MNI US OPEN - ECB's Simkus Says Rate Cut Expectations Are Too Optimistic

NEWS

MNI FOMC MINUTES PREVIEW: Rebalancing Act

The Minutes will be scrutinized for further insight into how participants viewed the impact of tighter financial conditions on the outlook, particularly given that they were added to the Statement as a factor that was "likely to weigh on economic activity, hiring, and inflation". The market's take on the implication was that the FOMC effectively saw higher longer-end yields as doing some of the job of potential short-end rate hikes, but the Fed's tightening bias remained, pending incoming data. There will as always be attention paid in the minutes to mentions of participants' criteria to hike further, or alternatively, to be satisfied that rates are sufficiently restrictive to return inflation to target.

MNI UK ISSUANCE DEEP DIVE: Autumn Statement Preview and FQ4 Outlook

In this note we outline the main measures that are expected to be under consideration for the Autumn Statement, expectations for revisions to the gilt remit, the wider political implications and outline our expectations for which gilts will be on offer in FQ4 (January to March). The median expectation of the 10 sell-side summaries that we have compiled looks for gilt issuance in 2023/24 to be cut from GBP237.8bln to GBP220.0bln. We look at the implications for the maturity breakdown and bills. We also include updated tables including all gilts in issue, how much is owned by the BOE, an auction calendar and data on BOE gilt sales.

MNI CANADA CPI PREVIEW: Watching for Potential Drop in Median/Trim Trend Rates

Consensus sees headline CPI slowing notably to 3.1% Y/Y in October owing to large energy-focused base effects, back to just above the BoC's upper end of the 1-3% target range. The Bank has been waiting to break through this level for some time and has grown more impatient, although a significant softening in its growth outlook has provided a partly offsetting factor.

ECB (BBG): Market Expectations on ECB Cuts Are Too Optimistic, Simkus Says

Investor are getting ahead of themselves in their speculation on when the European Central Bank will start lowering borrowing costs, according to Governing Council member Gediminas Simkus. “It’s very important to put the genie back into the bottle and to securely seal it — therefore expectations that we’ll have interest-rate cuts in a few months are too optimistic in my view,” he told reporters on the sidelines of a real estate conference in Vilnius on Tuesday.

ECB (MNI): CRE Loan Books a Risk to Financial Stability - ECB

Distressed commercial real estate (CRE) loan portfolios could “significantly amplify” the effects of adverse scenarios in other sectors, leading to "systemically relevant losses" for investment funds and insurers, a report published by the ECB Tuesday reported. Most euro area countries have taken macroprudential measures to address vulnerabilities in the residential real estate sector caused by recent rapid interest rate rises, with banks’ loan books also receiving some support from rising wages.

EU/FRANCE (BBG): EU Is Set to Place France on Watch List in Fiscal Assessment

France is at risk of flouting European Union fiscal guidance while Germany and Italy aren’t seen to be fully complying, people familiar with the matter said in advance of an annual scorecard from Brussels. The draft watch list of countries — scheduled for release on Tuesday — forms part of the European Commission’s opinion on national budgets for 2024, a year when the bloc is set to reinstate debt and deficit rules suspended during the pandemic.

BOE (MNI): Bailey Says We've Seen Slight Downside News on Inflation This Year

Bailey said we've seen slight downside news on inflation this year. Seen a weakening picture of demand in the economy. Some weakening on the quantity side of the labour market - little bit hard to read at the moment. On wages, some signs of evidence coming off but still not at levels consistent with target. Have seen signs that policy setting is restrictive which should bring inflation back to target. Asked if reached Table Mountain - says there is a case for holding the rate where it is for an extended period.

ISRAEL/HAMAS (BBG): Hamas Says Gaza Hostage Talks Progress And Could Yield ‘Truce’

The leader of Hamas said his group was close to reaching a “truce agreement” with Israel via Qatari mediation in rare public comments that suggest talks over freeing some hostages held by the Gaza-based group are progressing. Ismail Haniyeh’s comments come after US President Joe Biden said Israel and Hamas are closing in on a deal to free some of the 240 hostages taken when the group stormed Israel on Oct. 7, killing about 1,200 people. “The movement delivered its response to the brothers in Qatar and the mediators, and we are close to reaching a truce agreement,” Haniyeh said in a statement on Telegram.

UK/SOUTH KOREA (MNI): FTA to be Updated; Yoon to Address Parliament

The South Korean Ministry of Trade, Industry and Energy has confirmed that Seoul and London will re-open talks on the free trade agreement signed between the two countries in 2019. The UK Dep't for Business and Trade states that the two countries are set to announce GBP21bn of South Korean investment in UK green energy and infra projects. Yonhap reports the ministry stating, "The talks will focus on establishing a new third-generation FTA that reflects abrupt changes in the economy and trade environment, including bolstering economic security and stabilizing supply chains."

