Thursday's performance in crucial US equity indices appeared to be the long-awaited reversal pattern: a long decline, final capitulation on bad news, and strong reversal for no apparent reason. The Nasdaq100 index is up more than 6.5% from its intraday bottom to its highs in European trading, drawing a long tail at the bottom of the daily candle yesterday. Additional bullish signals are also the accumulated oversold conditions from two months of relatively flat declines, which created the conditions for massive coverage of short positions, which we probably saw yesterday. It's hard to argue with the thesis that too much negativity is embedded in prices. The sell-off on downbeat news, triggered by the rapid work of trading robots, which took away about 4% in less than 2 minutes, activated buyers just over an hour later, which more than compensated for the initial decline. This amplitude of change has been extremely rare in history. But we are also unlikely to find a combination of this kind of reversal without a meaningful reason. Among the most frequent explanations is that the most pessimistic of all possible scenarios was built into prices: a 75-point rate hike at the next two meetings. After this, market participants turned their attention to substantial discounts to prices from their highs with a relatively healthy economy that continues to create jobs and raise wages. Despite October's notoriety as a "bear market killer" and an auspicious intraday move, investors should maintain a certain degree of caution. A real change in trend requires a shift in fundamentals. And those changes are still not easy to identify. Oil's reversal from negative territory has only proven sustainable after coordinated and decisive action by oil consumers and producers. The turnaround in equities in 2020 was supported by unprecedented efforts by governments and central bankers. But there was no new information yesterday that promised to ease investor pain. Quite the opposite - the data worsened expectations. Without support from the fundamentals, the technical rebound can get choked by new selling rather quickly. Also, it is worth paying attention to the dynamics near the following points on the way up. First is the ability of Nasdaq100 to close the day and week above 11,000 – two days of gains above the round level can inspire more buyer confidence. The following signal line is the 11,200 area, where the 200-week moving average is set. This is also the former support area in the index in June, which can now become resistance. The next checkpoint is the 11,700 area, where the 61.8% Fibonacci retracement level from the August-October decline and the early-month highs are located. A successful and rapid break-up of the checkpoints mentioned above may become a meaningful signal of an end to the bear market that took over 35% of the highs of last November from the Nasdaq100.

US Dollar Index The dollar index edged higher in European trading on Friday, regaining traction after Thursday’s 0.7% drop. Unexpected drop was sparked by revived risk appetite, despite the latest report showed US inflation rose above expectations in September that adds to expectations for another aggressive action from Fed in the next policy meeting. Markets widely expect another 0.75% hike, which will be the fourth in a row, with conditions of persisting red-hot inflation, keeping in play the bets for possible 1% rate hike, although the expectations for such action are so far only at 10%. From the fundamental side, the overall situation remains very supportive for the dollar, as increased safe-haven flows on global political and economic uncertainty continue to inflate the currency. In addition, revised view for the US monetary policy signals that the Fed is likely to increase the size and pace of tightening and that interest rate would top at 5% by March 2023, overshooting the latest forecasts. The cocktail of positive factors leaves a little space for a deeper correction, although some price adjustments can not be ruled out. The picture on daily chart is mixed as 14-d momentum is in negative territory and heading south, but moving averages are in full bullish setup. Immediate supports lay at 112.34/19 (Fibo 38.2% of 109.95/113.83 upleg/10DMA) and so far keep the downside protected. Break here would risk test of next pivot at 111.89 (50% retracement, reinforced by daily Tenkan-sen), loss of which would weaken near-term structure and allow for deeper pullback towards 111.43/18 (Fibo 61.8%/daily Kijun-sen). Conversely, weekly close above 10 DMA would keep in play hopes for renewed attack at Thursday’s post-CPI data peak (113.83) and unmask key barrier at 114.72 (20-year high posted on Sep 28) on break. Res: 112.96; 113.83; 114.42; 114.72. Sup: 112.34; 112.19; 111.89; 111.43.

