Key test for markets with US CPI set to dominate attention in an environment of risk off sentiment

Notes/Observations

- European underlying inflation remains a headwind for key European countries

- Hotter-than-expected Swedish inflation data creates rising expectations for a Dec rate hike by Riksbank

- Turkey registers its 1st current account surplus since Sept 2015 (+$2.6B v +$2.5Be)

- Focus turns to key US CPI data for Sept

- European Indices registers multi month lows as selling intensifies

Asia:

- BOJ Sakurai reiterated need to continue with easing persistently, needed to continue easing cautiously

- DoJ charged alleged Chinese govt spy of economic espionage for theft of trade secrets from leading US aerospace cos

Europe:

- UK and EU are said to have agreed in principle on an all-UK backstop plan. 'Removed final major obstacle blocking a withdrawal agreement'. PM May to ask Brexit 'war cabinet' to keep UK in EU customs union until permanent deal can be agreed

- EU Brexit Negotiator Barnier: Brexit deal within reach if PM May agrees on customs union. could be within reach by next Wednesday EU Leader Summit

- Sun's Political Editor Dunn: "A lot of conflicting reports around tonight, but I am still told by a senior Govt source that any deal with the EU is 'still some way off'

Americas

- President Trump: "Fed is going loco, no reason for them to do it"; "Fed is going wild, don't know what their problem is"; "the problem is the Fed" - Fox interview

- Treasury Sec Mnuchin stated that he et with PBOC Gov Yi Gang and discussed important economic issues. Was not surprised market was having somewhat of a correction but nothing specific occurred today for market to react. Reiterated US was concerned about yuan currency depreciation. Market handling supply from Fed unwinding 'very well'

 

Energy

- Weekly API Oil Inventories: Crude: +9.8M v +0.9M prior

- Goldman Sachs analyst: US oil production can continue to grow 1M bpd annually until 2021

 

Macro

(UK) UK: The EU's chief negotiator Barnier reiterated during his speech yesterday a rejection of the UK government's Chequers plan, arguing that it would give the UK a competitive advantage over remaining EU member nations. He also re-outlined the EU's backstop plan for the Irish border problem. The third area Barnier addressed was how the future framework would be negotiated after the legal Brexit date on March 29th next year during a two-year transitional period. The speech will have been a major concern for PM May just a week out from the EU leaders' summit in Brussels. It now looks more likely as ever that she will have no choice but to back down from her demands for partial access to the single market. The Irish border backstop remains a significant hurdle, as the only acceptable solution to the Ireland, and thereby the EU, thus far involves running a border down the Irish Sea, which the DUP party continues to object to.

(ES) Spain: Local press report the government and Podemos have sealed a budget pact. Soon after taking office, the government had said it wanted to run bigger deficits than the previous administration and targeted 1.8% of GDP for next year, up from 1.3%. It’s due to send its draft budget to the European Commission by Oct. 15, but the real hurdle is within the Spanish parliament where PSOE only commands a quarter of the seats. Facing a veto in the Senate from the conservative PP over fiscal rules, any proposal with looser targets will be a hard sell. The PP and market friendly Ciudadanos have vowed to reject the budget proposal, leaving PM Sanchez relying on hard-left Podemos and smaller, regional parties including pro-independence parties in Catalonia to get the budget through. If Sanchez, who has seen support rise in recent polls, judges the political price of his options is too high, like rolling over the existing PP budget or reverting to the their deficit target, then he could call a snap election and try to get a full mandate for his vision for Spain.

(EU) ECB: The final reading for French HICP was confirmed at 2.5% y/y & Spanish HICP inflation was revised up to 2.3% y/y. Headline rates are way above the ECB's upper limit for price stability but, with energy price inflation the main factor, underlying inflation remains low. ECB officials have admitted that tight labor markets and slow wage growth will eventually push up core rates.

 

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx600 -1.7% at 361, FTSE -1.7% at 7020, DAX -1.2% at 11572, CAC-40 -1.4% at 5133, IBEX-35 -1.4% at 9030, FTSE MIB -1.4% at 19449, SMI -2.2% at 5697, S&P 500 Futures -0.9%]

Market Focal Points/Key Themes:

European Indices trade sharply lower across the board following on from sharp losses on Wallstreet overnight, and
weaker Asian Indexes, as European Indices hit mutli month lows. The DAX and FTSE MIB trade at new 20 Month lows as continued macro economic tensions weigh.
On the corporate front Dialog Semiconductor bucks the trend rising over 25% after it announces a deal with Apple; Dunelm also trades higher after a trading update with Ingenico a notable riser after reports its drawing interest from Edenred. Notable fallers include Keller Group down over 25% after a profit warning; Suedzucker, Hays, WH Smith, GEA Group are other earnings related decliners.
Looking ahead notable earners include Delta, Walgreens Boots Alliance and Commerce Bank shares.

