MNI US OPEN - French, Italian CPI Heap Pressure on ECB

NEWS

ECB: Multiple ECB speakers flag next steps for central bank

• The European Central Bank will continue to lift borrowing costs as it steps up its battle against record euro-area inflation, and remain flexible about the magnitude of individual steps, according to Governing Council member Bostjan Vasle.
• The European Central Bank needs to deliver a “substantial” increase in interest rates at its final meeting of the year in December, despite a strong likelihood of a technical recession in the euro area, according to Governing Council member Gediminas Simkus.
• The European Central Bank’s monetary policy will have to move into restrictive territory to get inflation under control, Governing Council member Peter Kazimir said. “We will pass through the neutral rate -- regardless of where anyone currently sees it -- like a runaway train,” the Slovak central bank chief said in a statement.
• The European Central Bank is under no obligation to repeat the 75 basis-point interest-rate increases enacted at the last two meetings, Governing Council member Francois Villeroy de Galhau said. “We’re not subscribed to what one calls jumbo increases,” the Bank of France chief said Friday on Boursorama.com’s Ecorama webcast.

ECB (MNI): Forecasters Up Price Expectations Again -ECB Survey
Professional forecasters have again upped their expectations for euro area inflation for each of the 3 year horizons, now seeing inflation average 2.4% over 2024, up from 2.1% in the July quarterly survey. Over 2023, the forecast now stands at 5.8%, a full 1.2% above the previous quarters outlook.

UK (BBG): Sunak Eyes as Much as £50 Billion of UK Spending Cuts, Tax Rises
UK Prime Minister Rishi Sunak is seeking to build a buffer in the public finances as he draws up an economic plan to plug Britain’s budget shortfall, which could entail tax rises and spending cuts totaling as much as £50 billion ($58 billion). Sunak and Chancellor of the Exchequer Jeremy Hunt want the extra headroom over and above the UK’s £35 billion fiscal hole so that the package has credibility with the markets, an official familiar with the matter said.

BANK OF JAPAN (MNI): BOJ On Hold; Keeps Easing Policy Guidance
The Bank of Japan board left monetary policy unchanged on Friday as the economy largely continued moving in line with its baseline scenario despite lingering uncertainties and downside risks. The BOJ maintained its forward guidance for its policy rates, with the decision to keep its easing bias in regards to the monetary policy outlook showing policymakers are vigilant against the near-term downside risk to economy. The short term interest rate was kept at -0.1% and the Bank will continue to target a 10-year bond yield of 0% with a range of 0.25 of a percentage point.

JAPAN (BBG): BOJ Changes Bond Purchase Plan for First Time During a Quarter
The Bank of Japan increases frequency of its bond buying for the October-December period, effectively boosting the purchase amounts, according to a statement Friday. This is the first time the BOJ has altered its plan in the middle of a quarter since it switched to a quarterly basis from monthly in mid-2021

JAPAN (RTRS): Japan cabinet approves spending package to ease inflation pain
Japan's government on Friday unveiled a new stimulus package with spending worth 39.0 trillion yen ($265 billion) that it said would boost gross domestic product (GDP) by around 4.6%. The government said it would compile an extra budget in the current fiscal year worth 29.6 trillion yen to fund the package.

CHINA (MNI): China Will Struggle To Hit 2022 Target On Stimulus Delay
China’s 2022 growth could slow to under 4% and miss the government’s target of “around” 5.5% as new stimulus is unlikely until key leadership roles are filled even as the ailing property market, weak exports and hit to consumer spending from Covid-Zero policies offset increased infrastructure spending, advisors and analysts told MNI.

AUSTRALIA (MNI): Hot Inflation Means 25bp Hikes Into 2023
The Reserve Bank of Australia is expected to deliver a 25bp hike to 2.85% at its Nov 1 meeting after a red-hot September quarter inflation print triggered the pricing in of additional hikes and a terminal rate above 4%. A seventh consecutive increase in rates will lift them to their highest level since April 2013, but the most aggressive tightening cycle in three decades is expected to push into 2023 after the September quarter CPI rose at a 7.3% y/y pace. The higher-than-expected inflation prompted some economists to call for a 50bp hike next Tuesday.