Summary United States: Inflation Is the Name of the Game Thursday's highly anticipated Consumer Price Index report surprised to the upside. Headline CPI rose 0.4% in September, and core CPI increased 0.6%. Even with some easing on a year-ago basis, the details of the report suggest inflation still has plenty of momentum and remains broad-based. Next week: Industrial Production (Tue.), Existing Home Sales (Thu.), Leading Index (Thu.) International: Increasing Signs of an Impending U.K. Slowdown This week's U.K. data offered increasing evidence of a slowing economy. August GDP unexpectedly fell 0.3% month-over-month and services activity dipped 0.1%, while industrial output dropped 1.8%. With GDP likely to also fall further in September, the U.K. economy is on course to contract for Q3 as a whole. The GDP data was not the only sign of softness, as labor market figures showed a decline in employment for the June-August period. Next week: China GDP (Tue.), U.K. CPI (Wed.), Canada CPI (Wed.) Interest Rate Watch: CPI Keeps Pressure on FOMC to Be Aggressive If there were any question that the FOMC would not raise its target range for the fed funds rate by 75 bps at its next meeting on Nov. 2, those doubts were forcibly put to rest by the higher-than-expected CPI data this week. Topic of the Week: China's Economy and the Start of the 20th National Party Congress Against a slowing growth backdrop, China will host its 20th National Party Congress starting this weekend. By most accounts, Xi Jinping, current general secretary of the Chinese Communist Party, will be named to a precedent-defying third term as head of the CCP. Read the full report here

US house prices fell for the first time in more than 10 years in July – we expect the market will slow further with declines in both existing home sales and house starts. For the UK, we see headline and core inflation rates edging higher. However, we believe we are now very close to the peak, given government's decision to cap household energy bills. US: Housing market showing weakness The latest job and inflation readings have cemented expectations of a 75bp hike from the Federal Reserve on 2 November and heightened the chances of a fifth consecutive 75bp hike in December. However, we still favour the Fed slowing the pace of hikes to 50bp on 14 December given the intensifying economic headwinds that should allow inflation to fall quickly through 2023. The housing market is going to be a key factor in this. House prices fell for the first time in more than 10 years in July as the surge in mortgage rates prompted a collapse in housing demand. Things have got much worse since then with mortgage applications for home purchases at the lowest level since the housing bear market of 2010-13. With more supply coming on the market, the challenge to sell homes is going to increase, which will weigh further on prices and lead to another sharp fall in home builder sentiment this week. Homebuilding looks set to slow further with existing home sales declining too. This is bad news for construction, confidence, job creation and retail sales tied to housing transactions such as building supplies, furniture, home furnishings and household appliances. However, it may well help to get inflation lower more quickly and allow the Fed to reverse course on its aggressive interest rate increases next year. Shelter accounts for a third of the inflation basket by weight, and historically the shelter series lags behind movements in house prices by around 12-14 months. Over the past couple of weeks, rent.com, apartments.com and CoStar Group have all been reporting rent price falls in major cities so this could imply a quicker transmission. We will see how this develops, but with surveys suggesting corporate pricing and vehicle prices are showing signs of softening, we think the risks are skewed toward inflation falling more quickly through 2023 than the consensus. UK: Fiscal U-turn in focus as Bank of England intervention ends Markets have been buoyed by reports that the UK government is preparing a major U-turn on its tax cut plans, which were announced in September and brought widespread disruption to UK bond markets. On paper, the resumption of the planned hike in corporation tax – if done in full – coupled with a revenue cap/windfall tax on renewable and perhaps nuclear energy producers, could materially reduce the government’s borrowing requirement over the next couple of years. But with the Bank of England (BoE) ending its temporary bond-buying scheme, investors will need to see these press reports crystalise into concrete and far-reaching plans this weekend to avoid a renewed sell-off in gilts next week. Further volatility is likely in either case, and we still think there’s a fair chance the BoE will at the very least need to further postpone its plans to start selling bonds later this month – not least because of the challenging environment created by ongoing Fed tightening. Further bond buying also shouldn’t be ruled out. All of this will also help determine just how aggressively the BoE will need to hike rates in early November. By that point we’ll have had the government’s Medium-Term Fiscal Plan (ie the full extent of any U-turns) and depending on whether we see a renewed period of sterling weakness between now and then, there’s a chance the BoE may be able to get away with a 75bp hike rather than the 100bp move we’ve been pencilling in. Next week’s CPI data is unlikely to be the main decider here, but for what it’s worth we see both the headline and core rates edging higher. However, we think we are now very close to the peak, given the government’s decision to cap household energy bills. Key events in developed markets next week Source: Refinitiv, ING Read the original analysis: Key events in developed markets next week

