• Asian equity markets traded mixed following on from a Wall Street lead where value outperformed growth
• The DXY heads into the European open marginally softer with EUR/USD and GBP/USD on 1.17 and 1.37 handles respectively
• Advances in the crude complex saw Brent reach USD 80/bbl for the first time since October 2018
• The Senate voted along party lines to block the bill to suspend the debt limit and avoid a government shutdown
• Looking ahead, highlights include German GfK Consumer Sentiment, US Consumer Confidence, ECB's Lagarde, de Guindos, Panetta, Schnabel, Fed's Powell, Evans, Bullard, Bowman, Bostic, BoE's Mann, OPEC World Oil Outlook 2021, supply from the UK and the US

CORONAVIRUS UPDATE

US CDC lowered Hong Kong travel advisory to Level 2 and raised Singapore advisory to Level 3. (Newswires)

Japanese Economic Minister Nishimura confirmed the government plans to lift the state of emergency on October 1st, but added they will continue the requirement of shorter hours for eateries and will ease curbs in phases in about a month. (Newswires)

ASIA

Asian equity markets traded mixed following on from a Wall Street lead where value outperformed growth and tech suffered as yields rose. ASX 200 (-1.3%) was the laggard with losses in healthcare, gold miners and tech frontrunning the declines which dragged the index beneath 7300. Nikkei 225 (-0.3%) was lacklustre and briefly approached 30k to the downside but then bounced off worse levels amid a softer currency, while the KOSPI (-1.1%) also declined following a suspected North Korean ballistic missile launch and with a recent South Korean court order to sell seized Mitsubishi Heavy assets as compensation for wartime forced labour, threatening a flare up of tensions between Japan and South Korea. Hang Seng (+1.2%) and Shanghai Comp. (+0.5%) were underpinned after the PBoC continued to inject liquidity ahead of the approaching National Day holidays and with Hong Kong led higher by strength in property names after the PBoC stated it will safeguard legitimate rights and interests of housing consumers which also provided Evergrande-related stocks further reprieve from their recent sell-off. Finally, 10yr JGBs retreated on spillover selling from T-notes after yields rose on the back of further Fed taper rhetoric and with prices not helped by the uninspiring 2yr and 5yr auctions stateside, while weaker results at the 40yr JGB auction also provided a headwind for prices.

PBoC injected CNY 100bln via 14-day reverse repos with the rate at 2.35% for a CNY 100bln net injection. (Newswires) PBoC set USD/CNY mid-point at 6.4608 vs exp. 6.4600 (prev. 6.4695)

World Bank expects China's economic growth of 8.5% and sees growth at 2.5% for the rest of East Asia and Pacific region, while it noted that the East Asia and Pacific region recovery is undermined by the Delta variant spread and that economic activity began to slow in Q2. (Newswires)

Japan's Foreign Minister said the South Korean court decision ordering sale of Mitsubishi Heavy (7011 JT) assets is a clear violation of international law, while Japan's Chief Government Spokesperson said the court decision on selling Japanese assets poses serious situation for relations and that South Korea liquidation of Japan assets must be avoided. (Newswires)

BoJ Minutes from the July meeting stated that Japan's economy picked up as a trend, but remained in a severe situation due to the impact of COVID-19 and private consumption was stagnant due to strong downward pressure on consumption of services including eating and drinking, as well as accommodations. Furthermore, it noted the employment and income situation remained weak due to the impact from the pandemic, while a few members stated increase in wholesale prices is not translating much to consumer inflation. (Newswires)

More than 120 ruling Liberal Democratic Party lawmakers plan to back former party policy chief Kishida for LDP leadership which puts him ahead with 30% parliamentary support, while vaccines chief Kono has more than 100 or over 20% of parliamentary votes. Furthermore, former internal affairs minister Takaichi appears likely to get around 20% and former internal affairs minister Noda has struggled to gain much traction beyond the 20 endorsements needed to launch her bid, according to a Nikkei/TV Tokyo survey. In relevant news, a Nikkei/TV Tokyo opinion poll showed 51% of LDP supporters viewed Kono as the best choice to lead the party, while Takaichi was at 19%, Kishida 18% and Noda at 2%. (Nikkei)

• Chinese Industrial Profits YY (Aug) 10.1% (Prev. 16.4%)
• Chinese Industrial Profits YY YTD (Aug) 49.5% (Prev. 57.3%)

UK/EU

UK government announced a standby pool of military drivers due to the fuel crisis and extends specific HGV licenses in the event that panic buying persists. (Sky News)

