AsiaPac Bond Briefing: Treasuries Hold Monday's Moves In Tepid Trade
THE ASIA-PAC SESSION
Treasuries have mostly nudged lower since the cash open, having kept in a limited range amidst a general lack of meaningful macro headline drivers and US economic data releases. TYU4 is -0-03 at 113-04 on volume of ~80K lots, operating towards the bottom of a 0-06 range established since the open. The move lower in the contract erases much of the 0-03+ gain seen on Monday, although TYU4 has in any case remained rangebound across recent weeks, extending a move away from multi-month highs made earlier this month (at 115-03+ on 5 Aug), consolidating gains from a broader richening move seen since June as expectations for Fed rate cuts have gained pace
FOMC-dated OIS continue to fully price in odds for a 25bp rate cut at each of the remaining three meetings for '24, with odds of a 50bp move seen at <20% in Sep '24, before rising to ~35% in Nov and ~60% in Dec
The ECB's Rehn was on the wires early on (speaking from NY), saying that "the recent increase in negative growth risks in the euro area has reinforced the case for a rate cut at the next ECB monetary policy meeting in September - provided that disinflation is indeed on track" - nothing particularly new here. He also said that the path towards the 2% inflation target is likely to be "bumpy", and that "there are no clear signs of a pick-up in the manufacturing sector, even though the energy cost drivers of the weak performance seem to have largely faded away". Note that euro-area CPI will be released at the end of the month, roughly two weeks ahead of the ECB's next monetary policy decision (12 Sep)
China's LPR fixings for Aug came in unchanged across the 1-Year (3.35%; BBG median 3.35%) and 5-Year (3.85%; BBG median 3.85%), matching wider expectations - providing nothing by way of a surprise after lenders had reduced both measures by 10bp last month. Broader markets were largely unmoved by headlines
The Philly Fed Non-Manufacturing gauge for Aug will solely headline the data docket later in NY dealing
Atlanta Fed Pres Bostic ('24 voter) and Fed Vice Chair for Supervision Barr (permanent voter) are scheduled to speak later at separate events. Note that the former is slated to speak about innovating for inclusion at the Atlanta Fed's Payment Inclusion Forum, while the latter will be speaking on cybersecurity - which will overall reduce the likelihood of meaningful commentary on monetary policy
THE DAY THAT WAS
To recap Monday's moves in Treasuries, cash went out 1.5bp cheaper to 2.0bp richer across the curve, twist flattening and pivoting around 5s. There was nothing by way of major US economic data scheduled for release on Monday, leaving focus on the continued rally on Wall St., while Fed Chair Powell's upcoming speech out of Jackson Hole (due Friday) has drawn closer
On the latter, focus will be on Powell's guidance (if any) on the path of rate cuts in the coming months, given that there has been a large surge in expectations for the Fed to do so at a relatively rapid pace by as soon as Sep '24. Powell may have to address non-negligible expectations for the Fed to opt for larger 50bp cuts this year, although in any case, he is likely to err on the side of caution here re: any commitments, given that the Fed will receive another set of NFPs (6 Sep) and CPI (11 Sep) data ahead of their next monetary policy meeting
Minneapolis Fed Pres Kashkari ('26 voter) said that since "the balance of risks has shifted", it would be "appropriate" to discuss a rate cut in September. A key factor for this consideration has been the rise in the unemployment rate, with the labour market overall currently "showing some concerning signs". He does not see any compelling reason to opt for larger 50bp cuts at present (WSJ link here)
ICYMI, on the other side of the aisle, San Fran Fed Pres Daly ('24 voter) said in an FT piece (interviewed last Thu) that she sees little evidence of the US economy heading for a deep recession, and that the economy is "not in an urgent place". While the labour market has been slowing, it is still "not weak". That being said, she highlighted that the Fed does not "want to overtighten into a slowing economy", and that being slow to adjust monetary policy can be a "recipe for getting the result we don’t want, which is price stability and an unstable and faltering labour market" (FT link here)
Adding to recent worry re: an incoming recession, the NY Fed released its Survey of Consumer Expectations Labor Market Survey for July, showing that the number of individuals looking for a job in the past four weeks has risen to 28.4% (19.4% in Jul '23), hitting its highest level seen since Mar '14 (NY Fed link here)
ACGBs
ACGBs have been biased modestly lower since the open, holding on to the negative lead from Aussie bond futures overnight, with the latter seen stuck around their overnight closing levels. YM and XM are -3.0 apiece, with the former back to around its overnight close after failing to break above neutral levels midway through Sydney dealing. XM deals just above a shallow breach through to fresh session lows, although overall moves remain somewhat limited. Bills run 1 to 4 ticks cheaper through the reds
The RBA released the minutes to its Aug monetary policy meeting, with the highlight out of that essentially being that the RBA will hold the cash rate target at current levels "possibly for an extended period". The Board indicated that their reaction function would be based on their view of if "inflation was still broadly on track to return to target within a reasonable timeframe", and on their view of if interest rates are "appropriate to balance the prevailing risks to inflation with those surrounding the outlook for the labour market" (RBA link to Minutes here)
