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ECB Governing Council member Klass Knot said, "we need at least two more significant hikes before we enter the range of plausible estimates for neutral... That'll take us into next year."

"This problem will not go away with a little of slowdown in the economy -- it will require continued effort from our side, and the Council is unanimous on that," he said.

"The way the Fed is dealing with QT -- that's clearly also going to be an example for us, they managed to move it into the background very quickly," Knot said. "A process like QT -- it should be predictable, it should be gradual, it should be even a little bit boring."

Markets

Be careful what you wish for. The Bank of England wishes to end its emergency bond buying at the very long end of the curve after this week, but markets are calling the UK central bank’s likely bluff. The UK 30-yr yield exceeds the 5% mark today for the first time since the huge sell-off early September which triggered the BoE’s U-turn on bond buying – be it for “financial stability reasons”. Recall that it was UK Chancellor Kwarteng’s mini-Budget (£65bn of debt-funded tax cuts) which lighted the fire. It forced a huge repricing of UK credit risk given the country’s big twin deficits and given the Bank of England’s shrinking of its QE bond portfolio. UK yields today rise by up to 27 bps at the very long end even as the BoE is probably intervening big time to stop the rot. We think it’s strange that sterling manages an intraday comeback today with EUR/GBP falling back from 0.8850 to 0.8785. In the current market climate, we’ve seen similar useless interventions in FX space. USD/JPY today for example sets a new multi-decade high of 147 despite the ministry of Finance burning through its reserves. The USD/JPY 1998 high of 147.66 is within reach. Next resistance is the 1990 top of 160.20.

The sell-off in UK Gilt markets spills to European bond markets. The reasoning on the return of some sort of European credit risk premium holds. Several nations presented multibillion fiscal support packages to help carry the burden of the energy crisis. Germany floated the idea to use the “exceptional” route of EU debt again (eg SURE-programme to finance unemployment benefits in the wake of the COVID-pandemic). The monetary context in Europe is also evolving to a central bank withdrawing liquidity by letting its bond portfolio wind down from next year onwards. The German yield curve bear steepens with yields rising by 6.3 bps (2-yr) to 15.8 bps (30-yr). German Bunds underperform swaps with the EMU swap curve up to 8 bps higher. US Treasuries sail quietly through the storm ahead of tomorrow’s CPI release. Daily changes are limited to +-1 bp. Main European stock markets trade between 0.5% to 1.5% in the red with US stock markets opening without conviction. EUR/USD flips up and down the 0.97 big figure.

News Headlines

OPEC for the fourth time this year cut its forecast for global oil demand growth. According to the OPEC statement, oil demand growth in 2022 is revised down by 0.5mn b/d due to macroeconomic trends and oil demand developments in various regions. These developments include the extension of China's zero-COVID-19 restrictions in some regions, economic challenges in OECD Europe, and inflationary pressures in other key economies. The factors have weighed on oil demand, especially in 2H22. With this, global oil demand for 2022 is now expected to grow by about 2.6mn b/d, 460 000 b/d lower compared to the previous forecast. In the OECD, oil demand growth is estimated at about 1.4m b/d with the non-Europe OECD at about 1.3 mb/d. 2023 world oil demand growth is revised down to about 2.3mn b/d to 102.02mn b/d (a downward revision of 360 000 b/d). Still OPEC expects 2023 demand to return to surpass the pre-pandemic level of 2019. Brent oil eases slightly today to trade just below $94/b.

Indian inflation in September rose further to 7.41% Y/Y, holding above the 4.0% +/-2.0% target band of the Reserve Bank of India throughout the whole of this year. The consumer food price index, rose 0.98% to be up 8.6% compared to the same period last year. Aside from the rise of individual product groups, the ongoing depreciation of the value of the rupee adds to broader inflationary pressures. The RBA at the end of last month raised its repurchase rate by 50 bps to 5.90%. A further, potentially more modest rise is expected at the next (December) meeting. At USD/INR 82.3, the rupee continues trade within reach of the all-time low gains the dollar reached earlier this week.

Daily Pivots: (S1) 0.9660; (P) 0.9718; (R1) 0.9762; More...

Despite loss of downside momentum, further decline is still in favor in EUR/USD for retesting 0.9534 low. Firm break there will resume larger down trend for 100% projection of 1.0368 to 0.9534 from 0.9998 at 0.9163. For now, risk will stay on the downside as long as 0.9998 resistance holds, in case of recovery.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, break of 0.9998 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish even with strong rebound.

Daily Pivots: (S1) 1.0889; (P) 1.1035; (R1) 1.1116; More...

