AsiaPac Bond Briefing: Very Limited Trade Ahead Of US CPI, Fed Decision; BOJ Makes No Change To Bond Buys

Wednesday 12th June 2024 - Asia-Pacific G-10 Bond Briefing
US Treasuries

Treasuries have edged lower in otherwise mixed, lacklustre trade since the cash open, trimming just a little of the richening that had been seen in the space on Tuesday, with participants likely adopting caution ahead of the Fed's monetary policy decision due later today. TYU4 is -0-02 at 109-15+ on very limited volume of ~38K lots, operating around the bottom of a limited 0-02 range established since the open, marginally trimming some of the 0-14+ higher close seen on Tuesday

Chinese CPI showed inflation rising by marginally slower than expected (+0.3% Y/Y; BBG median +0.4%; Apr +0.3%), maintaining its toehold in positive territory for a fourth straight month, while PPI was a little better than projected (-1.4% Y/Y; BBG median -1.5%; Apr -2.5%). Treasuries were little-bothered by that data release in any case (more writing here: USTs: Very Lacklustre Trade Ahead Of US CPI, Fed Decision; Markets Largely Unbothered By Soft Chinese CPI)

To recap Tuesday's moves, cash Treasuries went out 4.5-6.5bp richer across the curve, with the belly leading the way higher. There were some signs of haven demand for Treasuries following reactions to the European Parliament elections from over the weekend, while there was talk of the US CPI report for May (due later today) to point to a waning of price pressures from the Apr reading. The reopening of $39bn of 10-Year Treasuries was very well received - and perhaps the strongest driver (lower) for yields on the day, driving Treasuries to fresh session highs heading into the close (see: Treasuries - 10yr note reopening - strong indirects)

Looking ahead to the release of US CPI and the Fed's monetary policy decision due later today, participants have exhibited clear caution, with many expecting the latest update to the Fed's "dot plot" to show a clear decline in expectations for rate cuts in '24. Recall that the Fed's last projections in March saw median forecasts pointing to three 25bp rate cuts in '24 - a call that is by now, all but priced out by markets (although matters on this front remain volatile on a M/M basis as economic data has been released)

As it stands, several sections of the market have pointed to financial conditions being clearly too loose in recent weeks, being wholly unsupportive of the narrative of the Fed opting for rate cuts any time soon - or this year at all (see: Things That Stick Out: FOMC Preview Edition)

FOMC-dated OIS now price in a cumulative ~37bp of rate cuts through to end-'24 (was ~50bp just around the end of last week), pointing to ~50% odds of a second 25bp rate cut by the end of the year, with markets currently assigning a little over 85% odds for the first rate cut of this cycle to come by Nov '24

Apart from US CPI and the Fed's monetary policy decision, weekly MBA mortgage applications data is on tap as well. The highlight of the session will nevertheless be Fed Chair Powell's post-meeting presser, coming at 1830HRS GMT

ACGBs

ACGBs are sharply off their early bests, having pared the bullish lead from Aussie bond futures overnight as we have worked our way through Sydney dealing, shrugging off the lack of a meaningful direction from US Treasuries ahead of the release of US CPI and the Fed's monetary policy decision. There were no domestic data releases of note scheduled for today. Note that there are no auctions of ACGBs due this week, per the AOFM's issuance slate released last Friday

YM is flat while XM is +1.0, with both contracts down from their late overnight peaks at writing (at +3.0 apiece). Bills run 1 tick cheaper to 1 tick richer through the reds, twist steepening very slightly

Australian Treasurer Chalmers spoke in a BBG interview a little earlier in the session, saying that he does not expect the Australian economy to continue experiencing stagflation (low growth, high inflation). He believes that policymakers are continuing to fight to bring inflation down without wrecking the economy - likely taking reference in part to his goodies-filled Budget. On the latter, there has been much debate (widespread scepticism?) over increased government spending actually reducing domestic price pressures, with some domestic commentary since having even raised the possibility of the RBA revisiting rate hikes at a further point along in this cycle in response to the Budget

In any case, ICYMI, ANZ on Tuesday had said that they now see the first RBA rate cut of this cycle coming only by Feb '25, breaking ranks with the other "Big 4" calls (they largely see a cut in Nov '23), with ANZ saying that the above-expectations Q1 CPI reading "makes it hard to see the RBA being sufficiently confident that inflation will return to and stay in the band by the time the November meeting comes around". While the economy has slowed, "particularly across private final demand", getting to "an appropriate balance between the level of demand and supply is likely to take a little longer than expected"

