Welcome to the final day of the week and first day of Q3 earnings season, which coming after yesterday's torrid post-CPI reversal, has already seen a flood of newsflow and market volatility: while JPM reported solid earnings this morning to launch the latest earnings season helping push its stock higher in the premarket, followed by mediocre results from Wells and Citi and a soggy update from Morgan Stanley which sent its price down 3%, the big news of the day is the unexpected termination of UK chancellor Kwasi Kwarteng who was summarily fired as a scapegoat for the unprecedented chaos gripping the UK over the past month.

pic.twitter.com/4nvtyGWCoA

— Kwasi Kwarteng (@KwasiKwarteng) October 14, 2022

And with traders desperately scrambling to stay on top of all the flashing red headlines, futures are surprisingly flat, as S&P 500 and Nasdaq 100 futures flip between losses and gains as corporate results started rolling in. US banks are expected to post the biggest profit decline of any S&P 500 Index sector, according to data compiled by Bloomberg Intelligence, even as energy props up the entire market. The fear is Fed tightening will spark defaults and force banks to set aside higher provisions against losses.

In premarket trading, tech shares continued to weaken as Jefferies became the latest bank to highlight the impact of higher rates and US restrictions on shipments to China. Nutanix shares rose as much as 18% in premarket trading after Dow Jones reported that the company is exploring a sale after receiving takeover interest, citing people familiar with the matter. Here are some other notable premarket movers:

• Delta Air Lines (DAL US) shares gain 1.3% in premarket trading after Cowen upgraded the carrier to outperform from market perform, noting that the third quarter was strong outside of Hurricane Ian, which took earnings slightly below the broker’s estimates.
• Beyond Meat (BYND US) shares fell 10% in premarket trading after the company lowered its 2022 revenue outlook and said it’s reducing current workforce by approximately 200 employees.
• Keep an eye on Blue Owl (OWL US) as the stock was initiated with an overweight recommendation at Piper Sandler, which says the asset management firm is well positioned to take advantage of long-term industry tailwinds.
• Travere Therapeutics (TVTX US) fell 5.1% in postmarket trading on Thursday as the company announced that it sees a three-month extension of the previously assigned PDUFA target action date for its application for accelerated approval of sparsentan for the treatment of IgA nephropathy.

“Even though investors may look through a disappointing CPI print, it will be a much higher bar to look through weak corporate earnings.” Invesco global market strategist David Chao told clients. “Growth is below trend and decelerating because the Fed is still tightening. This is a tough backdrop for risk assets.”

In Europe, the Stoxx 50 adds 1%. IBEX outperforms peers, climbing 1.1%, DAX lags, adding 0.8%. Utilities, real estate and chemicals are the strongest-performing sectors. Here are the biggest movers:

• Bystronic shares rise as much as 1.9%, the most since June, after company reported a net revenue beat yoy for the nine-month period. Analysts welcome a more specified and positive outlook.
• Ahold Delhaize shares advance as much as 2.3% after Bryan Garnier said a potential Kroger-Albertsons tie-up removes concerns about Ahold merging with Albertsons, which had been rumored over the summer.
• Arcadis gains as much 5.3%, the most intraday in three months, after KBC Securities raised its rating on the engineering company to buy from accumulate, saying recent acquisitions have increased the company’s exposure to growth trends, while the stock’s valuation is “conservative.”
• Kone shares fall, paring earlier gains of as much as 4.3%, after the Finnish elevator firm reported preliminary adjusted Ebit for the third quarter that missed estimates.
• Temenos shares tumble as much as 23% to the lowest since 2016, after the banking software firm announced a sharp cut to FY Ebit target on the back of a 50% miss on bottom-line in 3Q.#
• International Distributions Services plunges as much as 17%, most since early days of Covid-19 pandemic, after reporting a loss at its Royal Mail unit and warning of possible job cuts in response to recent strike action.
• TomTom NV falls as much as 12%, the most since May 24, after it lowered guidance for free cash flow as a percentage of revenue to break-even from at least 5%.