Intraday bias in GBP/USD remains mildly on the downside with 1.1178 minor resistance intact. Deeper fall would be seen to retest 1.0351 low. On the upside, above 1.1178 minor resistance will turn intraday bias neutral again. But near term risk will stay on the downside as long as 1.1494 resistance holds, in case of recovery.

In the bigger picture, fall from 1.4248 (2018 high) is resuming long term down trend from 2.1161 (2007 high). Next target is 100% projection of 2.1161 to 1.3503 from 1.7190 at 0.9532. There is no scope of a medium term rebound as long as 1.1759 support turned resistance holds.

Daily Pivots: (S1) 0.9916; (P) 0.9969; (R1) 1.0021; More...

Intraday bias in USD/CHF stays neutral for the moment. While deeper retreat cannot be ruled out, break of 0.9779 support is needed to indicate short term topping. Otherwise, outlook will stay cautiously bullish in case of retreat. On the upside, above 1.0019 will target 1.0063 high first. Decisive break there will resume larger up trend.

In the bigger picture, current development suggests that up trend from 0.8756 (2021 low) is still in progress. Sustained break of 1.0063 will target 100% projection of 0.9149 to 1.0063 from 0.9369 at 1.0283, and then 1.0342 (2016 high). For now, this will remain the favored case as long as 0.9369 support holds, even in case of deep pull back.

Daily Pivots: (S1) 145.56; (P) 145.73; (R1) 146.03; More...

USD/JPY's rally continues today and accelerates to as high as 146.81 so far. Intraday bias remains on the upside for 147.68 long term resistance. On the downside, break of 145.789 resistance turned support will turn intraday bias neutral and bring consolidations again. But overall, outlook will remain bullish as long as 140.33 support holds, even in case of deep pullback.

In the bigger picture, up trend from 101.18 is still in progress, as part of the whole up trend from 75.56 (2011 low). Further rise should be seen to 147.68 (1998 high), and possibly to 100% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 149.26, For now, break of 130.38 support is needed to be the first indication of medium term topping. Otherwise, outlook will stay bullish even in case of deep pull back.

Dollar surges further in early US session against Yen, after BoJ Governor Haruhiko Kuroda dropped no hint on intervention despite today's Yen selloff. Indeed, he noted that Yen depreciation could be could for the economy as a whole, just that speculation driven move is bad. But the greenback is actually struggling to gain against other major currencies. FOMC minutes will be featured later today but they're unlikely to reveal anything new. Traders will be keenly awaiting tomorrow's US CPI release.

Technically, one focus for now is whether USD/JPY's rally could taken other Yen crosses higher, especially EUR/JPY and GBP/JPY. Both are still having 140.77 and 159.41 minor support levels in pocket. Break of 144.06 and 165.69 will resume last week's rebound, towards 145.62 and 148.93 highs respectively.

In Europe, at the time of writing, FTSE is down -0.67%. DAX is down -0.25%. CAC is down -0.29%. Germany 10-year yield is up 0.107 at 2.410. Earlier in Asia, Nikkei dropped -0.02%. Hong Kong HSI dropped -0.78%. China Shanghai SSE rose 1.53%. Singapore Strait Times dropped -0.70%. Japan 10-year JGB yield dropped -0.007 to 0.254.

BoJ Kuroda: Yen depreciation may have good impact on economy, but speculation is bad

BoJ Governor Haruhiko Kuroda said, "yen depreciation may have a good impact on macro-economy as a whole, but there are some sectors which are suffering from weak yen." He added that "we have to carefully watch, and analyze the impact of currency movements on the economy."

Kuroda also qualified that "if currency movement is so fast and uni-direction, probably caused by speculation, that would be bad for the economy."

Meanwhile, he reiterated, "we will continue our monetary easing to achieve the 2% inflation target in a stable and sustainable manner."

US PPI up 0.4% mom, 8.5% yoy in Sep

US PPI for final demand rose 0.4% mom in September, above expectation of 0.2% mom. Two-thirds can be traced to a 0.4% mom prices for services. The index for goods rose 0.4%. Prices less food, energy, and trade services rose 0.4% mom.

For the 12 months ended in the period, PPI slowed from 8.7% yoy to 8.5% yoy. PPI ex food, energy and trade was unchanged at 5.6% yoy.

BoE Pill: A significant monetary policy response required in Nov

BoE Chief Economist Huw Pill said in a speech, "Given the uncertain world and volatile markets we face, November can seem a long time away. At present, I am still inclined to believe that a significant monetary policy response will be required to the significant macro and market news of the past few weeks."

