MNI US OPEN: UK CPI at Forty Year High

NEWS

EUROPE (MNI): EU Remains Divided Over Energy Emergency Measures

EU leaders are set to endorse most of the bloc’s latest proposals announced by the EU Commission this week to tackle soaring energy prices. Leaders meet at their October 20-21 summit. It includes plans to launch an alternative price benchmark for LNG and start joint gas buying - each proposal requires 65% of the bloc’s support.

A cap on EU gas prices remains elusive lacking support from key nations like Germany and the Netherlands – despite most countries in the EU being in favour. Brussels could draft another proposal to set a temporary price limit on the TTF Dutch gas hub subject to certain conditions.

US (MNI): GOP Favourites for the Senate in Betting Markets for First Time Since August

Data from Smarkets shows the Republicans as favourites to take control of the Senate in the 8 November midterm elections among political betting markets. This is the first time the GOP have stood as favourites over the Democrats since early August.

At the time of writing, the Republicans are given a 53.8% implied probability of gaining control of the Senate, with the Democrats afforded a 47.2% chance of retaining control (sum adds to more than 100% due to bookmaker's margin).

UK (MNI): MoS-PM Truss Informed 15% Of Party Has Submitted No Confidence Letters

Dan Hodges at the Mail on Sunday: "Understand Liz Truss has been informed byGraham Brady the traditional threshold of letters for a leadership challengehas been breached. But he is insisting on a threshold of half the parliamentaryparty before acting."

UK (MNI): Gov't Could Ditch Pensions Triple Lock; Labour Minister Refuses to Commit

PM Liz Truss has refused to commit to maintaining the state pensions 'triple lock' - a guarantee that the state pension will rise in line with inflation, earnings, or 2.5%, whichever is highest - in order to balance the books following the collapse of her economic policy plans.

BOE (MNI): What Bucket Sizes Could the BOE Use for Active Gilt Sales?

The Bank of England confirmed in a statement at 18:00BST yesterday evening that it would commence active gilt sales on 1 November. The prior official guidance from the Bank (announced at the same time as the temporary purchases were launched) had been that gilt sales would begin the W/C 31 October.

Under the original plans we would have seen three operations each fortnight with GBP580mln of sales of each of shorts (3-7 year), mediums (7-20 year) and longs (20+ years). The Bank has confirmed that there will be no sales of long-dated gilts in Q4-22.

BONDS (MNI): Swap Spreads Narrow with German Repo Squeeze Seen Easing

German swap spreads are tightening on the announcement by the German finance agency that it will increase the availability of Bunds for repo operations. Recall there has been an ongoing squeeze in repo markets which has seen ASW widen. This move should ease those pressures to some degree and means swaps can richen vs German cash bonds.

RUSSIA (The Guardian): Russia’s New Ukraine Commander Signals Civilian Removals From 'Tense' Kherson

The new commander of Moscow’s army in Ukraine has announced that civilians were being “resettled” from the Russian-occupied southern city of Kherson, describing the military situation as “tense”.

“The enemy continually attempts to attack the positions of Russian troops,” Sergei Surovikin said in his first televised interview since being appointed earlier this month, adding that the situation was particularly difficult around the occupied southern city of Kherson.

NORTH KOREA (MNI): N. Korea Orders More Artillery Firing

North Korea says it has ordered more artillery firing in response to South Korea's firing of rounds from multiple rocket launchers. North Korea fired 100 artillery rounds into the West Sea buffer zone, violating the 9/19 inter-Korean military accord for the third time in just a few days, South Korea's Joint Chiefs of Staff notes.

CHINA (MNI): China LPR to Remain Steady as Congress Meets

China’s reference lending rates are expected to be left unchanged this month after the People’s Bank of China kept the rate on its medium-term lending facility, which feeds into LPR pricing, steady on Monday. The ongoing 20th National Party Congress in Beijing, which runs until Oct 22, is likely to be a consideration in keeping rates steady as China’s leadership seeks to avoid any move that may threaten market stability, sources told MNI. They said the release may be postponed. It is usually released on the 20th of the month. Key economic data have also been delayed due to the Congress.

AUSTRALIA (MNI): Upside Risks to Australian CPI, Will It Be Enough to Shift RBA?