DATA

MNI: SAXONY OCT CPI +1.2% M/M, +10.1% Y/Y
MNI: BADEN WUERT OCT CPI +0.8% M/M, +9.8% Y/Y
MNI: BAVARIA OCT CPI +0.7% M/M, +11% Y/Y

MNI: ITALY OCT FLASH HICP +4% M/M, +12.8% Y/Y

GERMAN DATA: Upside GDP Surprise Wards Off Recession - For Now

• German GDP surprised to the upside in the Q3 flash estimate, advancing by +0.3% q/q, a 0.2pp uptick on Q2 growth and beating expectations of a -0.2% q/q contraction. Annualised GDP was also stronger than anticipated at +1.2 % y/y.
• Private consumption was the driver of Q3 growth.
• In comparison to pre-pandemic Q4 2019, price and calendar-adjusted GDP exceeded pre-pandemic levels (by +0.2%).
• This data signals that the German economy is more robust than anticipated, following consumer demand surveys, IFO and ZEW surveys signalling the onset of a recession.
• The marked upside surprise to German GDP will outpace the marginal downside surprise in the Spanish data this morning. This could see EZ GDP stabilise at a flat reading (currently consensus is looking for -0.1% q/q).

FRANCE DATA: CPI Surprises At a Hot +7.1%

• French inflation surged by 0.9pp to +7.1% y/y in the October flash estimate, up +1.3% m/m alone. This is substantially higher than forecasts of +0.6% m/m and +6.5% y/y.
• Strong accelerations were seen across Energy (+19.2% y/y after +17.9%) and food (+11.8% y/y after +9.9%), whilst services continued to expand at the September rate (+3.2% y/y).
• With no slowing across the sub-indexes, core inflation is also anticipated to have increased again following brief September relief. The core index is due with the final release.
• Global energy and food prices have been extremely high following the onset of the Ukraine war, spilling over into more broad-based price pressures.
• This hot CPI beat adds substantial upside pressure to the aggregate eurozone print. Consensus at present expects a 0.6pp slowing to +9.4% y/y.

FOREX: EUR Holds Up Well as Kazimir Sees 'Runaway Train' on Rates

• ECB speak has picked up following yesterday's decision, with hawks among the governing council still clearly in control as inflation marches higher. ECB's Kazimir stated that the bank would cross the neutral rate like a "runaway train". This has helped EUR hold toward the upper end of the G10 table so far Friday, second to only the USD.
• The USD Index is testing the 50-dma resistance, extending the bounce off yesterday's lows to over 1.25%. 111.135 marks the next upside level for the USD Index ahead of Fib resistance of 111.5378.
• The Bank of Japan rate decision came and went with little surprise, with governor Kuroda doubling down on policy by stating that markets should not expect rate hikes or an exit from easy policy anytime soon. The JPY is falling against most others, helping put USD/JPY back above Y147.50.
• The latest leg higher in the pair followed an operational update from the BoJ - who made the first mid-quarter tweak to their bond purchase plan for the first time and boosted the frequency of super-long JGB purchases next month.
• Focus turns to the prelim German CPI read for October, with markets expecting prices to have risen 0.6% on the month and 10.1% on the year. In the US, personal income/spending data takes focus - both of which seen rising 0.4%. Final UMich data also crosses.

BONDS: Downside Reversal Continued On Eurozone Inflation Surprises

Bund gains made during and after Thursday's dovish ECB outcome have been all but erased in the European morning session amid higher-than-expected inflation readings.

• October German State Inflation has mostly come in above the expected national figure, but the real shock was in Italian flash HICP which came in 4.0% M/M vs 1.4% expected, 1.7% prior.
• Combined with some hawkish ECB member commentary casting doubt on the prevailing dovish market narrative of yesterday's meeting, the German short end sold off and BTP spreads widened, as ECB terminal pricing moved higher (Sep'23 to 2.74%, up 17bp on the session).
• The German curve has underperformed the UK and US, with the latter two seeing some bear flattening in sympathy with the eurozone moves.
• Attention the rest of the session is on the flash German national inflation reading with US PCE prices/spending/income and final UMichigan (all of which will be eyed carefully ahead of next week's FOMC decision).

Latest cash curve yields:

• US: 2Y yield up 9.3bps at 4.3668%, 5Y up 9.9bps at 4.1599%, 10Y up 7.9bps at 3.9978%, 30Y up 3.3bps at 4.116%.
• DE: 2Y yield up 19.2bps at 1.965%, 5Y up 18.4bps at 2.002%, 10Y up 15bps at 2.112%, 30Y up 9.9bps at 2.11%.
• UK: 2Y yield up 9.4bps at 3.232%, 5Y up 10.1bps at 3.581%, 10Y up 7.9bps at 3.482%, 30Y up 3.4bps at 3.544%.
• Italy / German 10Y spread 3.5bps wider at 208.1bps