"But I will see when we get to November how events have evolved in the meantime. As always, my policy choices will be driven by the data and guided by pursuit of the inflation target," he added.

UK GDP contracted -0.3% mom in Aug, driven by production

UK GDP contracted -0.3% mom in August, worst than expectation of 0.1% mom expansion. In the three months to August, compared with the three months, GDP contracted by -0.3%, with -1.5% fall in production, -0.1% fall in services and flat growth in construction.

Production fell by -1.8% mom, and was the main contributor to the decline in GDP. Growth was negative in three of the four sectors. Services dropped -0.1% mom. Construction rose 0.4% mom.

Also released, industrial production came in at -1.8% mom, -5.2% yoy, versus expectation of -0.2% mom, 0.6% yoy. Manufacturing production came in at -1.6% mom, -6.7% yoy, versus expectation of 0.0% mom, 0.7% yoy. Goods trade deficit widened to GBP -19.3B, but smaller than expectation of GBP -20.5B.

UK NIESR: Energy price guarantees to drive GDP growth higher in Q4

NIESR said the -0.3% contraction in UK GDP in August "possibly signalling the beginning of an economic recession". Given that September PMI pointed to further decrease in the manufacturing sector, it's likely to continue to drag on the economy in Q3.

However, it expects "the energy price guarantees for households and firms announced in September's fiscal event to drive GDP growth higher in the fourth quarter. The extent to which the measures in the mini-budget will counter the dampening effects of plummeting confidence and increased interest rates will become clearer over the coming months."

Eurozone industrial production up 1.5% mom in Aug, EU up 1.1% mom

Eurozone industrial production rose 1.5% mom in August, above expectation of 0.5% mom. Production of capital goods rose by 2.8% mom, durable consumer goods by 0.9% mom and non-durable consumer goods by 0.7% mom, while production of intermediate goods fell by -0.5% mom and energy by 2.1% mom.

EU industrial production rose 1.1% mom. Among Member States for which data are available, the highest monthly increases were registered in Ireland (+16.6%), Estonia (+5.0%) and Denmark (+4.3%). The largest decreases were observed in Sweden (-7.0%), Belgium (-6.1%) and the Netherlands (-1.5%).

RBA Ellis: Neutral is not a destination we necessarily reach

RBA Assistant Governor Luci Ellis said in a speech that "don't think of this as a mechanistic approach of 'we have to get back to neutral', or above neutral" interest rate.

"The neutral rate is an important guide rail for thinking about the effect policy might be having. It is not necessarily a prescription for what policy should do," he said.

"'Neutral', then, is not a destination we necessarily reach, but more a pole-star to guide us. And even then, its location is sufficiently uncertain that we are perhaps better served by paying more attention to the ground as it shifts beneath our feet than to that faraway pole-star," he added.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 145.56; (P) 145.73; (R1) 146.03; More...

USD/JPY's rally continues today and accelerates to as high as 146.81 so far. Intraday bias remains on the upside for 147.68 long term resistance. On the downside, break of 145.789 resistance turned support will turn intraday bias neutral and bring consolidations again. But overall, outlook will remain bullish as long as 140.33 support holds, even in case of deep pullback.

In the bigger picture, up trend from 101.18 is still in progress, as part of the whole up trend from 75.56 (2011 low). Further rise should be seen to 147.68 (1998 high), and possibly to 100% projection of 75.56 (2011 low) to 125.85 (2015 high) from 98.97 at 149.26, For now, break of 130.38 support is needed to be the first indication of medium term topping. Otherwise, outlook will stay bullish even in case of deep pull back.

Economic Indicators Update

BoJ Governor Haruhiko Kuroda said, "yen depreciation may have a good impact on macro-economy as a whole, but there are some sectors which are suffering from weak yen." He added that "we have to carefully watch, and analyze the impact of currency movements on the economy."

Kuroda also qualified that "if currency movement is so fast and uni-direction, probably caused by speculation, that would be bad for the economy."

Meanwhile, he reiterated, "we will continue our monetary easing to achieve the 2% inflation target in a stable and sustainable manner."

BoE Chief Economist Huw Pill said in a speech, "Given the uncertain world and volatile markets we face, November can seem a long time away. At present, I am still inclined to believe that a significant monetary policy response will be required to the significant macro and market news of the past few weeks."

"But I will see when we get to November how events have evolved in the meantime. As always, my policy choices will be driven by the data and guided by pursuit of the inflation target," he added.

Full speech here.