: Equities down, Treasuries up, Crude down, Dollar flat.
STLA will match F and GM's wage offer. Mester sees a further hike. Harker says that rate hikes are unnecessary. Bostic believes the neutral rate may be higher. Hamas frees two US hostages.
Highlights: EZ/UK Flash PMIs, ECB and BoC, US PCE and Australian CPI. Download the report.
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CENTRAL BANK - WEEKLY
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Newsquawk in two easy steps
The Nasdaq led the losses of the major US indexes on Friday, with geopolitical tensions and mixed earnings into the weekend being the catalysts. S&P 500 lost its 200d MA under the pressure. In the NY afternoon, the indices bounced along with broader haven asset dewinds in response to Hamas's release of two US hostages. However, selling resumed and new lows made at the close. Stocks fell despite Treasuries rising into the weekend. This was especially true in the front and belly, after the dust settled following Powell's appearance on Thursday. There was also a rejection of bond declines, even though bond yields briefly reached new cycle highs in the morning. Fed Speak heard Fed dove Bostic play with the idea that a higher neutral interest rate is possible, while Harker reiterated his view of no more hikes, and Mester spoke in a more hawkish tone than her peers. Oil and Gold have retreated from their previous highs as a result of the hostage releases. The FX vol was muted, with little change in the DXY. USD/JPY experienced a sudden drop as the cross crossed the 150-level, but the cross has now returned to just below the round number. Sterling recovered all its losses on the backs of weak UK retail sales.
She said that while she had seen some progress in the inflation rate, it was still too high. She is not convinced that they have reached 2%. She noted, however, that the economy is continuing to perform well and the labour market is tight. Logan stated that it was important to have restrictions on the financial markets and economy in general. The Fed also has the time to monitor the economy before making a decision about monetary policy. Logan said that part of the bond yield increase is due to term premiums, and part is due to economic data. She added that the rise of bond yields is pretty orderly, and the bond markets are working, but she's still on the lookout for problems. Logan said she was not considering when the Fed could cut rates, but that a persistent increase in bond yields would reduce the need for Fed rate increases.
He said that he doesn't know if neutral rates have changed but suggested they could be higher. He reiterated his belief that the Fed could cut rates in late 2024. Bostic said that his contacts in business are predicting a slowdown and are preparing for it. He also noted we won't see a recession, but inflation will reach 2%. Bostic said that many businesses have cash on hand, which will dampen the increase in market yields. He said that the economy has been resilient and inflation has dropped significantly.
Dove (2023 voter) reiterated the need to keep rates stable, as the Fed can't allow inflation to accelerate. The Philadelphia Fed President said that the US economy and jobs market are "remarkably resilient" and remain "surprisingly strong". Harker has heard that the inflation rate is dropping faster than expected and contacts want time to adjust policy.
She reiterated that she agrees with the Fed's forecast and is looking to raise rates one more time. Mester noted that the sustained rise in bond yields will moderate economic activity. Mester stated that the Fed must be flexible with its policy and not complacent in achieving 2% inflation. Cleveland Fed President Mester said decisions would be based on economic data. He noted that the labour market is showing signs of moderation, resilience and moderate wage increases. Recent developments may slow down the inflation rate, but the Fed underestimated inflation levels up until recently. She said that she also considers the money supply in assessing policy. Mester concluded that the Fed has a few more years to reduce its balance sheet, regardless of changes in interest rates.
Following the escalation seen on Thursday, (reports of an imminent ground invasion), there were more encouraging updates Friday. Bloomberg reports that the US has been pressuring Israel to postpone the Gaza invasion in order to secure hostage releases. After initially refusing to do so, Israel finally agreed to wait. Hamas released the first two hostages, a Hamas spokesperson said that they did so in response to Qatari humanitarian efforts. This was confirmed later by officials. Earlier, it had been reported that Israel announced plans to evacuate the city of Kirya shmona, near the Lebanese-Israel border. Hezbollah, meanwhile, was targeting Israeli targets with guided missiles.