FX

In FX markets, the DXY eked mild gains amid the upside in yields and slew of taper rhetoric including from Fed’s Brainard who said employment is a bit short of the bar for tapering but may meet it soon and with Fed’s Williams suggesting the time to pull back on asset buying is coming up whereby it could be reasonable for tapering to be done by the middle of next year, while Fed's Evans also noted that the US economy is close to meeting its substantial further progress bar. Sticking with the Fed, Chair Powell’s prepared testimony for today’s Senate hearing provided nothing groundbreaking in which he noted that higher prices and hiring difficulties may be more enduring than expected but reiterated expectations for strong growth for remainder of year despite risks from the Delta variant, and it was separately announced that regional Fed Presidents Kaplan and Rosengren are to step down, which follows their recent stock trading controversy, although the latter’s retirement at month-end was attributed to a health condition. Furthermore, developments in Congress were also in focus with the Senate voting along party lines to block the bill to suspend the debt limit and avoid a government shutdown, although Democrats are planning further action this week to avert a government shutdown and debt default. EUR/USD was subdued after retreating beneath 1.1700 for part of the overnight session before reclaiming the level, and with recent ECB comments not providing much to spur the single currency while there was a lack of fresh developments post-election in Germany with both the SPD and CDU/CSU seeking their own party-led coalitions with the Greens and FDP. GBP/USD was rangebound near 1.3700 with the currency unmoved by comments from BoE Governor Bailey. USD/JPY extended above 111.00 after yield differentials fuelled recent upside, with the pair unfazed by the subdued mood in Japan and stale BoJ minutes, while antipodeans were choppy coinciding with the tentative picture across stocks and contraction in Australian Retail Sales, albeit at a narrower than expected decline.

• Australian Retail Sales MM (Aug F) -1.7% vs. Exp. -2.5%

COMMODITIES

Commodities were mixed with outperformance in the energy complex led by NatGas amid the ongoing China energy crunch and with tightness in the market spilling over into crude oil as higher pricing spurs some gas-to-oil switching which ING noted will continue to support crude demand. WTI crude futures extended gains overnight to above USD 76/bbl level and the November Brent contract broke above USD 80/bbl to reach its highest in nearly three years, adding credence to the recent bullish calls. Nonetheless, newsflow was light but there were recent reports that Many OPEC+ officials noted the planned easing of cuts will likely continue at the October 4th meeting, while focus now shifts to the latest inventory reports beginning with the private sector data due later. Gold prices were little changed as the greenback held on to the prior day's mild gains and copper was marginally higher amid the constructive mood in its largest purchaser China but with upside also limited as the nation's ongoing fuel crunch threatens activity.

China is said to be mulling curbing coal prices to ensure steady supply for factory output, while several suppliers for Apple (AAPL) and Tesla (TSLA) have reportedly halted output for days amid China's power supply issues. (Newswires)

Brazil's Petrobras President said there is no change in Petrobras' pricing policy but added they will increase supplies of natural gas amid energy crisis. (Newswires)

GEOPOLITICAL

North Korea fired an unidentified projectile into the East Sea which Japan stated could be a ballistic missile, while the US State Department later stated that the North Korea test violates UN resolutions although the US remains committed to diplomacy and urges North Korea to return to talks. In relevant news, North Korea's UN ambassador said no one can deny North Korea's right to self defence and test weapons given hostile policies and that if US drops hostile policy, North Korea is also prepared to respond willingly at any time. Furthermore, the ambassador stated that if the US wants to end the Korea war, it should abandon hostile policies, halt military exercises and the deployment of strategic weapons. (Newswires)

Unidentified planes were reported to have struck a base run by Iranian-backed militias in Syria's Deir al Zor near the Iraqi border. (Newswires)