In any case, the Minutes also showed that the Board had considered a rate hike vs a hold, although they ultimately "decided that the case to leave the cash rate target unchanged at this meeting was the stronger one". To elaborate, they see the current cash rate target as providing the "best balance the risks to both inflation and the labour market, particularly in light of the prevailing uncertainties, market volatility and market expectations". The Board also noted that "the flow of data since the previous meeting had not been sufficient to warrant a change in the stance of monetary policy", adding to the case for a hold
The Board said that they will continue placing "somewhat greater-than-usual weight on the flow of data, relative to the forecasts, when there were uncertainties about the persistence of supply shocks", again flagging their data dependence in the face of prevailing staff forecasts
Also of note, the Board "affirmed that their strategy was still to bring inflation back to target within a reasonable timeframe and their tolerance for this timeframe being pushed out further was limited" - repeating well-worn themes, although the lack of monetary policy tightening earlier in this cycle (and not to mention the strategy of taking the cash rate to a lower peak than that of peer central banks) despite signs of a slowdown in progress in bringing inflation back to target will have injected an element of uncertainty into this view
In all, STIR markets showed virtually no change in expectations for the RBA to make no change to the cash rate target when it issues its next monetary policy decision in Sep, continuing to price in ~10% odds of a 25bp rate cut after the release of the Minutes
The composite PMI reading for July is due on Wednesday. The manufacturing and services measures will follow on Thursday
NZGBs
NZGBs are off lows but have held and earlier reversal into cheapening territory heading into the close, having cheapened modestly earlier on as we had worked our way across the session, loosely tracking losses in Aussie bonds and US Treasuries
From a broader perspective, while NZGBs are off their post-RBNZ bests, they currently trade around their richest levels seen in over a year, having headed higher following months of soft economic data, culminating in the RBNZ's mid-Aug rate cut. As it stands, OIS markets are currently pricing in a cumulative ~72bp of rate cuts through to the RBNZ's end-Nov monetary policy meeting
While this is far short of the ~105bp priced in at the beginning of Aug, it continues to point to fully-priced-in expectations for a 25bp and a 50bp rate cut at the remaining two decisions for the year. Note that this still reflects far more aggressive cuts than the RBNZ is forecasting - they see the OCR at ~4.9% by end-'24, implying at least one more 25bp rate cut (see page 51 of RBNZ's Aug MPS here)
ICYMI, this week's otherwise usual round of NZGB auctions has been cancelled owing to the upcoming sale of the new NZGB May-36 bond. The Treasury is expected to issue at least ~NZ$3bn of the line, to be capped at NZ$6bn, with initial price guidance being ~7-11bp over that of the NZGB May-35 bond. The issue is expected to be priced today (20 Aug)
The NZ trade balance for Jul flipped back into a deficit, with a rebound in imports from June contributing the most to that reversal. On a Y/Y basis, exports rose by 14.0% from Jul '23, while imports increased by a more modest 8.5%. Of note here, outbound shipments of dairy products (+11%) contributed the most to growth in exports, adding to a strong surge in fruit exports (+28%) as well (StatsNZ link here)
- Jul Trade Balance NZ$963mn; Jun revised +NZ$585mn, was +NZ699mn
- Jul Exports NZ$6.15bn; Jun revised NZ$6.04bn, was NZ$6.17bn
- Jul Imports NZ$7.11bn; Jun revised NZ$5.45bn, was NZ$5.47bn
REINZ released its monthly property report for Jul, titling their update "Green shoots appear in New Zealand’s property market". Of note, REINZ highlighted that there has been a "new wave of buyer activity not typically seen in late winter". The total number of properties sold in NZ has risen strongly on a Y/Y basis ahead of the "spring selling season", while seasonally adjusted sales was also said to be reflecting "a market performing above anticipated levels". While prices fell on a Y/Y basis - and sales volumes were observed to be "lower than average", REINZ said that "sentiment is beginning to change", aided by the decline in interest rates in July. The RBNZ's recent cut to the OCR - and "strong signals of more reductions to come, will bring relief to households and will provide some confidence to buyers to act soon" (REINZ link here)
NZ Finance Minister Nicola Willis was on the wires a little earlier, speaking on the recommendations from the Commerce Commission re: banking. In essence she said that she shares the "vision" for a "stronger, more disruptive Kiwibank", which should get the "growth capital it needs to become a 'maverick' that exerts real competitive pressure on the Big 4"
The Commission's report said that the RBNZ should place greater emphasis on competition - a recommendation that Willis said that she would take up, with a new Financial Policy Remit expected to be released before Dec '24. The Remit will "make clear the Government's expectation that the Reserve Bank, in its policies and actions, supports a more competitive banking sector".