In Britain, government bonds rallied sharply as Prime Minister Liz Truss prepared to reverse parts of her tax-cutting program and ousted chancellor Kwasi Kwarteng. The pound weakened. Her plans have roiled UK markets for weeks, forcing the Bank of England to launch an emergency bond-buying program. That program expires later on Friday.

“It does seem pretty clear that the government is preparing a U-turn on at least a very big chunk, if not half, the permanent tax cuts in the budget,” BlackRock Inc.’s chief macroeconomic strategist, Rupert Harrison, told Bloomberg Television. “And if we don’t get that, then the markets will react very negatively.”

Earlier in the session,  Asian stocks took impetus from the aggressive rebound on Wall St where stocks made a remarkable comeback from the initial CPI-related selling with several factors attributed to the turnaround including a dovish ECB staff model view, speculation of a major U-turn in the UK’s fiscal plans and a touted short squeeze. ASX 200 was lifted in which energy led the broad strength across sectors and after Australian Treasurer Chalmers recently ruled out scrapping tax cuts in the budget. Nikkei 225 outperformed and breached the 27,000 level amid some earnings encouragement with index heavyweight Fast Retailing boosted after it posted a record annual profit. Hang Seng and Shanghai Comp. benefitted from the heightened risk appetite as the PBoC reiterated support pledges, while participants digested relatively inline inflation numbers and now await the latest Chinese trade data.

In FX, the Bloomberg Dollar Spot Index staged a modest rebound after yesterday’s loss and the greenback advanced versus most of its Group-of-10 peers.

• The pound led G-10 declines, halting a blistering rally that’s made it the best performer among major currencies this week amid reports of potential u-turns on the UK government’s proposed tax cuts.
• The euro pared some of yesterday’s advance, to trade at around $0.9750. Bunds and Italian bonds advanced for a second day, led by the belly.
• The Aussie was the best G-10 performer after China’s central bank pledged to do more to stimulate the economy. Shorter-maturity bonds declined, following losses in similar-dated Treasuries on Thursday.
• The yen headed for an eighth day of losses, but selling was tempered by speculation the authorities will step in to support the currency. A five-year auction drew solid demand
• The Hungarian forint rallied by as much as 3% versus the euro, the biggest jump in 11 years, after the central bank said it would provide 18% one-day deposit rate

In rates, Treasury yields fell by as much as 4bps, led by the front end following a sharp rally in gilts as UK bonds head toward their biggest weekly gains since 2011 amid expectations the British government is preparing to partially reverse its tax cuts plans.  The UK curve aggressively bull-flattens with long-end yields richer by 30bp on the session; UK 2s10s, 5s30s spreads flatter by 17bp and 5bp. In the US, 10-year futures remain short of Thursday’s highs with cash yields richer by 3bp-5bp across the curve. Focal points of US session include retail sales data and three scheduled Fed speakers. US 10-year yields near lows of the day into early US session, richer by 4.5bp at around 3.90% with gilts outperforming by an additional 20bp in the sector; long-end of the US curve lags slightly, steepening 5s30s spread by ~1bp.

In commodities,  WTI and Brent front-month futures are modestly softer on the day as the Dollar picked up in early European hours, but the contracts hold onto most of yesterday's gains. Turkish President Erdogan has ordered the energy minister to build a gas hub in Turkey following talks with Russian President Putin; says both countries will immediately work on Putin's proposal to transport Russian gas, via NTV cited by Reuters. Spot gold found resistance at it is 21 DMA (USD 1,671.50/oz) with the yellow metal edging lower as the USD extends on intraday highs. LME futures are mixed/contained with 3M copper holding onto levels above USD 7,500/t, but LME aluminium dips following the recent rise. Spot gold falls roughly $5 to trade near $1,662/oz.

Bitcoin posts modest gains after yesterday's rebound, with the crypto above USD 19,500, whilst Ethereum holds a USD 1,300+ handle.

