine, have seen Franco-German relations deteriorate notably. Hard for EU to work effectively when its two most powerful member states aren't in agreement.
• Politico also highlights another cloud over the summit, disagreements between Poland and the EU on funds: "Warsaw — by its own admission, according to the Commission — is not complying with the EU’s Charter of Fundamental Rights. The EU executive has therefore suggested it can’t yet hand over money Poland is owed from the EU’s so-called “cohesion” funds[...] the prospect of Brussels withholding portions of Poland’s enormous €75 billion slice of the EU’s budget pie has sparked uproar in Warsaw. "

UK: Chair Of Backbench Conservative MPs Meets w/Truss At No.10

As we covered in our 0936BST bullet, chair of the 1922 Committee of backbench Conservative MPs Sir Graham Brady is now meeting with PM Liz Truss at 10 Downing Street.

• Brady is the only individual in the Conservative party who knows how many letters of no confidence have been submitted in the prime minister, and is the leading individual who is likely to decide when a critical threshold has been hit to say to the PM that she must resign or face an official confidence vote.
• Some speculation yesterday that it could be 33% or 50% of Conservative MPs. It is believed that at least 54 have sent letters of no confidence in, hitting the 15% threshold that would usually trigger a confidence vote (under present rules Truss cannot be challenged in her first year as leader, but these are subject to change).
• There remains no agreed to 'unity candidate' that could replace Truss that would garner support from all the various factions of the governing centre-right Conservative Party.

EUROPE ISSUANCE UPDATE:

Spain auction results
E1.75bln of the 0% May-25 Bono. Avg yield 2.663% (bid-to-cover 2.07x)
E1.218bln of the 1.95% Apr-26 Obli. Avg yield 2.669% (bid-to-cover 1.92x)~
E2.458bln of the 0.80% Jul-29 Obli. Avg yield 3.247% (bid-to-cover 1.86x).

France MT OAT auction results
E3.268bln of the 0% Feb-25 OAT. Avg yield 2.38% (bid-to-cover 2.7x)
E2.302bln of the 0.50% May-26 OAT. Avg yield 2.46% (bid-to-cover 2.7x)
E4.427bln of the 0.75% Feb-28 OAT. Avg yield 2.65% (bid-to-cover 2.25x)

France linker auction results
E509mln of the 0.10% Mar-36 OATi. Avg yield 0.61% (bid-to-cover 2.51x)
E646mln of the 0.10% Jul-36 OATei. Avg yield 0.76% (bid-to-cover 2.31x)
E345mln of the 0.10% Jul-53 OATei. Avg yield 0.61% (bid-to-cover 2.43x)

Latvia syndication update:
New long 4-year Mar-27 GMTN. Spread set at MS+105bp. Books in excess of E1.5bln.

FOREX: Political Risk Premium Conspires Against GBP

• Risk appetite has stabilised, however equities remain below the better levels of the Wednesday session, keeping the e-mini S&P near support of 3677.00. Government bond yields continue to creep higher, however, with the US 10yy hitting a new cycle high of 4.1778% in early European trade.
• Meanwhile, GBP remains heavy given the overwhelming political risk premium, with reports suggesting the UK could have a new Prime Minister by the end of the day. Reports are conflicting, with some seeing Truss forced out of office as soon as today, while others argue for a stay of execution until October 31st in order to press on with the much-needed fiscal policy U-turn. GBP is the poorest performer in G10, with GBP/USD narrowing the gap with weekly lows of 1.1148 just ahead of the NY crossover.
• Adding to GBP pressure were somewhat dovish comments from BoE's Broadbent, who commented that "Whether official interest rates have to rise by quite as much as currently priced in financial markets remains to be seen."
• At the other end of the table, EUR trades well, higher against most others as the currency continues to benefit from the downdraft in energy prices. European natural gas prices remain under pressure, close to the lowest levels since June and confirming the late summer price-spike has likely concluded.
• Focus turns to the US weekly jobless claims data as well as existing home sales for September. Fed's Harker, Jefferson, Cook and Bowman are all on the docket.

TURKEY: CBRT Cuts Rates by 150bps, A Larger Cut Than Expected

Turkey's CBRT cuts rates by 150bps to 10.50%, against expectations of a 100bps cut.

Full policy statement here: TCMB - Press Release on Interest Rates (2022-42)

Statement highlights:

• Again flags benchmark / commercial loan rate spread: "the spread between policy rate and the loan interest rates driven by the announced macroprudential measures is closely monitored."
• Still sees disinflation setting in next year: "Committee expects disinflation process to start on the back of measures taken"
• Looking to support jobs: " critically important that financial conditions remain supportive to preserve the growth momentum in industrial production and the positive trend in employment"
• Could pause rate cut cycle: "The Committee evaluated taking a similar step in the following meeting and ending the rate cut cycle."