MNI US MARKETS ANALYSIS - Tsy Curve Bull Flatter as Hike Expectations Cool

US TSYS: Bull Flattening With Core PCE, Fedspeak In Focus Ahead

• Cash Tsys see a sizeable bull flattening which pushes the 10YY through week lows for a greater than 30bp swing from Wednesday’s brief clearance of 4% prior to BoE gilt purchases, and with Treasuries continuing to lag moves in Gilts and EU FI this morning ahead of a data- and perhaps Fedspeak-focused session with no issuance.
• 2YY -5.2bps at 4.141%, 5YY -8.5bps at 3.932%, 10YY -9.7bps at 3.688%, and 30YY -9.1bps at 3.633%, which leaves 2s10s at the lower end of the week’s wide range at -45bps.
• TYZ2 trades 13 ticks higher at 112-27+, edging towards Wednesday’s high of 112-30 (and the Sep 23 high of 112-30+) after which sits 114-00 (Sep 22 high).
• Data: Heavy docket with PCE core inflation & income/spending for Aug after yesterday’s sizeable revisions in national accounts up to Q2 (pushing historical core PCE notably higher) plus MNI Chicago PMI for Sep and final U.Mich for Sep.
• Fedspeak: VC Brainard, Governor Bowman, NY Fed Williams plus 2x Barkin (’24 voter) although some might have limited focus on mon pol.

STIR FUTURES: 2H23 Fed Hike Rate Expectations Cool

• Fed Funds implied hikes have firmed slightly for 2022 meetings, despite initially dipping on a large French CPI miss, but see a larger decline in 2H23 (terminal unchg at 4.48% Mar'23, Dec’23 -5bps at 4.20%).
• Despite that, end’23 rate expectations are similar to after last week’s FOMC, with the adjustment instead in terminal to mid’23 rates as the curve flattens (May -15bps) – see chart.
• Four Fed speakers scheduled today including VC Brainard giving opening remarks on how mon pol affects financial vulnerabilities (text, no Q&A).

MNI BRIEF: Eurozone Inflation In Double Figures As ECB Watches

There is no respite for European Central Bank policymakers in the September inflation data, with the headline number coming in at 10%, above expectations and a number that is likely to spook even the most dovish of Governing Council members. Headline inflation was up a preliminary 1.2% month-on-month, rising 10% year-on-year. Core inflation was also higher, rising 1.0% m/m and 4.8% y/t, Eurostat said Friday.

The ECB will be closely watching the data, with only the final September print expected now before the October 27 policy meeting. Many governing council members are now shifting towards a view that a more restrictive rate setting will be needed in coming months (MNI SOURCES: More ECB Policymakers See Restrictive Rates).

Financial markets are current pricing ECB's deposit rate to hit near 2% by the end of 2022, rising to close to 3% by late summer 2023.

Source: MNI / Bloomberg / EUROSTAT

EU: Czech EU Pres-Ministers Reached Agreement On Energy Price Mitigation

Comments from the Czech EU presidency hitting wires.

• Czech EU Presidency: 'Ministers reached a political agreement on measures to mitigate high electricity prices'.
• Czech EU Presidency: 'Deal reached on mandatory electricity demand reduction, a cap on market revenues from inframarginal electricity producers and solidarity contribution from fossil fuel producers'.
• Inframarginal electricity producers refers to renewable, nuclear, and lignite electricity producers who sell electricity at a higher market price in spite of lower generation costs.
• There is still the thorny issue of a gas price cap to work out, which several countries including Germany are seen as opposing. While the measures above look set for approval, the gas price cap could prove too large an issue to resolve in today's meeting.

FOREX: GBP Extends Bounce, With GBP/USD Nearing Pre-Budget Levels

• The recovery in UK assets continues, with GBP/USD nearing the Friday (i.e. pre-mini budget) levels at 1.1274 and rallying against all others in G10. The moves coincide with a further pull lower in the UK yield curve, putting the longer-end under additional pressure as the BoE's emergency action in the middle of the week tempers market uncertainty.
• The more stable market backdrop has helped risk assets find bottom, putting the e-mini S&P back above the 3650 level and around 60 points above the late Thursday low.
• For currencies, this has meant the dollar trades on the backfoot, while AUD trades more favourably. NOK should be benefiting from the calmer market sentiment, however the Norges Bank's larger-than-expected FX sales across October have tempered any progress in the currency. The bank are to sell NOK 4.3bln per day on behalf of the sovereign wealth fund.
• Personal income and spending data crosses Friday, with further focus on September's MNI Chicago PMI as well as the final Michigan confidence read for this month.

UK: OBR Readout Of Meeting w/PM & Chancellor

OBR readout of meeting w/PM and Chancellor below:

• "The OBR’s Budget Responsibility Committee met with the Prime Minister and Chancellor this morning. We discussed the Economic and fiscal outlook and the forecast we are preparing for the Chancellor’s Medium-term Fiscal Plan. We will deliver the first iteration of that forecast to the Chancellor on Friday 7 October and will set out the full timetable up to 23 November next week. The forecast will, as always, be based on our independent judgment about economic and fiscal prospects and the impact of the Government’s policies."
• Link: https://obr.uk/obr-meeting-with-the-prime-minister...

RUSSIA: Member States Provisionally Agree On New Russia Sanctions-RTRS

Reuters reporting that EU member state gov'ts have provisionally agreed on the eighth package of sanctions on Russia announced by European Commission President Ursula von der Leyen on Wednesday.

• Commission statement on sanctions package: https://ec.europa.eu/commission/presscorner/detail...
• Package includes cap on Russian oil prices for third countries, a further import ban "to deprive the Kremlin's war machine of key technologies", and a ban on EU citizens sitting on Russian boards.