To the day ahead now, and data releases include US retail sales for September, and the University of Michigan’s preliminary consumer sentiment index for October. From central banks, we’ll hear from the ECB’s Holzmann, and the Fed’s George, Book and Waller. Finally, earnings releases include JPMorgan, Wells Fargo, Citigroup, Morgan Stanley and UnitedHealth.

Market Snapshot

• S&P 500 futures down 0.2% to 3,674.50
• STOXX Europe 600 up 1.1% to 393.36
• MXAP up 1.9% to 138.38
• MXAPJ up 1.7% to 446.58
• Nikkei up 3.3% to 27,090.76
• Topix up 2.3% to 1,898.19
• Hang Seng Index up 1.2% to 16,587.69
• Shanghai Composite up 1.8% to 3,071.99
• Sensex up 1.5% to 58,119.00
• Australia S&P/ASX 200 up 1.7% to 6,758.83
• Kospi up 2.3% to 2,212.55
• German 10Y yield little changed at 2.18%
• Euro down 0.3% to $0.9751
• Brent Futures down 0.6% to $93.97/bbl
• Gold spot down 0.2% to $1,663.18
• U.S. Dollar Index up 0.36% to 112.76

Top Overnight News from Bloomberg

• Hawkish European Central Bank officials aim to start unwinding the institution’s €5.1 trillion ($4.9 trillion) asset hoard by early 2023 while retaining interest rates as their primary monetary-policy tool, according to people familiar with the matter
• The euro-area economy may succumb to two consecutive quarters of contraction, European Central Bank Vice President Luis de Guindos told Verslo žinios, a Lithuanian newspaper
• Overstretched positioning in the options market is taking a hit after the dollar retreated following the release of the latest US inflation data
• Singapore’s central bank tightened monetary policy settings for a fifth time in the past year, warning of persistent price pressures and a clouded outlook for the global and local economy
• China’s consumer inflation remained subdued in September as lockdowns continued to impact spending habits, while soft commodity prices kept producer inflation in check. The consumer price index rose 2.8% last month from a year earlier
• A shift toward private markets is cushioning many of the world’s largest investors from the wreckage wrought by runaway inflation and spiraling interest rates
• Sweden’s nationalists, who emerged as the second largest political force in last month’s elections, will stay out of the new government that will take over from Magdalena Andersson’s Social Democrats

A more detailed look at global markets courtesy of Newsquawk

APAC stocks took impetus from the aggressive rebound on Wall St where stocks made a remarkable comeback from the initial CPI-related selling with several factors attributed to the turnaround including a dovish ECB staff model view, speculation of a major U-turn in the UK’s fiscal plans and a touted short squeeze. ASX 200 was lifted in which energy led the broad strength across sectors and after Australian Treasurer Chalmers recently ruled out scrapping tax cuts in the budget. Nikkei 225 outperformed and breached the 27,000 level amid some earnings encouragement with index heavyweight Fast Retailing boosted after it posted a record annual profit. Hang Seng and Shanghai Comp. benefitted from the heightened risk appetite as the PBoC reiterated support pledges, while participants digested relatively inline inflation numbers and now await the latest Chinese trade data.

Top Asian News

• Xi Faces ‘Rockiest Economy in Decades’ on Eve of Party Congress
• Singapore Unveils New $1.05 Billion Inflation-Relief Package
• Japan Keeps Up Yen Warnings, Declines to Say If Intervened
• Iron Ore Heads for Longest Run of Weekly Losses in Almost a Year

European bourses trade on a firmer footing in an extension of yesterday’s gains. There hasn’t been a clear factor behind today’s moves with some desks continuing to cite oversold conditions, evidence of disinflationary impulses in more timely indicators (e.g. NY Fed survey) and hopes of a policy u-turn in the UK. Sectors in Europe mostly firmer, with outperformance in Real Estate and Utilities. To the downside but still in positive territory, Tech, Autos and Telecom names lag peers. Stateside, Stateside, US futures are showing a more contained performance with the e-mini S&P back below 3700 as pausing for breath from yesterday’s rally.