 

Equities

- Consumer discretionary: Kappahl Holdings [KAHL.SE] -12% (earnings), Ingenico [ING.FR] +11%, Natixis [KN.FR] -5%, Edenred [EDEN.FR] -2% (Natixis confirms discussions regarding combining payment activities; Ingenico said also to draw preliminary interest from Edenred), WH Smith [SMWH.UK] -13% (earnings), Hays [HAS.UK] -11% (earnings; CEO comments on exchange rate headwinds), Dunelm [DNLM.UK] +4.4% (earnings), Brown (N) Group [BWNG.UK] -22% (Earnings)

- Consumer staples: Suedzucker [SZU.DE] -0.7% (earnings)

- Financials: Hargreaves Lansdown [HL.UK] -6% (trading update)

- Industrials: GEA Group [G1A.DE] -4.4% (outlook cut)

- Technology: Dialog Semiconductor [DLG.DE] +26% (deal with Apple), Keller Group [KLR.UK] -27% (trading update)

 

Speakers

- ECB's Rehn (Finland) reiterated that core inflation remained still rather weak, so accomodative policy was still necessary

- ECB's Hansson (Estonia): Happy with where we stand with forward guidance. Could have a further discussion about level of precision, ambiguity

- Sweden Central Bank (Riksbank) Dep Gov Skingsley: Negative rate policy to be exited in 2019; inflation and inflation expectations were on target

- Bank of England (BOE) Credit Conditions & Bank Liabilities Surveys noted that overall demand for unsecured lending increased significantly in Q3; this was solely driven by a significant increase in demand for credit card lending

- Ireland Foreign Min Coveney: no agreement yet on Brexit; still a lot work to be done on deal

- Italy Dep PM Salvini reiterated Italy govt would not backtrack on its budget; rating agencies would not make the govt change its mind

- Italy League party official Borghi (budget committee) said to expect EU rejection of italy 2019 fiscal plan

- ESM's Regling stated that saw no immediate danger of Italy losing market access nor being downgraded below Investment Grade

- German Economic Ministry said to seek €20B in annual corporate tax cuts

- India Economic Affairs Sec Garg: Current account deficit not expected to cross the 3% level

- China PBoC Gov Yi Gang: Macro economy was stable and able to achieve 2018 growth target. Monetary policy was based upon the domestic economy. Financial risks were controllabl with macro leveraging ratio being stabilized

- China Commerce Ministry (MOFCOM)rReiterated its stance that US must stop its unilateralism and protectionism; reiterated its willingness to resume trade talks

- India Finance Ministry official: Working on finalizing a 2nd list of import curbs; to make an announcement soon

- OPEC Sec Gen Barkindo: oil market is steadily seeing brighter path ahead. Oil market balance continuously being tested and noted that Russia and Saudi Arabia to work with OPEC to ensure there was no shortages

- UAE Energy Min Mazrouei (OPEC president): UAE began to increase its oil production in Q3. Expects to further increase its production levels in Oct and Nov. Production capacity by year-end 2018 will be 3.5M bpd

 

Currencies

- USD was at multi-week lows as risk off sentiment continued to simmer and push US Treasury yields lower.

- EUR/USD holding onto slight gains in session but analysts noted that underlying inflation still lacked vigor thus providing time before ECB gets the job done. Italian budget concerns also continue to be a headwind as various Italian officials reiterated the stance that they will not be pressured into change the 2019 fiscal plan.

- Despite optimism on the Brexit front, the GBP/USD saw its initial gains evaporate with the pair back below the 1.32 level just ahead of the NY morning.

- Higher-than-expected Swedish CPI data prompted the markert to push forward its expect 1st rate hike by the Riksbank to Dec (from Feb). EUR/SEK fell 1% in the aftermath of the data to test the 10.40 area.

 

Fixed Income

- Bund Futures trades at 158.41 up 29 ticks as the 10-year Bund falls back below the 0.50% level. A downside break of 157.25 sees 155.69 initially. To the upside 158.50 remains initial resistance.

- Gilt futures trades at 119.61 down 13 ticks following the move in Treasuries. Continued support at 120.50, with a continued move higher targeting 123.93 then 124.00.

- Thursday's liquidity report showed Wednesday's excess liquidity rose from €1.892T to €1.897T. Use of the marginal lending facility stayed fell from €40M to €35M.

- Corporate issuance saw 4 issuers raise $5.4B in the primary market

 

Economic Data:

- (FR) France Sept Final CPI M/M: -0.2% v -0.2%e ; Y/Y: 2.2% v 2.2%e

- (FR) France Sept Final CPI EU Harmonized M/M: -0.2% v -0.2%e ; Y/Y: 2.5% v 2.5%e , CPI Ex-Tobacco Index: 103.25 v 103.28e

- (ES) Spain Sept Final CPI M/M: 0.2% v 0.2%e ; Y/Y: 2.3% v 2.2%e

- (ES) Spain Sept Final CPI EU Harmonized M/M: 0.6% v 0.6%e ; Y/Y: 2.3% v 2.2%e

- (ES) Spain Sept CPI Core M/M: 0.0%v 0.1% prior; Y/Y: 0.8% v 0.9%e

- (ES) Spain Aug House transactions Y/Y: 7.4% v 16.2% prior

- (TR) Turkey Aug Current Account: +$2.6B v -$2.5Be (1st surplus since Sept 2015)