US

Yields were higher along the Treasury curve by 0-2.5bps by settlement, although settled off highs, and the curve was mixed (2s and 2s10s a little steeper, 2s30s, 5s30s and 10s30s narrow). Underperformance was once again in the belly of the curve, and given the moves in curve spreads, implies a market pricing in a more hawkish near-term trajectory for rates, desks said, continuing the downside for the complex seen in wake of last week’s hawkish Fed. That said, much of the action was front-loaded, with the downside seen late European morning/early US day, and by the time the cash equity trading session got underway, the Treasury complex was traversing, and largely stayed that way through the US day. Yields on 10yr Treasuries rose above 1.50% briefly, and technicians said that this opens an eventual test to the post-pandemic range highs around 1.75%, although some are sceptical that can be seen in the near-term. Today’s slate of Fedspeak did not provide any new catalysts for the market to price – it seems Williams is in line with the FOMC statement and Powell, while Brainard and Evans were dovish, with the latter making efforts to lean-back on weekend news flow where analysts suggested that the Fed had given up on its new framework, and was looking to preserve its track record of inflation targeting. The day’s supply events were mixed, with an auction of 2s tailing by 0.8bps, on a weaker cover and weak bidding metrics, where dealers took more than the prior and six-auction averages, and indirect take-down fell below the prior and recent averages; an auction of 5yr notes was better. Stopping through 0.4bps, with cover in line with recent averages, although the bidding metrics saw dealers take more than the prior and six auction averages, while directs took down fewer than the prior and recent averages. By settlement, 2s +0.8bps at 0.282%, 3s +0.8bps at 0.553%, 5s +2.5bps at 0.983%, 7s +3.0bps at 1.292%, 10s +2.1bps at 1.482%, 20s +1.0bps at 1.944%, 30s +0.7bps at 1.994%. 5yr TIPS -1.0bps at -1.610%. 10yr TIPS -0.2bps at -0.877%. 30yr TIPS -0.9bps at -0.250%. US T-note futures (Z1) settle 7 ticks lower at 131-25+.

Fed Chair Powell said in the prepared testimony for Tuesday's Senate hearing that higher prices and hiring difficulties may be more enduring than expected, while he reiterated that he sees strong growth for remainder of the year despite risks from the Delta variant and that they would act against sustained higher inflation. Furthermore, Powell added the Fed will do everything it can to keep the economy afloat for as long as it takes and that risks to the outlook remain. (Newswires)

Fed’s Brainard (voter) said employment is a bit short of bar for taper, but it may meet it soon and that the Delta variant has been more disruptive than initially expected. Brainard added the September labour report may be weaker and less informative of underlying momentum than had hoped, while she also commented that asset values across a range of asset classes are stretched and the environment is right to consider macroprudential steps like applying the countercyclical capital buffer. (Newswires)

Fed's Williams (voter) said it could be reasonable for tapering to be done by the middle of next year but the timing has not yet been decided and that the US economy is on a good trajectory for employment and inflation. Williams earlier commented that the time for the central bank to pull back on asset buying is coming up, but indicated that rate rises still lie well off, while he stated it is clear they made substantial further progress on achieving the inflation goal and there has also been very good progress towards maximum employment. Furthermore, he said that a moderation in the pace of asset purchases may soon be warranted assuming the economy continues to improve as he anticipates and he agrees with the premise that the economic boost from fiscal policy is disappearing as support comes to an end. (Newswires/WSJ)

Fed's Bostic (2021, 2024 voter) said he is not convinced they are facing a lengthy bout of troublesome inflation, while he added without clear data showing inflation has arrived and is likely to last, they will allow labour markets to run their course. (Newswires)

Fed's Evans (2021, 2023 voter) said he sees inflation rising to 2.4% in 2024 which would be a 'virtue' and 'helpful' in reinforcing inflation expectations, while he sees one hike in 2023 and a rate path on a gentle incline after that. Furthermore, he commented that if they saw inflation that was more exuberant than appropriate for the 2% average target, there would be a steeper rate hike path and noted they cumulatively made a tremendous amount of progress on employment and wants the momentum to continue in the next jobs reports. (Newswires)

Fed's Kashkari (2023 voter) said their highest priority is to put people back to work and that it will take time for people to get back to in-person work due to COVID fears, while he added that a healthy economy is one where businesses have to work hard to find workers. (Newswires)

Fed's Kaplan (2023 voter) is set to retire on October 8th due to the distraction of recent financial disclosure for his decision. (Newswires)

White House and Democrats are reportedly discussing financial means test for some reconciliation agenda items to lower costs which include income caps on free community college, child tax credits and EV rebates, according to sources. (Newswires)

US Senate failed to secure enough votes (48 vs. 50) to advance the bill to suspend the debt limit and avoid a government shutdown, while US Senate Majority Leader Schumer switched his vote to No to allow a future vote on the measure and stated that Democrats will take further action this week to avert a government shutdown and debt default. (Newswires)

US Senate Minority Leader McConnell reiterated that GOP's will vote for a clean continuing resolution but will not provide Republican votes for raising the debt limit. (Roll Call)

US SEC Chairman Gensler said crypto markets will not end well without regulation and it is unlikely that thousands of cryptocurrencies can compete. (Newswires)