Top European News

• UK PM Truss is to reverse some economic plans later today, according to Bloomberg sources.; UK PM Truss is to hold a press conference today (timing TBC), according to Bloomberg.
• UK Trade Department Minister Hands said there are absolutely no plans to change anything; there is no change to plans on corporation tax, according to Reuters.
• UK PM Truss and Chancellor Kwarteng are weighing up whether to announce corporation tax rise today after chancellor's early flight back from the US, according to Times' Swinford; no decision has yet been taken.
• UK Tory whips warned that UK PM Truss could face a leadership challenge if Chancellor Kwarteng's economic statement on October 31st fails to end the turbulence in financial markets, according to the Daily Mail front page.
• UK senior Tories are reportedly holding talks about replacing PM Truss with a joint ticket of Rishi Sunak and Penny Mordaunt, according to The Times.
• The 1922 Committee is ready to suspend the rule that prevents a vote to oust the Conservative leader within a year of taking office, according to the New Statesman.
• ECB's Lagarde said inflation in the EZ is far too high, and likely to stay above the ECB's target for an expected period of time; governing council expects to raise the interest rate further over the next several meetings
• ECB's Kazimir said 75bps hike in October is appropriate; Deposit Rate must rise above Neutral but start of balance sheet reduction can wait until next year

FX

• DXY attempts to claw back some of yesterday's losses and briefly reclaimed 113.00 to the upside vs yesterday's 113.92 peak.
• GBP sits as the laggard as it unwinds some of the prior day's gains.
• USD/JPY topped yesterday's high of 147.67 whilst BoJ Kuroda reiterated the need to maintain stimulus.
• HUF strengthened following an unexpected NBH hike to the Overnight Collateral Loan Rate.
• Hungarian Central Bank unexpectedly hikes the Overnight Collateral Loan Rate to 25% from 15.5%. NBH will launch a new one-day deposit tender from today with an 18% interest rate.

Fixed Income

• Bunds are well within a 136.75-138.52 range vs their prior 136.22 prior close.
• Gilts are back above 97.00 between from yesterday’s 94.52 Liffe settlement amidst further reports that some economic plans may be reversed by the PM later today.
• T-note towards the top of its 111-14/110-27 overnight extremes ahead of US retail sales and Fed speakers

Commodities

• WTI and Brent front-month futures are modestly softer on the day as the Dollar picked up in early European hours, but the contracts hold onto most of yesterday's gains.
• Turkish President Erdogan has ordered the energy minister to build a gas hub in Turkey following talks with Russian President Putin; says both countries will immediately work on Putin's proposal to transport Russian gas, via NTV cited by Reuters.
• Spot gold found resistance at it is 21 DMA (USD 1,671.50/oz) with the yellow metal edging lower as the USD extends on intraday highs.
• LME futures are mixed/contained with 3M copper holding onto levels above USD 7,500/t, but LME aluminium dips following the recent rise.

Geopolitics

• Japan's Chief Cabinet Secretary Matsuno said North Korea's repeated ballistic missile launches are unacceptable and he believes North Korea will take further provocative action including a possible nuclear test. Matsuno added it is getting more difficult to detect North Korea's missiles early and react, while they are considering all options including counterattack capabilities, according to Reuters.
• North Korea fires artillery shells off sea, according to South Korean military; into the buffer zones in the east and west seas during the afternoon, Yonhap reported

US event calendar

• 08:30: Sept. Import Price Index YoY, est. 6.2%, prior 7.8%
• 08:30: Sept. Import Price Index MoM, est. -1.1%, prior -1.0%
• 8:30: Sept. Export Price Index YoY, est. 9.3%, prior 10.8%
• 08:30: Sept. Export Price Index MoM, est. -1.0%, prior -1.6%
• 08:30: Sept. Retail Sales Advance MoM, est. 0.2%, prior 0.3%
• 08:30: Sept. Retail Sales Control Group, est. 0.3%, prior 0%
• 08:30: Sept. Retail Sales Ex Auto MoM, est. -0.1%, prior -0.3%
• 10:00: Aug. Business Inventories, est. 0.9%, prior 0.6%
• 10:00: Oct. U. of Mich. 5-10 Yr Inflation, est. 2.8%, prior 2.7%
• 10:00: Oct. U. of Mich. 1 Yr Inflation, est. 4.6%, prior 4.7%
• 10:00: Oct. U. of Mich. Expectations, est. 58.2, prior 58.0
• 10:00: Oct. U. of Mich. Current Conditions, est. 59.5, prior 59.7
• 10:00: Oct. U. of Mich. Sentiment, est. 58.8, prior 58.6