China Q3 GDP – 18/10 – the various lockdowns that were implemented across China during Q2 had a chilling effect on the Chinese economy, contracting by -2.6%, on a quarterly basis. This was much more than expected, dragging the annualised rate down to 0.4%, from 4.8% in Q1. Consequently, any lingering hope that the Chinese economy might grow by the 5.5% targeted by the Chinese government this year went up in smoke. A lot of the economic data has improved on a month-on-month basis since then as a lot of the more onerous restrictions got relaxed, however the insistence of the Chinese government to continue with their current zero-covid policy has meant that the recovery in Q3 has been very stop start. On retail sales we have seen a solid rebound with a solid 5.4% performance in August, the best performance in 12 months, although most of that is likely to have been the release of pent-up demand after several months of weak growth. With industrial production also looking solid we should see a decent expansion in Q3, with expectations of a 3.5% rebound.   UK CPI (Sep) – 19/10 – UK inflation got a bit of a respite in August falling back to 9.9% from 10.1% in July, with the fall in petrol prices helping to pull the headline number back below double figures. While welcome news on a headline level, food prices are still acting as a tailwind rising by 13.1% and up from 12.7% in July, with the price of staples like milk, eggs, and butter all up by over 20%. The rise in core prices is now becoming more of a concern with the stabilisation being seen in energy prices the last two months or so. With all the ructions taking place with respect to fiscal policy the Bank of England is facing a dilemma with core prices now at 6.3%, which could shift their focus to be more aggressive in the short term. However, the new government’s fiscal plans could cause it to stay its hand, making any decision as to how much to raise rates by next month a much more difficult decision. Rising wages is also likely to be a factor in any decision.                    UK Retail Sales (Sep) – 21/10 – no one was expecting great things from August retail sales which was just as well given that they tanked -1.6%, which probably means that even with the UK economy avoiding a contraction in Q2, we’ll probably see one in Q3 unless we get a Lazarus like rebound in consumer spending in September. Last week’s BRC retail sales numbers could well be a decent bellwether, although given that they showed an increase of 0.5% in August, it’s probably a coin toss as to whether we see a rebound in this week’s September numbers.    China Retail Sales (Sep) – 18/10 – August retail sales saw the Chinese consumer bounce back strongly with the best performance in 12 months, rising 5.4%. After months of underperformance, lockdowns and fragile consumer confidence there is a sense that there was an element of some pent-up demand being released here. Whether that can continue when the Chinese government remains committed to its zero-covid policy remains to be seen, especially with the weather starting to get colder and infection rates only likely to increase. This is likely to translate into fairly subdued demand going forward, so while we can expect a better performance in Q3, the upside is likely to be constrained by uncertainty over the outlook heading into year end. Expectations are for a rise of 3.2%, with industrial production expected to rise by 4.9%.   EU CPI final (Sep) – 19/10 – having seen EU CPI rise to a record 9.1% in August there was a high expectation that the September numbers would be even worse, with the pressure on businesses to pass price increases on reflected in a shocking German PPI number which saw factory gate prices rise by an absolutely staggering 45.8%. For several months now there has been a massive mismatch in PPI and CPI numbers when it comes to EU headline inflation. It now appears that the headline CPI numbers are accelerating. The latest flash number saw headline inflation surge by 1.2% month on month, pushing the annualised number up to 10%, and pushing core prices up from 4.3% to 4.8%. The only reason EU CPI isn’t higher is because countries like France are suppressing the CPI impact on its numbers by price caps, while in Germany headline inflation is at 10.9%, up from 8.8% in August. A confirmation of these numbers this week are likely to see the ECB come under further pressure to go ahead with another 75bps hike when they next...

Inflation will dominate the market theme again in the coming week as, after the United States, it will be the turn of others to face their inflation demons. With the risk of recession growing by the day but not a lot changing with the inflation dynamics, UK CPI figures will attract the most attention, while a modest pickup in Japan is unlikely to spur any policy shifts at the Bank of Japan. China will also come under the spotlight as it releases GDP estimates for the third quarter and its leaders convene for the National Congress of the Communist Party.