CHINA (MNI): State-Owned Banks Seen Selling USD Via Onshore Swap Agreements

Reuters report that major state-owned banks in China are seen acquiring USD via onshore swaps and selling the USD in spot FX markets this week, according to sources. Not the first time we've seen reports of state-owned banks using onshore swaps to sell spot USD and pressure the USD/CNY rate - in late August the same strategy was used as Chinese exporters took the other side of the trade. Back in August, the USD sales were used to counteract a rallying USD/CNY rate - but this week it's the opposite, with state-banks selling into USD/CNY weakness, potentially accelerating declines.

CHINA (BBG): China Guides Banks to Cap Early 2024 Loans, Shift Some Forward

China’s central bank has encouraged lenders to cap the amount of new loans they issue in early 2024 and shift some forward to this year as authorities try to smooth the credit cycle, people familiar with the matter said. The People’s Bank of China last week guided lenders to make sure the value of new loans they extend in January-to-March does not exceed the quarterly average issued over the past five years, said the people, asking not to be identified discussing a private matter.

RBA (MNI): RBA's Fresh Forecasts Embed Strong Rates Profile

The Reserve Bank of Australia’s November Statement on Monetary Policy is consistent with a more aggressive rates stance, MNI understands, despite speculation by some former staffers that pushing back the expected return to the 2-3% inflation target band by six months to December 2025 signals a dovish shift. The RBA upgraded its short-term inflation outlook within the November statement compared to its August forecasts and downgraded its peak unemployment call 25bp to 4.25% by December 2024, following the board's decision to hike the cash rate 25bp to 4.35% earlier this month.

RBA (MNI): Staff See 1-2 More Hikes in Forecasts - RBA Minutes

The Reserve Bank of Australia board noted the recently updated inflation forecasts found within the November Statement on Monetary Policy would have been higher if Reserve staff had not factored in one or two more rate rises, the recently published minutes from this month’s meeting showed. The RBA board lifted the cash rate 25bp to 4.35% earlier this month, its highest level since 2011. MNI reported today November’s statement embedded an more aggressive policy stance.

COMMODITIES (BBG): Russia Cuts Seaborne Crude Flows to Three-Month Low Before OPEC+

Russia cut back its seaborne crude exports to the lowest since August before a meeting of OPEC+ oil minsters this weekend when compliance with production cuts will be in sharp focus. The move came after shipments surged in October. About 2.7 million barrels a day of crude was shipped from Russian ports in the week to Nov. 19, tanker-tracking data monitored by Bloomberg show. That was down by 580,000 barrels a day from the revised figure for the period to Nov. 12, the biggest week-on-week drop in more than four months.

DATA

UK OCT PSNCR GBP13.33 BN (MNI)
UK OCT PSNB GBP+13.97 BN (MNI)
UK OCT PSNB-X GBP+14.9 BN (MNI)
UK OCT CGNCR GBP18.21 BN (MNI)

MNI BRIEF: UK YTD Gov't Borrowing Below OBR's March Forecast

UK government borrowing was higher than expected in October, coming in above the Office for Budget Responsibility's single month forecast back in March. However, overall borrowing year-to-date is almost GBP17 billion below the OBR's forecast and will offer the Chancellor some fiscal leeway in Wednesday's Autumn Statement, although overall the finances still remain pressured.

FOREX: Greenback Downdraft Extends, Prompting New Pullback Lows

• The greenback remains offered, with the USD Index lower for a fourth consecutive session to touch the lowest level since late August. The solid demand at the 20y Treasury auction yesterday has spilled over into currency markets, as the retreat in the 10y yield holds through to Tuesday morning.
• NZD has continued to be the primary beneficiary, pushing NZD/USD to new multi-month highs and within range of the 200-dma resistance at 0.6096. Clearance here would see the highest levels since mid-August, while AUD/NZD also reverts back to the midpoint of the recent range.
• JPY is among the firmest performers, helping aide a fourth session of losses for EUR/JPY. 161 undercuts as support, marking the 50% retracement for the late October – mid November upleg.
• Focus ahead turns to the Canadian CPI release, at which markets expect Y/Y to slow to 3.1% from 3.8% previously. US existing home sales data is also set to cross, as well as the Fed minutes for their November 1^st meeting. The central bank speaker slate includes ECB’s Lagarde, Schnabel & Centeno as well as BoE’s Bailey.

EGBS: Reverse Early Gains; Peripheries Outperform Again

Bund and OAT futures hover around session lows as global FI markets have moved away from best levels over the course of Tuesday morning.