DB's Jim Reid concludes the overnight wrap

The term rollercoaster is one of the most overused, lazy terms to describe markets, but the last 24 hours are best summed up by being a major rollercoaster ride and actually home to one of the biggest intra-day turnarounds in living memory.

The white-knuckle ride started with a boost amidst reports of a potential fiscal U-turn out of the UK before then slumping on another upside surprise in US inflation, before rallying again (and rallying very hard) for no obvious reason other than potentially stretched bearish positioning ahead of the CPI. If that was the case one can only imagine how bullish markets would have been if CPI was soft. If you’re looking to further explain the unexplainable, Bloomberg suggested that the S&P 500 had given back 50% of the post-covid rally at the lows which triggered technical buy programs. Who knows if this was true.

To give you an idea of the ride, futures on the S&P were up +1.57% before CPI, down -2.40% around an hour later, but with the main index closing +2.60% and thus putting a spectacular end to a run of 6 consecutive declines, in spite of a CPI report that was another case of bad news from whatever angle you wanted to look at it. The index had a remarkable intraday range of 5.52%. Let's see what US bank earnings bring today as they herald in the unofficial start of earnings season.

In terms of the details of that CPI report, the headline price gains for the month came in at +0.4%, which was above the +0.2% reading expected and meant that the year-on-year measure only ticked down to +8.2% (vs. +8.1% expected). Second, and more concerning from the Fed’s point of view, core CPI was also stronger than expected, with monthly core CPI at +0.6% (vs. +0.4% expected) for a second month running, thus taking the year-on-year measure up to +6.6%, which is the fastest that core inflation has been since 1982. Third, it wasn’t just a case of outliers driving inflation higher, since it continued to remain broad-based across the consumer basket. In fact, the Cleveland Fed’s trimmed mean measure that excludes the biggest outliers in either direction was still up +0.56% on the month (or +6.96% on an annualised basis), so still far from levels that the Fed can be comfortable with. And fourth, if you look at the Atlanta Fed’s measure that divides the consumer basket into sticky prices that change slowly and flexible prices that change quickly, then the monthly gain in sticky prices in September was the biggest since June 1982 at +0.68%, so things are getting even worse on that measure.

Against that backdrop, investors swiftly moved to upgrade their expectation of future tightening from the Federal Reserve, with a 75bp hike at the November meeting now fully priced in for the first time. In addition, markets placed a growing probability on the chances of the Fed continuing at a 75bps pace in December rather than slowing down. That’s in line with our US econ team’s updated call following the release, where they now expect the Fed to maintain the +75bp pace of hikes through December (link here). In markets a total of 143bps of hikes are now priced in by year-end. Looking further out into 2023, the peak rate priced for March rose +25.5bps on the day to a new high of 4.92% to reflect the extra 25bps of hikes, and the rate priced for end-2023 similarly rose +22.0bps to a fresh high of 4.57%.

With more tightening being priced in for the months ahead, Treasuries sold off across the curve with the front-end particularly impacted. By the close of trade, yields on 2yr Treasuries surged +17.2bps on the day to a post-2007 high of 4.46%, and their 10yr counterparts were also up +4.7bps to 3.94% after trading in a 23.8bps range. This morning yields are less than a bps lower across most of the curve.