T-NOTE FUTURES (Z3) SETTLED 18+ STICKS HIGHER AT 106.00
Treasuries rallied over the weekend in particular the front and belly as the dust settled after Powell's speech and traders rejected new yield heights.
2s at 5.084% -8.7bps, 3s at 4.924% -10.5bps, 5s at 4.856% -10.5bps, 7s at 4.923% -9.5bps, 10s at 6.8bps, 20s at 5.286% -4.8bps, 30s at 5.080% -2.2bps
10yr BEI +2.5bps @ 2.465%; 30yr BEI--0.9bps @ 2.548%.
Treasuries were on top of the market Friday morning. The APAC session saw several block purchases, followed by a more aggressive bid on the London morning, which took T-Notes up to the resistance of 105-28, before the post-Powell 105-20 high. The geopolitical uncertainty and weekend hedges have been cited as factors. However, the surge in the European session has also been attributed in part to the weak UK retail data. Gilts opened higher after their reopen.
T-Notes were down a few ticks at the NY handover. The downside was more pronounced and the long end took the lead as US trade began. This coincided with Fed dove Bostic (2024 vote) saying on CNBC that the neutral rate might have increased, although he reaffirmed his view of a possible rate cut in late 2024. Cash 30yr yields reached a new high of 5.146% and the 10-year yields brushed near their post-Powell peak of 5%. T-Notes printed a low at 105-15+ before strong buying took over, without any obvious catalyst other than a technical reject. T-Notes went on to print session lows of 106-6 late in the NY morning. The settlement saw some contracts reduced, as the market was pleased with Hamas's release of two US Hostages. Demand for haven assets also decreased. Fed's Mester (hawkish, 2024 voter) made some comments that were slightly less dovish.
Next Week's Auctions
US will sell USD 51bln in 2yr FRNs on October 24th. USD 52bln in 5yr FRNs on Oct 25, and USD 38bln in 7yr FRNs on Oct 26th. All to be settled on October 31st. US will sell USD 26bln in 2yr FRNs to settle on October 31st.
SR3Z3 +2.5bps at 94.575, H4 +4bps at 94.665, M4 +6bps at 94.875, U4 +9bps at 95.12, Z4 +12bps at 95.365, H5 +14bps at 95.58, M5 +15bps at 95.705, U5 +15bps at 95.755, Z5 +15bps at 95.755, Z6 +11bps at 95.66, Z7 +9bps at 95.53.
Volumes rose to USD 1.3998tln, up from USD 1.396tln.
Demand for NY Fed RRP Ops at USD 1,139tln. (Prev. Demand for NY Fed RRP op at USD 1.139tln (prev. 97).
Volumes increase to USD 90bln, up from USD 89bln.
WTI (Z3) SETTLED US $0.29 LOWER, AT 88.08/BBL. BRENT(Z3) SETTLED US $0.22 LOWER, AT 92.16/BBL
After Hamas released hostages, oil prices fell on Friday as Israel's anxiety about the weekend eased.
WTI and Brent futures peaked at USD 90.78/bbl apiece and 93.79/bbl respectively. Participants were preparing for a weekend filled with geopolitical risks amid reports that IDF was on the verge of entering Gaza. The prices were holding gains until NY afternoon, when Israel confirmed that Hamas released two US hostages. Crude futures reversed gains and settled at lows. Benchmarks were still higher for the week. Baker Hughes' US weekly rig count showed oil rigs +2 at 502 while nat. gas rigs were up 1 at the 118 mark. JPMorgan's Sell Side strats predict a mostly balanced oil market for Q4 with Brent ending the year at USD86/bbl.
: SPX -1.26% at 4,224, NDX -1.50% at 14,561, DJI -0.86% at 33,127, RUT -1.29% at 1,681
Energy -1,74%, Technology -1,69%, Consumer Discretionary (CD) -1,66%, Financials (1,55%), Materials (Materials) -12,29%, Communication Services (1,15%), Utilities (Utilities) -10,05%, Industrials (10,03%), Real Estate (0,54%), Health (0,4%), Consumer Staples (0,38%).