• Well-received 20Y US Tsy and JGB auctions overnight prompted the initial firmness, while comments from ECB's Villeroy at the Society of Professional Economists' dinner r.e. downplaying the "last-mile" on inflation will have also provided support.
• However, Villeroy also noted that ECB PEPP reinvestments could end earlier than December 2024 and still be consistent with the overall monetary stance, which may have capped the initial rally and pushed markets off highs.
• The main support in Bund futures is seen at 130.47 - yesterday's low and the 15 Nov close. Futures sit at 130.88 at typing, up +0.20 ticks.
• Core/semi-core cash curves are seen lightly twist flattening, with 10Y Bund yields down -1.5bp at 2.595% and Schatz yields up 0.4bp at 3.013%. The E3.5bln Bobl auction this morning represents 29.8k Bobl equivalent, indicating pressure should be limited going into the cut-off.
• Periphery spreads to Bunds are once again tighter, as effects from last Friday's positives ratings decisions for Italy and Portugal continue to provide support.
• Today's morning docket is very light, though ECB hawk Simkus is speaking presently and noted little reason to hike in December.
• Comments from ECB's Lagarde (subject "Inflation kills democracy"), Schnabel (subject "Monetary policy in times of stubborn inflation") and Centeno (subject "Fiscal Policy vs Monetary Policy") are due this afternoon.

GILTS: Light Twist Flattening Seen, Futures Hold Shy of Early Highs

Gilt futures haven’t been able to better the highs seen at the open, last trading +20 or so around 97.20, ~30 ticks shy of the peak of their ~40 tick range.

• This comes as core global FI markets also move away from best levels (the wider bid seen since yesterday’s gilt close had provided early support).
• Cash gilt yields are 1.5bp higher to 1.5bp lower on the day, twist flattening.
• The front end of the gilt curve and SONIA strip has underperformed all day, after BoE Governor Bailey continued to leave the door open to further rate moves if risks to the inflation outlook become apparent. He also stressed that it is too early to start considering rate cuts.
• As noted elsewhere, bulls remain in short-term technical control when it comes to gilt futures, with last week’s high (97.99) providing initial technical resistance.
• SONIA futures are -3.5 to +0.5 through the blues, with some light twist flattening seen.
• BoE-dated OIS is little changed to 2bp firmer on the day.
• BoE MPC testimony in front of the Treasury Select Committee has just got underway, with opening remarks failing to move/surprise markets.
• Our preview of tomorrow’s Autumn Statement can be found here.
• Expect continued fiscal speculation to do the rounds ahead of that event.

EQUITIES: E-Mini S&P Starts Week on Bullish Note, Confirming Extension of Recovery

A short-term bull cycle in Eurostoxx 50 futures remains intact and the contract continues to appreciate. Price has recently cleared resistance at both the 20- and 50-day EMAs - a bullish development. Note that last Tuesday’s gains resulted in a breach of resistance at 4256.00, the Oct 12 high, reinforcing the bullish theme The focus is on 4388.00, the Aug 30 high. Initial firm support to watch is at 4228.90, the 20-day EMA. S&P e-minis traded higher Monday, starting the week on a bullish note and confirming an extension of the recovery that started Oct 27. Recent gains have resulted in a break of a trendline drawn from the Jul 27 high. This reinforces bullish conditions and signals scope for a climb towards 4597.50, the Sep 1 high. On the downside, initial firm support is seen at 4415.80, the 20-day EMA.

• Japan's NIKKEI closed lower by 33.89 pts or -0.1% at 33354.14 and the TOPIX ended 4.81 pts lower or -0.2% at 2367.79.
• Elsewhere, in China the SHANGHAI closed lower by 0.386 pts or -0.01% at 3067.933 and the HANG SENG ended 44.18 pts lower or -0.25% at 17733.89.
• Across Europe, Germany's DAX trades higher by 39.57 pts or +0.25% at 15943.36, FTSE 100 lower by 31.67 pts or -0.42% at 7465.68, CAC 40 down 9.25 pts or -0.13% at 7237.58 and Euro Stoxx 50 up 0.49 pts or +0.01% at 4343.19.
• Dow Jones mini down 51 pts or -0.14% at 35172, S&P 500 mini down 5.75 pts or -0.13% at 4556.5, NASDAQ mini down 11 pts or -0.07% at 16075.

COMMODITIES: Recent Gains in Gold Continue to Support Bullish Conditions

A bearish theme in WTI futures remains in play and the latest recovery is considered corrective. The break lower last week marks an extension of the downtrend that started late September and maintains the price sequence of lower lows and lower highs. Moving average studies are in a bear-mode position, highlighting bearish market sentiment. The focus is on $70.96, a Fibonacci retracement. Key resistance is at $79.65, the Nov 14 high. The trend condition in Gold remains bullish and recent gains reinforce this condition. Furthermore, MA studies are in a bull-mode set-up, highlighting a rising trend cycle. A stronger resumption of gains would open $2022.20, May 15 high. The bull trigger is at $2009.4, the Oct 27 high. Note that support at the 50-day EMA, at $1944.7, has been pierced. A clear break of this average would undermine the bullish theme and expose $1908.3, Oct 16 low.

• WTI Crude down $0.44 or -0.57% at $77.42
• Natural Gas up $0.03 or +0.9% at $2.909
• Gold spot up $7.31 or +0.37% at $1985.54
• Copper down $0.05 or -0.01% at $384.2
• Silver up $0.06 or +0.27% at $23.512
• Platinum down $1.9 or -0.21% at $921.26