Decomposing the S&P, the best performers were the cyclically-sensitive energy, financial, information tech, and materials sectors, which, again, bucks against the macro news from yesterday. The Nasdaq lagged slightly behind the S&P, gaining +2.23%. In overnight trading, US equity futures are pointing to further gains with contracts on the S&P 500 (+0.54%) and the NASDAQ 100 (+0.47%) higher ahead of the big bank earnings.

Whilst there was plenty of interest in the US CPI, here in the UK there was also lots of market action going on amidst speculation that the government could be on the verge of a U-turn over their recent mini-budget. Sterling surged on the reports, which came from multiple outlets all suggesting that talks were taking place on reversing course. The biggest centre of speculation was with regard to corporation tax, which had been set to go up to 25% from April before Truss came to office, before that was then scrapped by Truss. Not going ahead with that increase was one of the biggest single items in terms of cost in the mini-budget, which totalled £19bn of the £45bn package of tax cuts announced, although it’s not clear yet to what extent they’ll reverse, and whether that might be to a lower rate than 25%. Overnight it's been confirmed that Chancellor Kwarteng has left the IMF conference early which has further raised speculation of an imminent U-turn.

For now we haven’t had anything officially confirmed, but sterling surged by +2.04% on the day. Admittedly it had a helping hand from general dollar weakness, but that was still the largest daily increase in sterling since the Covid-related volatility of March 2020, so not the sort of moves we’re used to seeing every day. In the meantime, there was also an incredible rally for gilts as speculation of a U-turn mounted, with the 10yr yield down -23.5bps to 4.19% and 30yr yields down -26.1bps to 4.54% having been 5.09% at the highs in the previous session. That also came as the Bank of England bought a record £4.68bn of bonds yesterday, which is the largest so far, ahead of the scheduled end to their intervention in the gilt market today. Whether that actually happens we'll see next week.

That sovereign bond rally was echoed elsewhere in Europe, with yields on 10yr bunds (-2.8bps), OATs (-3.7bps) and BTPs (-6.0bps) all moving lower on the day. And Euro equities put in a decent performance too, with the STOXX 600 recovering from its initial losses to gain +0.85%. That came in spite of investors also moving to ratchet up their expectations of future ECB tightening, with the rate priced in by year-end up +1.9bps on the day. Nevertheless, there was some better news on the inflation side from natural gas futures, which dropped to their lowest levels since early July, falling -3.98% on the day to €154 per megawatt-hour.

This morning in Asia, stock markets are tracking US equities with the Nikkei (+3.44%) leading gains and the Hang Seng (+3.38%) trading sharply higher while the Kospi (+2.45%), the CSI (+2.14%) and the Shanghai Composite (+1.74%) are also trading in positive territory.

Moving on to China, inflation has remained subdued amid persistent lockdowns and soft commodity prices. Early morning data showed that CPI advanced +2.8% y/y in September, up from +2.5% in August, pushed higher by food costs. While it rose at the fastest pace since April 2020, it fell short of market forecasts for a +2.9% gain. At the same time, the producer price index (PPI) dropped to its slowest pace in 20 months, rising by +0.9% (v/s +1.0% expected), down from +2.3% growth in August.

In the FX market, the Japanese yen has hit a fresh 32-yr low of 147.45 versus the US dollar, below the level when the Japanese authorities intervened last month. Yesterday, the BOJ Governor Haruhiko Kuroda in a speech indicated that he intends to stick to his policy of large-scale monetary easing as raising interest rates now seems inappropriate given Japan’s economic and price conditions.

The CPI was the main data focus yesterday, but we also got the weekly initial jobless claims from the US, which showed an increase to 228k in the week through October 8. That was a bit above the 225k reading expected and above the 219k reading the previous week, although it partly reflected a rise in Florida claims following Hurricane Ian.

To the day ahead now, and data releases include US retail sales for September, and the University of Michigan’s preliminary consumer sentiment index for October. From central banks, we’ll hear from the ECB’s Holzmann, and the Fed’s George, Book and Waller. Finally, earnings releases include JPMorgan, Wells Fargo, Citigroup, Morgan Stanley and UnitedHealth.