MNI US OPEN - GBP Higher, Yields Lower as Markets Welcome Prospect of Sunak

NEWS

UK (MNI): Signals Point To Sunak Coronation As New PM, Mordaunt Struggles For Support

• It is looking increasingly likely that former Chancellor of the Exchequer Rishi Sunak will be made the next leader of the Conservative Party at 1400BST (0900ET, 1500CET), when nominations for the leadership contest close, given that he may be the only candidate to gain the required nominations to get onto the ballot.
• The other publicly announced figure in the contest, Leader of the Commons Penny Mordaunt, is well short of the 100 signatures from Conservative MPs to get on the ballot (27 public backers at present according to the Guido Fawkes blog).

CHINA (MNI): China To Prioritise High Quality Growth - NDRC
GDP growth isn’t the only yardstick to measure China's progress and high-quality innovative growth is now the priority, Mu Hong a Deputy Director of the National Development and Reform Commission told reporters at a press conference on Monday.

CHINA (MNI): PBOC FX Intervention Still An Option - Guan Tao
The People’s Bank of China would have to act if an overshoot in the yuan threatened financial stability or stoked inflation, with currency intervention one of many options in the bank’s toolkit, said former senior State Administration of Foreign Exchange official Guan Tao. “It is not impossible for the central bank to step in and spend its huge pile of forex reserves to safeguard the yuan,” said Guan, who was formerly SAFE’s director-general of its balance of payments department, adding the bank would act if a “disorderly movement” encouraged speculation of a one-way move.

JAPAN (MNI): Japan's Dai-ichi Life To Buy Super-Long JGBs
Japan’s Dai-ichi Life Insurance will increase its holding of yen bonds in the October-March period, building on purchases of Japanese government and corporate bonds through the April-September period, the company's fund manager said Monday.

AUSTRALIA (MNI): Weak Aussie To Have 'Modest' Inflation Impact - RBA
The Reserve Bank of Australia forecasts only a "modest" uplift to inflation over the next few years from weakness in the Australian dollar, said Assistant Governor (Financial Markets) Chris Kent in a speech on Monday. While acknowledging the 14% decline in the aussie against the US dollar this year, Kent said the currency had fallen only 2% in trade weighted index terms as it had been supported by high prices for key commodity exports, which include iron ore, coal, and liquefied natural gas.

AUSTRALIA (MNI): RBA Modelling Shows House Prices Could Fall 20%
Reserve Bank of Australia modelling showed house prices could fall 20% if people react more negatively to higher interest rates, according to emails and documents disclosed through a Freedom of Information request.

DATA

CHINA (MNI): GDP Rebounds More Than Expected
China's economy grew 3.9% y/y in Q3, rebounding from 0.4% in Q2 and beating the median forecast of 3.3%, data released by the National Bureau of Statistics showed. China's GDP in the first three quarters grew at a 3.0% y/y rate.

Industrial production rose 6.3% y/y in September from August's 4.2%, beating the consensus forecast for a 4.8% rise. But retail sales halved to 2.5% in September from August's 5.4% y/y, missing the forecast 3.2% gain. The surveyed urban unemployment rate stood at 5.5% in September, up 0.2 percentage point from August.

CHINA (MNI): China's Exports Increase 5.7% Y/Y in Sept
China's exports slowed to a 5.7% y/y pace in September from 7.1% y/y in August, helping deliver a 12.5% y/y increase in exports during the first nine months of the year, China Customs data showed on Monday.

Imports rose 0.3% in September, the same pace as August, reflecting a high base effect, lower commodity prices and constrained shipping markets. Exports in the first nine months reached USD2.70 trillion, while imports amounted to USD2.05 trillion. The trade surplus over the first three quarters of the year was USD645.15 billion, with September contributing USD84.75 billion.

UK DATA: October PMIs Contract Further, Political Uncertainty Adds to Falling Confidence

• The UK PMIs noted a deepening contraction in the October flash, both coming in weaker than anticipated.
• The October data saw the sharpest fall in services activity since January 2021 lockdowns. The composite index contracted for the third consecutive month and was the lowest since March 2009 when excluding pandemic lockdowns.
• Manufacturing slumped due to slowing demand and continued supply issues, whilst services contracted as inflation concerns, recessionary fears and political uncertainty saw consumer confidence weaken further.

FOREX: GBP Builds Off Lows as Sunak Seen as Likely PM

• Markets have largely shrugged off a dire set of PMI manufacturing and services numbers from across the UK, German and France, with conviction light ahead of the ECB rate decision on Thursday.
• GBP is firmer ahead of the likely victory for Rishi Sunak in the race to be head of the Conservative party and new UK PM. Markets are clearly of the view he will take a steadier approach to public finances, helping relieve Gilt yields and steady UK currency markets. He is the current front-runner, with polling closing later today and markets on watch to see if Penny Mordaunt garners sufficient backing from MPs to take the race to the next stage.
• JPY is the poorest performer headed into the European open as markets bounce after suspected intervention on Friday (and possibly overnight). Authorities rolling out now familiar language on FX vigilance, but is having little impact on the pair which continues to inch higher having recovered off 145.56 overnight lows.
• Nearby tech levels are scant given the acute volatility Friday/Overnight, with 149.71 marking the first upside level ahead of Friday's 151.95. BoJ policy meeting Friday now the focus, with bank exp. To boost CPI forecast, cut growth view.
• With the Fed and ECB inside their pre-meeting media blackout periods, there are few central bank speakers to note, with focus turning to the prelim October US PMI release.

BONDS: Short-End Gilts Outperforming Early With Political Risk Seen Receding

Global core FI is on the front foot to start the week, with Gilts easily outperforming as UK policy risk is seen receding.

• Events over the weekend have all but assured Rishi Sunak will become the next UK Prime Minister (96% probability on betting exchanges) as soon as 1400BST, resulting a further pullback in yields as the ex-Chancellor is considered a less risky proposition fiscally.
• The UK curve has bull steepened, with BoE hike expectations continuing to be priced out.
• Otherwise, PMIs have been the focus of the European session so far. While they have missed to the downside almost across the board, there has been little market reaction, with more attention on UK politics and the ECB meet later this week.
• German yields have retraced most of their drop on the open; both the German and US curves have modestly twist-flattened, with US PMIs the focus of the rest of the session.
• Central banker appearances are scarce, with the customary pre-meeting quiet periods underway for both the Fed and ECB.

Latest cash yield levels:

• US: 2Y yield up 0.2bps at 4.4747%, 5Y down 2.1bps at 4.3198%, 10Y down 3.1bps at 4.1855%, 30Y down 3.1bps at 4.3025%.
• DE: 2Y yield up 0.1bps at 2.042%, 5Y down 0.8bps at 2.204%, 10Y down 1.5bps at 2.402%, 30Y down 1.7bps at 2.425%.
• UK: 2Y yield down 26.4bps at 3.535%, 5Y down 22bps at 3.933%, 10Y down 14.8bps at 3.906%, 30Y down 12.5bps at 3.935%.
• Italy / German 10Y spread 1.5bps tighter at 231.5bps