AsiaPac Bond Briefing: Treasuries Hold Tuesday's Gains In Directionless Asian Trade; JGB Futures Virtually Flat As BOJ Decision Looms

THE ASIA-PAC SESSION

Treasuries are shallowly mixed across the curve heading into European hours, having generally lacked direction across Asia-Pac dealing. Participants have been happy to hold Tuesday's modest richening as they have digested generally soft US economic data from yesterday. Liquidity was thinned in Asia, with Japan now within the Golden Week holiday period (markets are open today)

TYM5 is +0-01+ at 112-06+ on volume of ~60K lots, operating around the middle of a 0-05 range established in Asia, testing a breach of Tuesday's three-week high (also 112-07+) at writing

Supporting the recent overall bid in Treasuries, fed funds futures are now fully pricing in odds for four 25bp rate cuts by the Fed this year, with a cumulative ~97bp of rate cuts priced in through to the 10 Dec '25 monetary policy decision - up from ~88bp of cuts priced in at the start of this week, supported by soft economic data, and likely also aided by a doubling-down of the Trump administration's tariffs on China

• The Atlanta Fed's GDPNow estimate for growth in Q2 was bumped down to -2.7% from -2.5% prev. following Tuesday's US data releases

On the latter, note that Trump had said on an interview with ABC News that China will "probably eat those tariffs", suggesting an appetite to keep the prevailing tariff rates on China in place for quite a while longer - a departure from his remarks last week that tariffs on China would "come down substantially" (link to ABC News report here)

• Certainly it would arguably be one's own mistake to take statements from the current administration at face value (recalling the moves in markets on the latter remarks last week)

In any case, Trump acknowledged that 145% tariffs on Chinese goods was basically an embargo, saying that "that's good". Trump also denied the interviewer's assertion that tariffs would raise prices on items from electronics to clothing to housing materials

• In our view, noting that Chinese exporters tend to run very thin margins on their shipments owing to high competition, it is perhaps more likely that outbound shipments will be halted entirely before exporters will be willing to cut prices on exports to the US so as to offset 145% tariffs (with the baseline understanding that tariffs are paid for by US consumers)

On related geopolitical (and trade-related) matters, the win by the Liberal Party in Canada has seen them nevertheless fall short of a majority, although the winning message of the campaign - a repudiation of Trump (particularly on his calls for Canada to become the 51st state of the US), means that US-Canada tensions re: trade and border matters are unlikely to de-escalate from the Canadian side - at least for now

UP NEXT

Focus now turns to the first release of US Q1 GDP due later (1230GMT), with the Price Index metrics likely to provide some cues re: price pressures as well, although focus on that front will likely be centred around the release of PCE metrics at 1400GMT. Also on prices, the Employment Cost Index for Q1 will also be in focus, and is slated for release at 1230GMT

Apart from that, the ADP labour market report for Apr will also be in focus (1215GMT), noting that it comes ahead of the release of US NFPs on Friday. Weekly mortgage applications (1100GMT), the Chicago PMI for Apr (1345GMT), personal income & spending for Mar (1400GMT), and pending home sales for Mar (1400GMT) are also on tap

THE DAY THAT WAS

To recap Tuesday's moves in Treasuries, while trading in cash was halted in Asia-Pac hours owing to a holiday in Japan, they opened in London hours, running 3.5-4.5bp richer across the curve come the close, bull steepening in the process as the front end had outperformed slightly

There was quite a bit of US data for participants to chew through, with the first of the day's bouts of richening in Treasuries seen coming a little after the release of incrementally softer-than-expected wholesale inventories for Mar (+0.5% M/M; BBG median +0.6%; Feb revised +0.5%, was +0.3%), noting that retail inventories posted a surprise contraction (-0.1% M/M; BBG median +0.4%; Feb revised -0.1%, was +0.1%)

The data also showed that the US trade deficit of goods widened to the largest on record for the month of March (~$162bn from ~$147.8bn in Feb), which is sure to set bells ringing off in the White House - given the current administration's fixation on reversing US trade deficits with major trading partners (although a fair bit of this surge would probably have something to do with front-loading of imports as well given the emphasis on incoming tariffs throughout Q1)

• Treasuries richened by a decent amount soon after the data release, with 10s seen reversing an earlier bout of cheapening, likely as worry re: Trump administration moves provided tailwinds

JOLTS data for Mar showed job openings coming in a lot softer than expected (7,192K; BBG median 7,500K; Feb revised 7,480K, was 7,568K), pointing to signs of cooling in the US labour market, likely further adding to the bid in Treasuries amidst demand for havens. Treasuries surged to fresh session highs after that data release, before drifting to fresh bests after, allowing yields to go out near their lowest levels of the day after

ACGBs

ACGBs have diverged across Sydney dealing as we have headed towards the close, with front end ACGBs seen paring gains while long end ACGBs have stuck near session bests, flattening the curve following the release of Q1 CPI

YM is +1.0, having retreated from session highs following the release of Q1 CPI (was at +5.0). XM is at +3.5, dealing a little below its own session high of +4.5, having risen from its slightly negative overnight close since the Sydney open. Bills run 4 ticks cheaper to 4 ticks richer through the reds, twist flattening

• There were no sale of ACGBs scheduled for today. Note that the week's sole sale of Aussie bonds will be on Friday, with A$1.2bn of ACGB Jun-35 on offer then

The latest Q1 CPI report showed headline CPI coming in incrementally above forecasts, with the pace of inflation being unchanged from that seen in Q4 from a Y/Y basis (sharply higher on a Q/Q basis). Underlying price pressures were broadly above forecasts as well, representing a slightly slower-than-expected slowdown in underlying inflation (ABS data release here, media release here)