Correlations between NZ and Australia CPI measures are high at the moment, across both headline and core measures. Whilst correlation doesn't imply causation, given Australia has been experiencing similar cost pressures to NZ, the elevated NZ Q3 CPI outcome increases the risk of a strong Q3 Australian CPI result too, which prints next Wednesday.

AUSTRALIA (MNI): High Employment and Commodities Give Government Budget Windfall

Next Tuesday, October 25 the new Australian government will hand down its first budget. Treasurer Chalmers has been at pains to prepare households that there will only be moderate cost-of-living relief which will be focussed on election promises, such as childcare, medicine and education.

DATA

UK DATA (MNI): CPI Retests High, 'Significant' BOE Hike Eyed

• UK SEP CPI +0.5% M.M, +10.1% Y/Y
• UK SEP CORE CPI +6.5% Y/Y
• UK SEP INPUT PPI +0.4% M/M, +20% Y/Y
• UK SEP OUTPUT PPI +0.2% M/M, +15.9% Y/Y

The CPI reading is, along with July, the highest since 10.2% in February 1982 on the ONS's synthetic model (the official time series only dates from early 90's) and underscores the challenge facing the MPC when it meets on November 3. Policymakers have already indicated a 'significant' rate hike is on the cards for then, with the latest prices data unlikely to diminish market pricing that suggests a 100 bps hike, followed by a further 75 bps in December.

The main driver was food and non-alcoholic beverage prices, which rose to a record time series high of 14.6% y/y, up from 13.1% in August. The annual rate of inflation for this category has continued to rise for the last 14 consecutive months, from negative 0.6% in July 2021. On the model, it stood at 14.7% in April 1980.

EUROZONE DATA (MNI): Small Downwards Revision to CPI to +9.9% y/y

• EUROZONE SEP FINAL CPI +1.2% M/M (= FLSH); AUG +0.6% M/M
• EUROZONE SEP FINAL CPI +9.9% Y/Y (FLSH +10.0%); AUG +9.1% Y/Y

A small 0.1pp downwards revision was made on euro area annualised September CPI, down by 0.1pp to +9.9% y/y largely on the back of revised prints for both Spain and Italy. This confirms the fifth consecutive month of rising headline inflation for the bloc, surging 0.8pp on August and remaining a eurozone record.

Energy again accounted for the bulk of the headline figure (+4.19pp) followed by food (+2.47pp). Services (+1.8pp) and non-energy industrial goods (+1.47pp) also generated considerate upwards pressure, confirming that inflationary pressures remain broad-based. Core inflation was unadjusted at the flash level of +4.8% y/y and the pressure is on for the ECB to hike 75bp on Oct 27 (markets currently pricing 73bp).

FOREX: GBP Recovery Fading as CPI Tops Expectations

• The greenback is making furtive gains early Wednesday, with EUR/USD faltering on the approach to Tuesday's $0.9876 high during the Asia-Pac session, and drifting lower through the European morning.
• GBP is among the session's poorest performers as markets further bake-in the likelihood of a protracted stagflationary phase in the UK, as CPI came in ahead of expectations at 10.1%. GBP/USD shed around 30 pips following the release, as has traded sluggishly since, touching pullback lows of 1.1247. Key short-term support has been defined at 1.0924, the Oct 12 low.
• NZD is extending the week's outperformance, trading higher against all others in G10 on an extension of the post-CPI move earlier in the week. NZD/USD looks to $0.5719 for direction, a break above which would open $0.5814 and above.
• USD/CHF, meanwhile, has bounced back to parity, with the pair erasing the Monday/Tuesday losses to narrow the gap with the cycle best at 1.0074.
• Canadian inflation data takes focus going forward, wit markets expecting Y/Y CPI to drift to 6.7% from 7.0% prior. US housing starts and building permits are also on the docket. Markets also await speeches from BoE's Cunliffe & Mann, ECB's Visco & Centeno and Fed's Kashkari, Evans and Bullard.

