US PPI slows further in October

• US producer inflation slowed again in October, coming in at 0.2% m/m and 8.0% y/y, below consensus estimates of a 0.4% m/m gain. The September reading was revised lower to 0.2% m/m from 0.4% as well. Core PPI (excluding food and energy) was flat m/m as services PPI declined for the first time since November 2020 and goods inflation eased as well. The better than expected PPI data provides further evidence that inflation in the US may have peaked, allowing the Fed to slow the pace of tightening. Comments from Fed officials overnight have indicated support for this, with Bostic and Harker both indicating that slower rate hikes are likely going forward even as they continue to stress that rates will need to move higher.
• The UK’s unemployment rate increased to 3.6% in the three months to September from 3.5% previously even as wage growth (including bonuses) remained high at 6.0% y/y. Payrolls increased by a bigger than expected 74k in October indicating that demand for labour remains strong even as the economy slows. The number of job vacancies still exceeds 1.2mn, well above pre-pandemic levels.  The data is likely to provide support to hawks on the MPC, which is expected to raise rates by 50bp at the next meeting.
• The German ZEW survey showed an improvement in investor sentiment in November on expectations that inflation will slow in the coming months. Preliminary estimates for eurozone GDP confirmed the flash reading of 0.2% q/q and 1.7% y/y. The economy is expected to contract in Q4. 
• Geopolitical tensions have increased in Eastern Europe after two Russian missiles struck on the Polish side of Ukraine’s border, although Russia denied firing on Poland. NATO officials will discuss the situation today.  
• Saudi Arabia’s consumer prices rose 0.2% m/m and 3.0% y/y in October, slightly lower than the September reading of 3.1% y/y. Food prices declined -0.4% m/m in October but were up 4.4% y/y. Inflation in the kingdom has averaged just 2.3% year to date, among the lowest in the region.

Key Economic Data and Events

• 11:00 UK CPI (Oct) forecast 1.8% m/m and 10.7% y/y
• 17:30 US Retail sales (Oct) forecast 1.0% m/m
• 18:15 US Industrial production (Oct) forecast 0.1% m/m

Fixed Income

• An escalation in geopolitical tension following explosions in Poland, a NATO member, reportedly caused by Russian missiles prompted a flight to safety in the later part of trading overnight. Yields on USTs settled lower with the 2yr UST yield down 5bps at 4.3382% while the 10yr UST yield fell 8bps to 3.7696%.
• European bonds also pulled higher overnight with 10yr bund yields down about 4bps at 2.101% and the 10yr gilt yield falling 7bps to 3.285% ahead of the release of tomorrow’s budget from the UK. Emerging European bonds were generally stronger as well; Polish 10yr yields dropped almost 30bps to 6.942% while Hungarian 10yrs fell 27bps to 8.356%. South African bonds sold off moderately, with yields up 3bps to 10.711% while Turkish 10yrs were relatively unchanged.

FX

• The dollar ticked lower overnight in uncertain FX trading. EURUSD managed a gain of 0.2% to 1.0349 against the dollar while GBPUSD soared more than 0.9% to close at 1.1865. Both are moving more negatively against the dollar in early trade today, however, as some risk havens may be being sought. USDJPY dropped 0.44% to 139.28 overnight.
• Commodity currencies recovered some of their losses from earlier in the week overnight with USDCAD falling by 0.26% to 1.328 while AUDUSD added 0.8% to 0.6756 and NZDUSD jumped almost 1% to 0.6156.

Equities

• Equity markets were broadly positive yesterday, with the three major US benchmarks all gaining ground again overnight. The NASDAQ was the biggest mover once again as it closed up 1.5%, lagged by the S&P 500 (0.9%) and the Dow Jones (0.2%).
• Gains by GBP weighed on the FTSE 100 which closed down -0.2%, but the CAC and the DAX both closed 0.5% higher.
• Locally, the DFM lost -0.6% while both the ADX and Saudi Arabia’s Tadawul ended the day down -0.9%. Egypt’s EGX 30 closed flat.

Commodities

• Oil prices settled higher overnight in response to the escalating geopolitical tensions in Europe. Brent futures added 0.77% to USD 93.86/b while WTI added 1.22% to USD 86.92/b. Geopolitics will probably drive oil markets for a few days in response.
• The IEA warned about the shortage of stockpiles in OECD countries, saying distillates were “exceptionally tight” in its latest oil market report. It warned that the EU sanctions and use of a price cap on Russia will “add further pressure” on to oil markets in the coming months.

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