MNI US MARKETS ANALYSIS - Yield Slide Hits Reverse

US TSYS: Sizeable Retracement On Continued European Drivers

• Cash Tsys retrace approximately half of yesterday’s rally, with impetus coming from strong regional German CPI prints and gilts also moving lower after PM Truss continued to defend the mini budget.
• 2YY +7bps at 4.205%, 5YY +11.1bps at 4.059%, 10YY +9.5bps at 3.826%, and 30YY +6.8bps at 3.767%.
• TYZ2 trades 30 ticks lower at 111-29+ within yesterday’s wide range of 110-19 to 112-30, with volumes cooling after an above average European morning.
• Fedspeak from ’22 voters Mester and Bullard plus ’24 voter Daly, all of whom have spoken since the Sep 21 FOMC.
• Data: Final GDP print for Q2, with likely some attention on revisions vs GDI, plus weekly jobless claims data after the recent trend decline has pushed back against imminent recession fears.
• Bill issuance: US Tsy $50B 4W, $45B 8W bill auctions – 1130ET

STIR FUTURES: Fed Hike Expectations Helped Higher By German Regional CPI

• Fed Funds implied hikes take their cue from strong German regional inflation and ECB commentary, nudging higher from yesterday’s intraday recovery but still well off Monday highs.
• 68bps for Nov (+0.5bp) and rates of 4.22% for Dec’22 (+2.5bp), 4.49% for Mar’23 (+5bp) and 4.28% for Dec’23 (+7bp). Monday US session highs of 4.75% for the terminal and 4.52% for Dec’23.
• Fedspeak: Starts with Mester (’22) on CNBC at 0800ET before again with ECB’s Lane at 1300ET, along with Bullard (’22) and Daly (’24).

FOMC-dated Fed Funds futures implied rates at specific meetingsSource: Bloomberg

GERMANY: September Flash CPI Likely To Hit 10% Y/Y

• Following a slew of higher-than-anticipated state CPI data this morning, the implied German flash CPI print for September should be in the order of +1.9% m/m and +10.0% y/y. This is based on 88.1% of regional data available prior to the release.
• This implies a hot beat on headline inflation, while consensus was looking for +9.5% y/y and +1.5% m/m.
• Numerous regional reports highlighted the upward price pressure associated with the expiration of subventions including the 9-euro transport ticket and fuel rebate.
• Markets are currently pricing in 71bp of tightening at the ECB's October meeting for the ECB's late October, with the latest German inflation data further supporting a 75bp hike.
• Furthermore, the German government is set to announce an energy relief package at 1300 BST.
• French, Italian and the Eurozone aggregate flash CPIs are due tomorrow morning.

Source: MNI / individual state sources

Gov't To Announce EUR150-200bn Energy Price Relief Package @ 1400CET

Wires reporting that the German government is set to announced a 'comprehensive solution' to high gas and electricity prices at 1400CET [0800ET/ 1300BST] in Berlin.

• Handelsblatt reports that the relief package could cost EUR150-200bn.
• Chancellor Olaf Scholz (SPD), Economy Minister Robert Habeck (Greens) and Finance Minister Christian Lindner (FDP) are reported to have been negotiating the package in recent days. Lindner, from the pro-business liberal FDP and the most hawkish of senior ministers, is believed to have held out on a deal, raising concerns of compliance with this year's debt brake.
• Handelsblatt: "A solution has now been found: the gas price brake is to be financed via the Economic Stabilization Fund (WSF). This was set up during the corona pandemic to help companies. It actually expired in the summer, [but] now it should receive additional funds."

CHINA: USD/CNH Edges Lower as State Banks Ordered to Take Inventory

• USD/CNH slips away from session highs as Reuters cite sources in reporting that state banks have been told to take stock ahead of CNY offshore intervention.
• The piece writes that state banks were told to ask their offshore branches to review their holdings of both CNH and the USD, to make sure they are ready to be deployed.
• The pieces further adds that the scale of this round of dollar selling will be "rather big".

FOREX: Lofty German Regional Inflation Prompts Renewed Risk-Off

• German regional CPI data has unsettled risk sentiment further this morning, with just over 2/3 of regions having reported so far. The regional data - and in particular Bavaria - are posing upside risks to the national reading later today, and has prompted renewed core bond sales and some resilience in the EUR.
• Nonetheless, the USD is rallying against all others, partially reversing the rare downtick in the USD Index posted yesterday. Wednesday's high at 114.778 remains the cycle high, and EUR/USD's recovery off the day's lows may keep that mark out of reach for now.
• Further evidence of unsettled markets in equity space, with core indices off 1.5-2.0% in Europe. High beta and growth proxy currencies including the NOK are therefore suitably lower, putting EUR/NOK again within range of key resistance and the bull trigger at the mid-June highs of 10.5402.
• Focus looking ahead turns to the national German CPI print as well as Canadian monthly GDP, the weekly US jobless claims data as well as the tertiary Q2 GDP from the US.
• Central bank speakers include no fewer than 16 scheduled ECB appearances (a handful of governing council members appear more than once) as well as speeches from BoE's Pill, Ramsden, Tenreyro and Fed's Bullard, Mester and Daly.