BOND SUMMARY: Bunds Move Lower as Germany Creates Extra Securities; Gilts 10s30s Flatten

• There have been two dominating stories in core FI markets this morning.
• First, the reaction to yesterday's announcement from the Bank of England that it would be pressing ahead with active gilt sales (but would not be selling any long-dated 20+ year gilts in 2022). We also saw the release of UK CPI a tenth higher than consensus expectations. The 10s30s curve has flattened 17bp today on the QT announcement while short/medium gilts had initially opened the day lower, but have retraced a large portion of their losses to now trade with yields around 3-5bp higher than yesterday's close.
• Second, the German Finanzagentur has created an additional E54bln of extra government securities. This is not through extra issuance, but the securities will be held on the Finanzagentur's own account and used for repo purchases. The market was a bit confused by the announcements with some other newswires alluding to this being extra issuance and Bunds fell around 100 ticks in the initial reaction. Some move lower is justified as this will help address a collateral shortage in the market, particularly going into year-end, and hence asset swap spreads have narrowed.
• US Treasuries followed Bunds lower.
• Looking ahead we have US housing data and the Beige Book. The BOE's Cunliffe and Hauser testifying on the temporary gilt purchase programme and are also due to hear from BOE's Mann, ECB's Centeno and Visco and the Fed's Kashkari, Evans and Bullard.
• TY1 futures are down -0-14+ today at 110-14+ with 10y UST yields up 5.1bp at 4.060% and 2y yields up 4.8bp at 4.480%.
• Bund futures are down -0.95 today at 136.27 with 10y Bund yields up 5.2bp at 2.333% and Schatz yields up 11.4bp at 2.067%.
• Gilt futures are down -0.40 today at 974.49 with 10y yields up 3.8bp at 3.980% and 2y yields up 3.1bp at 3.557%.

EQUITIES: European, US Equity Futures Trade Softer Following Recovery

EUROSTOXX 50 futures remain firmer on the week as price extends the recovery from 3251.00, Oct 13 low, although price is off the Tuesday highs. Recent gains have resulted in a break of the 50-day EMA and resistance at 3492.00, the Oct 6 high and a bull trigger. Price has also arrived at a trendline resistance drawn from the Aug 17 high. The trendline intersects at 3497.40 and a clear break of this level would strengthen bullish conditions. Initial firm support is at 3352.00, the Oct 14 low. S&P E-Minis maintains a firmer tone from the Monday open as the contract extends last week’s reversal from 3502.00, the Oct 13 low. The latest recovery suggests the contract has entered a corrective phase and if correct, this is allowing an oversold trend condition to unwind. The 20-day EMA has been breached, reinforcing a bullish theme and opening 3820.00, the Oct 5 high and a bull trigger. Key support is unchanged at 3502.00.

• Japan's NIKKEI closed higher by 101.24 pts or +0.37% at 27257.38 and the TOPIX ended 3.62 pts higher or +0.19% at 1905.06.
• Elsewhere, in China the SHANGHAI closed lower by 36.58 pts or -1.19% at 3044.378 and the HANG SENG ended 403.3 pts lower or -2.38% at 16562.56.
• Across Europe, Germany's DAX trades lower by 47.09 pts or -0.37% at 12804.42, FTSE 100 lower by 41.81 pts or -0.6% at 6951.85, CAC 40 down 17.41 pts or -0.29% at 6088.63 and Euro Stoxx 50 up 1.38 pts or +0.04% at 3485.37.
• Dow Jones mini down 99 pts or -0.32% at 30593, S&P 500 mini down 11 pts or -0.29% at 3740.75, NASDAQ mini down 22.25 pts or -0.2% at 11253.25.

COMMODITIES: Gold Hits New October Low

WTI futures traded lower again Tuesday. This reinforces the current bearish theme and highlights potential for a continuation lower. An extension would open $80.35, a Fibonacci retracement level and potentially $76.25 further out, the Sep 26 low. On the upside, a reversal higher and a resumption of gains would instead suggest scope for a climb towards the key short-term resistance at $93.64, the Oct 10 high. Initial firm resistance is at $90.07. Gold maintains a softer tone following the recent reversal from $1729.5, the Oct 4 high. An extension lower would expose the key support and bear trigger at $1615.0, the Sep 28 low. On the upside, a break of $1729.5 is required to reinstate a bullish theme.

• WTI Crude up $0.56 or +0.68% at $83.59
• Natural Gas down $0 or -0.07% at $5.756
• Gold spot down $9.03 or -0.55% at $1639.49
• Copper down $1.95 or -0.58% at $334.5
• Silver down $0.1 or -0.53% at $18.5837
• Platinum down $12.32 or -1.35% at $897.82