In all, there are several components within the Commission's report that covers upcoming decisions by the RBNZ. While these developments understandably do not cover monetary policy, they are expected to impact long-term productivity and growth, which may factor into monetary policy considerations further out
No domestic data of note has been scheduled for Wednesday. real retail sales will provide the next point of interest on this front (due on Friday)
JGBs
JGB futures are +4 ticks at 144.76 in the second half, back from a pre-lunch surge to session highs (at 144.86), with that advance blunted around the release of results of a sale of 20-Year JGBs - although overall moves in reaction to that auction has been relatively limited on balance, with nothing by way of a lasting shift seen in JGB futures. The contract has firmed slightly from its overnight close (-5 ticks at 144.67). Taking a step back, JGB futures have remained somewhat rangebound across much of the month of Aug so far, having traded between 144.50 to 145.50 across the past two weeks amidst a lack of meaningful domestic catalysts - while also essentially tracking moves in US Treasuries across the same period
There were no domestic data releases of note scheduled for today
The latest round of 20-Year JGB supply saw decent enough demand, with the low price coming in exactly in line with wider expectations (102.70 vs 102.70 per the BBG dealer poll), while cover came in at 3.42x (3.80x prev., but not much difference against the prior six-auction average of 3.44x). The tail widened to its widest seen since Apr '24. Super-long end JGB yields nudged higher after the release of results from the auction, although overall moves were very limited, leaving them comfortably within the confines of their pre-auction ranges
Looking domestically, Nikkei reported that the Japanese government plans to raise the long-term interest rate estimate (to 2.1% from 1.9%) for the calculation of its state budget for the next fiscal year, a move that would reflect a rise in JGB yields (and implying an estimate of JGB yields to trend at ~1.0% across the period, taking into account how the estimate is derived) amidst monetary policy tightening from the BOJ. Debt-servicing costs are expected to increase to ~Y28.9tn for the next FY as a result, up from ~27.0tn for the current FY. The overall budget will likely come in above the Y110tn mark for a fourth straight year. Note that the interest rate estimate for the next FY will be finalised in Dec '24
Apart from that, the LDP's Nakatani has confirmed that the party's leadership election will be held on 27 Sep, with campaigning to begin on 12 Sep. Based on past contests, results will likely be out by the middle of the Tokyo afternoon on that date (27 Sep)
Note that the contest will decide the next Prime Minister of Japan. On potential winners, there are arguably no clear frontrunners at present, although in any case, the field of candidates do not seem to have policy platforms/views that are very different from PM Kishida's at present, with most pundits having already said that they expect broad policy continuity
A Kyodo telephone poll has placed former Defence Minister Ishiba (25.3% approval) as the favourite as the next PM, followed by former Environment Minister Koizumi (19.6%) and Economic Security Minister Takaichi (10.1%). A poll of LDP supporters shows Koizumi (24.2%) in the lead - followed by Ishiba (21.0%). All in all, hardly stuff pointing to a clear frontrunner (1,064 responses collected in total for this poll)
Note that minister for digital transformation Kono has been reported (per NTV) to be announcing his own run next Monday (26 Aug) - no surprise here
Trade data for July will solely headline the domestic data docket on Wednesday. The BOJ will conduct its regularly scheduled round of Rinban purchase operations covering 1- to 10-Year JGBs.
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