: DAX -1.64% at 14,798.47, FTSE 100 -1.30% at 7,402.14, CAC 40 -1.52% at 6,816.22, Euro Stoxx 50 -1.57% at 4,026.25, IBEX 35 -1.29% at 9,029.10, FTSE MIB -1.40% at 27,357.00, SMI -0.95% at 10,348.60, PSI -1.18% at 6,039.46.
American Express (AXP).
It reaffirmed revenue and EPS forecasts for FY, while also being well positioned to reach its long-term growth goals. The reaffirmed guidance, however, has disappointed many with the shares falling.
Intuitive Surgery (ISRG)
EPS was better than expected, but revenue fell short of expectations. The Da VINCI system and worldwide procedure growth also missed.
Revenue missed but EPS beat.
The company has slashed revenue, operating income, and gross margins.
The deal could be worth USD 22bn for the Japanese company, depending on how successful the cell-targeting treatments are.
The Model X Plaid all-wheel drive was priced at 5.5% more. DPA News Agency reported that TSLA expects to receive approval for the expansion of its factory just outside Berlin.
Eli Lilly's LLY
According to a WSJ report, a weight loss GLP-1 medication is unlikely to be approved before 2026.
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The agreement on Tesla superchargers for North America was reached.
Alphabet Inc (GOOGL)
TechCrunch reports that Google plans to begin assembling the Pixel 8 Pro and Pixel 8 in India in 2024 and to ship products made in India. UAW negotiator: Getting closer to tentative agreement
General Motors (GM),
Bloomberg reports that Stellantis (STLA), GM, Ford and Ford (F), are all offering pay increases of 23%, while the UAW wants a pay increase of 25%. Meanwhile,
The UAW's current strike action has a weekly impact of around USD 6mln. Throughout the year, the supply chain stability has improved with fewer customer cancellations. Meta (META), and Google (GOOGL), both pulled out of the web summit.
Spirit Airlines (SAVE)
It has cancelled some of its flights in order to conduct a required inspection on a small portion of 25 of their aircraft. The impact of the cancellation is expected to last for several days, and it was done out of a sense of caution.
WEEKLY FX REPORT
As geopolitical tensions increase, oil gushes are followed by gold rushes
The conflict between Israel's Hamas and the US President Biden continued to rage and threaten to escalate on several occasions. Hamas issued a worrying warning about a day of unprecedented terror when he visited his Israeli counterpart in person and offered support. The war continued to rage and threaten to escalate at several points. Hamas issued a warning on a day of unprecedented terrorism on Wednesday, when US President Biden personally visited his Israeli counterpart in order to offer support. Another potential flashpoint was the tragic bombing that occurred inside a Gaza Hospital, which sparked accusations on both sides. The demand for safe havens, however, was not indiscriminate but rather selective. This is evident by the relative 'underperformance of the Dollar' and another slide in US Treasuries. In fact the 10-year yield rose from 4.64% up to within a whisker 5%. And the long bond broke the psychological 5% mark clearly after recent rejections. The DXY, which is a reference to the Dollar, peaked after robust retail sales and before Fed Chair Powell's balanced remarks. Powell said that policy was not too tight but that higher bond yields could reduce the need for additional tightening. The index peaked at 106.670, then reversed to 105.970 in a single session to set the w-t - d boundaries on Thursday. It remained low as the week ended despite greater strength in crude oil and gold. WTI gained a hefty premium in the supply chain on its way from Usd 85.60/brl to Usd 95.78/brl (printed following reports that the US had clinched a agreement with Venezuela to lift sanctions against oil) and Xau/Usd topped Usd 1996/oz after being sub-Usd 1920/oz for a time. It's no surprise that the Loonie was able to appreciate crude's resurgence in response to Canadian CPI metrics which were weaker than expected. This boosted the odds of a BoC increase for October 25, with Usd/Cad falling from 1.3734 down to 1.3671 within the wider 1.3740-1.3607 weekly range.