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Global Macro and Markets

• Global markets: Neither the Fed minutes, nor the PPI numbers yesterday pushed US Treasury yields higher. Though on the face of it, both should have done so (see more below). The 2Y yield rose a modest 1.3bp to 4.982%, but the 10Y Treasury yield dropped 9.5bp, taking it all the way back to 4.558%. At these levels, the argument that higher bond yields are doing the Fed’s work for it start to look a bit thin. This is all rather circular, since if we want to use this argument for no hike in November, then we might need to see yields rising again. Anyway, here’s our Head of Rates Strategies take on all of this.
• There was a mixed response to all of this on currency markets. In the G-10, we saw a further slight increase in EURUSD to 1.0624. Cable also gained, rising to 1.2318, while the AUD was more or less flat at 0.6418. USDJPY rose back up to 149, bucking the trend. In other Asian FX, the THB made further gains, followed by the KRW, which is now trading at 1338.78. US equity markets continued to make small gains. The S&P 500 rose 0.43% on the day, while the NASDAQ rose 0.71%. Chinese stocks also had a more solid day. The Hang Seng rose 1.29%, and the CSI 300 rose 0.28%
• G-7 macro: Newswires are reporting that investors are moving to price in that the Fed will not raise rates any further following the FOMC minutes. But it isn’t clear that this is what the minutes are saying at all. In fact, though some participants felt that there was no need to raise rates further, most thought that some more tightening was needed. All, however, agreed that they should proceed "carefully". While 10Y US Treasury yields were closer to 5% than 4%, then you could read into this “careful” wording a trade-off between bond yields and the Fed funds target. It is a lot harder to do that when 10Y yields are close to 4.5%. The inflation data out yesterday were not helpful either to the bullish bond camp. The headline PPI index for September rose 0.5%MoM, after the 0.7%MoM rise in August. Core inflation rose 0.3% MoM, also a bit stronger than expected. Both inflation rates rose in year-on-year terms. Today, it is the turn of US CPI for September, and there is likely to be a similar story here to that seen on PPI, as both headline and core CPI indices are expected to rise by 0.3% MoM – higher than consistent with the Fed’s inflation target longer-term, though helpful base effects mean that both year-on-year inflation rates should decline again. How exactly the market responds to this mixed message could tell us a lot about where we go next. Outside the US, there is a raft of UK activity data.
• India: Inflation data due out later today will show moderating food prices allowing the inflation rate for September to fall back within the Reserve Bank of India’s (RBI) 2-6% target range. We are looking for inflation to fall back to 5.8% YoY from 6.83% in August. This is a bit higher than the consensus 5.4% forecast. We don’t believe this has any implications for RBI policy near-term, which should remain on hold with the repo-rate at 6.5%. Industrial production for August is also due. A very solid 9.1% YoY growth rate is the market expectation.
• Japan: A surprisingly weak PPI result for September won’t help those arguing for the Bank of Japan to tweak policy any time soon. The headline PPI index fell 0.3% MoM, taking the annual inflation rate to just 2.0% YoY, down from 3.3% in August. Weak core machine orders (-0.5% MoM) and a slight slowdown in bank lending growth all paint a weaker-than-hoped-for picture this morning.

What to look out for: US CPI inflation

• Japan PPI and core machine orders (12 October)

• India CPI inflation (12 October)

• US CPI inflation and initial jobless claims (12 October)

• South Korea unemployment (13 October)

• China CPI inflation (13 October)

• Singapore GDP and MAS (13 October)

• US University of Michigan sentiment (13 October)

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