• Q1 CPI +2.4% Y/Y; BBG median +2.3%; Q4 +2.4%
• Q1 CPI +0.9% Q/Q; BBG median +0.8%; Q4 +0.2%
• Q1 Trimmed Mean CPI +2.9% Y/Y; BBG median +2.8%; Q4 revised +3.3%, was +3.2%
• Q1 Trimmed Mean CPI +0.7% Q/Q; BBG median +0.6%; Q4 +0.5%
• Q1 Weighted Median CPI +3.0% Y/Y; BBG median +2.9%; Q4 revised +3.5%, was +3.4%
• Q1 Weighted Median CPI +0.7% Q/Q; BBG median +0.7%; Q4 revised +0.6%, was +0.5%

All in all, the data release should incrementally add to expectations that the RBA will tread carefully re: rate cuts in the coming months, although the magnitude of today's surprise in trimmed mean CPI certainly wouldn't make for a very strong case overall (when taking into account worry re: the external environment), and should do very little to derail prevailing expectations for a 25bp rate cut come the upcoming 20 May monetary policy decision

• STIR markets are continuing to price in ~28bp of rate cuts for the 20 May monetary policy decision, pointing to fully priced in odds of a 25bp rate cut at that meeting
• Looking further out, a cumulative ~117bp of rate cuts is priced in through to the Dec '25 monetary policy decision, pointing to ~65% odds of a fifth 25bp rate cut by the end of the year, with odds not that much changed from levels seen a week ago

Looking into the details of the data release, the ABS observed that annual trimmed mean CPI has now hit its lowest level seen since Dec '21, which should clear the way re: rate cuts by the RBA in the coming months

From a Q/Q perspective, much of the increase in CPI was due to housing (+1.7% Q/Q), education (+5.2%), and food & non-alcoholic beverages (+1.2%).

In turn, much of the increase in the housing sub-group was due to an increase in electricity prices (+16.3% Q/Q), with the ABS observing that much of that was in turn driven by electricity prices in Brisbane where "most households have used up the $1,000 Queensland State Government electricity rebate resulting in higher out of pocket electricity costs", while other households in other states paid more owing to lessened impact from the Commonwealth Energy Bill Relief Fund rebates owing to the timing of said payments

Apart from that, the rise in education prices was due in part to the start of the school year, with higher operating costs seen being passed through as higher school fees up to Secondary education, while university course fees rose owing to annual indexation

The rise in food & non-alcoholic beverage prices was due largely to increases in fruit & vegetable prices (+2.8%), with various fruits and vegetables seen being hit by reduced supplies

NZGBs

NZGBs have held on to an earlier richening impulse as we have headed towards the close, although long-end NZGBs have fairly outperformed across the day so far, flattening the curve across that period

• 2-Year NZGB yields are at ~3.23%, keeping well within ranges carved out across the past few weeks
• 10-Year NZGB yields are at ~4.43%, continuing to operate just a tad above three-week lows hit on Monday (at ~4.43%)

The latest ANZ monthly business survey for Apr showed an outright cratering in business confidence, with the gauge seen dropping by >8 points to hit its lowest level seen since Jul '24, marking a sharp retreat from its recent peak back in Oct '24. Tempering negative reads of the Apr report, ANZ pointed out that past own activity however rose strongly, highlighting that this metric tends to be the best GDP indicator within the survey (ANZ report here)

• Apr ANZ Business Confidence 49.3; Mar 57.5
• Apr Activity Outlook 47.7; Mar 48.6

To elaborate on the latter, ANZ said that "activity indicators overall continue to tell a tale of an economy that's recovering". ANZ also pointed out that "for the first time since June 2023, more firms (26%) said they have more staff versus a year ago than said they have fewer (24%). (50% reported no change)"

Looking further into the survey, cost expectations rose again (77.9; Mar 74.1), hitting its highest since Sep '23. Pricing intentions however dipped a little (49.4; Mar 51.3), while year-ahead inflation expectations was described as being "steady as a rock" (2.65%; Mar 2.63%)

JGBs

JGB futures are +7 ticks at 140.70 in the second half, having done little since their return from the national holiday observed on Tuesday, trading around the upper end of a limited 21-tick range established across today's session. The lacklustre price action in the contract has come ahead of the BOJ's monetary policy decision on Thursday, with weaker-than-expected economic activity data released earlier today seen spurring nothing by way of a meaningful move in JGBs

Participants have been happy to keep JGBs largely rangebound in recent sessions as we have entered the typical Golden Week holiday period for the country, while expectations for BOJ tweaks to monetary policy in the coming months have waned, noting that the BOJ is due to issue its next monetary policy decision tomorrow

Earlier in the day, economic activity metrics for Mar were released, with both flash industrial production for Mar and retail sales for Mar seen undershooting forecasts, going some way to supporting views that the BOJ will opt to slow the pace of rate hikes in the coming months, particularly as the impact of US tariffs on Japan's economy is expected to gain pace further out. There wasn't much by way of a meaningful reaction in JGBs to the data releases

• Mar P Industrial Production -1.1% M/M; BBG median -0.4%; Feb +2.3%
• Mar P Industrial Production -0.3% Y/Y; BBG median +0.8%; Feb +0.1%
• Mar Retail Sales -1.2% M/M; BBG median -0.7%; Feb revised +0.4%, was +0.5%
• Mar Retail Sales +3.1% Y/Y; BBG median +3.5%; Feb revised +1.3%, was +1.4%

OIS markets are now pricing in a cumulative ~15bp of rate hikes through to end-'25, pointing to ~60% odds of a 25bp rate hike by the end of the year, not that much changed from levels seen a week ago as participants have largely leaned into narratives that the BOJ will likely hike rates by at most twice through the remainder of the FY.

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