- (SE) Sweden Sept CPI M/M: 0.5% v 0.3%e ; Y/Y: 2.3% v 2.2%e

- (SE) Sweden Sept CPIF M/M: 0.5% v 0.3%e ; Y/Y: 2.5% v 2.3%e, CPI Level: 331.14 v 330.46e

- (SE) Sweden Sept Average House Prices (SEK): 2.770M v 3.010M prior

- (GR) Greece July Unemployment Rate: 19.0% v 19.1% prior

 

Fixed Income Issuance

- (SE) Sweden sold SEK500M in I/L 2032 bonds; Avg Yield: -0.8752% v -0.7603% prior; Bid-to-cover: 2.69x v 3.14x prior

- (IT) Italy Debt Agency (Tesoro) sold total €6.5B vs. €5.0-6.5B indicated range in 2021, 2025, 2033 and 2037 BTP bonds

- Sold €3.5B vs. €3.0-3.5B indicated rangein new 2.30% 2021 BTP; Avg Yield: 2.51% v 1.20% prior; Bid-to-cover: 1.26x (lowest since Apr 2017) v 1.67x prior

- Sold €1.5B vs. €1.0-1.5B indicated range in 2.50% Nov 2025 BTP; Avg Yield: 3.28% v 2.55% prior; Bid-to-cover: 1.90x v 1.28x prior

- Sold €942M in 2.45% Sept 2033 BTP; Avg Yield: 3.66% v 3.04% prior; Bid-to-cover: 1.41x v 1.46x prior(

- Sold €558M in 4.00% Feb 2037 BTP; Avg Yield: 3.79% v 2.93% prior; Bid-to-cover: 1.90x v 2.15x prior

 

Looking Ahead

- (PT) Bank of Portugal Releases October Economic Bulletin

- (UK) May's to hold inner cabinet meeting with ministers (rather than all top ministers)

- (PT) Bank of Portugal October Economic Bulletin

- (AR) Argentina Aug Capacity Utilization: No est v 60.1% prior

- 05:30 (HU) Hungary Debt Agency (AKK) to sell Bonds (3 tranches)

- 06:00 (IE) Ireland Sept CPI M/M: No est v 0.3% prior; Y/Y: No est v 0.7% prior

- 06:00 (IE) Ireland Sept CPI EU Harmonized M/M: No est v 0.3% prior; Y/Y: No est v 0.9% prior

- 06:00 (PT) Portugal Sept Final CPI M/M: No est v 1.1% prelim; Y/Y: No est v 1.4% prelim

- 06:00 (PT) Portugal Sept Final CPI EU Harmonized M/M: No est v 1.5% prior; Y/Y: 1.8%e v 1.8% prior

- 06:00 (IL) Israel Sept Trade Balance: No est v -$2.2B prior

- 06:00 (RO) Romania to sell Bonds

- 06:45 (US) Daily Libor Fixing

- 07:00 (ZA) South Africa Aug Manufacturing Production M/M: -0.3%e v +1.6% prior; Y/Y: 1.2%e v 2.9% prior

- 08:00 (BR) Brazil Aug Retail Sales M/M: +0.2%e v -0.5% prior; Y/Y: +1.4%e v -1.0% prior

- 08:00 (BR) Brazil Aug Broad Retail Sales M/M: +2.4%e v -0.4% prior; Y/Y: 5.1%e v 3.0% prior

- 08:00 (BR) Brazil CONAB Crop Report

- 08:15 (UK) Baltic Dry Bulk Index

- 08:30 (US) Sept CPI M/M: 0.2%e v 0.2% prior; Y/Y: 2.4%e v 2.7% prior

- 08:30 (US) Sept CPI Ex Food and Energy M/M: 0.2%e v 0.1% prior; Y/Y: 2.3%e v 2.2% prior

- 08:30 (US) Sept CPI Index NSA: 252.697e v 252.146 prior, CPI Core Index SA: 258.629e v 258.141 prior

- 08:30 (US) Initial Jobless Claims: 209Ke v 207K prior; Continuing Claims: 1.66Me v 1.650M prior

- 08:30 (US) Sept Real Avg Weekly Earnings Y/Y: No est v 0.5% prior; Real Avg Hourly Earning Y/Y: No est v 0.2% prior

- 08:30 (CA) Canada Aug New Housing Price Index M/M: 0.1%e v 0.1% prior; Y/Y: 0.5%e v 0.5% prior

- 09:00 (RU) Russia Gold and Forex Reserve w/e Oct 5th: No est v $461.1B prior

- 10:30 (US) Weekly EIA Natural Gas Inventories

- 11:00 (US) Weekly DOE Crude Oil Inventories

- 11:00 (US) Treasury announcement for upcoming 30-year TIPS reopening for Oct 18th

- 12:00 (US) USDA World Agricultural Supply and Demand Estimate (WASDE) Crop Report

- 13:00 (US) Treasury to sell 30-Year Bonds Reopening

- 19:00 (PE) Peru Central Bank (BCRP) Interest Rate Decision: Expected to leave Reference Rate unchanged at 2.75%