Looking ahead, apart from imminent US-centric event risk from the release of US CPI and the Fed's monetary policy decision later today, focus domestically will centre around the all-important labour market report for May, with BBG median forecasts currently calling for a marginal decline in the unemployment rate back towards 4.0% amidst steady employment gains. In any case, note that the RBA's latest forecasts issued back in May '24 had shown projections for unemployment to hit 4.0% by Jun '24 before softening to 4.2% by Dec '24 (RBA link here)

The CBA Household Spending Insights report for May and the labour market report for May will dominate the domestic data docket on Thursday. The AOFM will sell A$2.0bn of Bills

NZGBs

NZGBs are modestly richer across the curve heading into the close, having done little since the cash open, bucking the generally positive lead from US Treasuries from Tuesday. NZGB yields are consolidating lower following a ~20bp-30bp drop from their end-Apr peaks, loosely tracking moves in core global bonds across that period. 10-Year NZGB yields print ~4.74% at writing, down from its end-Apr high of ~4.92%, trading around the middle of its YtD range at current levels

StatsNZ released net migration data for Apr '24, showing a net gain of ~98.5K people for the year ended Apr, marking an 11-month low, and declining from the ~106.4K (revised down from ~123.4K) seen for the year through to Mar '24. On its face, the report adds to already-firm expectations that the peak of the impulse in net inbound migration has passed (StatsNZ release here)

Taking a closer look at the data, the continued slowdown in the pace of inbound net migration has continued to have more to do with a rising (and record) pace of outbound migration, rather than a proper moderation in migrant arrivals - although the impact on wage/housing price pressures will likely lean to the downside in any case, which may give the RBNZ confidence of a moderation in domestic inflation in the coming periods, given a few more months of data on this front

Elsewhere in the country, Trade Me's (local auction and classifieds site) property price index for May showed a 2.3% M/M decline, falling for a second straight month. The data roughly corroborates tracked metrics from other real estate participants, continuing to show the property market straining under expectations of the RBNZ holding rates steady until at least '25. Trade Me data also showed listings staying on the site for longer (May 68 days, Apr 62 days), pointing to further downward pressure on asking prices

Looking to the week ahead, focus will likely turn to the release of the Selected Price Indexes for May on Friday, with focus on that front likely to centred around the state of non-tradeables inflation

Card spending data for May will be on tap on Thursday. NZ$250mn of NZGB Apr-29, NZ$200mn of NZGB May-32, and NZ$50mn of NZGB Apr-37 will be on offer via auction on Thursday as well

JGBs

JGB futures are +27 ticks at 143.81 in the second half, just shy of a very brief breach of its overnight high (to a session high of 143.83) seen ahead of the lunch break, with the contract in any case seen retaining much of the bullish impetus that had been derived from the bid in Treasuries on Tuesday. 10-Year JGB yields have slipped a little below the 1.00% mark at writing, extending a move away from its end-Apr cycle high (just shy of 1.10%) as we have headed into the BOJ's monetary policy decision for June

The BOJ conducted its regularly scheduled round of Rinban operations, offering to buy Y1.3tn of 1- to 10- and 25-Year JGBs earlier in the session - marking no change from offered purchase amounts across the various buckets from that seen at prior rounds of Rinban ops. JGB futures saw a modest knee-jerk move through to fresh session highs after, but quickly erased that move higher soon after

Japanese PPI for May came in firmer than expected, accelerating at its quickest pace seen since Aug '23 (+2.4% Y/Y; BBG median +2.0%; Apr revised +1.1%, was +0.9%), with an upward revision noted to the Apr figure as well. Import prices (+2.5% M/M; Apr +2.0%) rose at a far quicker pace than export prices (+1.5% M/M; Apr +2.2%), reflecting recent yen weakness - and perhaps portending further contribution of yen weakness to domestic price pressures, taking reference to recent BOJ warnings re: the matter (BOJ release here)

From a commodity-based (and M/M) perspective, increases in prices across the "electric power, gas, and water" (+0.31 ppts) and "nonferrous metals" (+0.25 ppts) categories contributed to much of the rise in producer prices in May, with much more muted shifts seen in other groups

Focus looking ahead will continue to centre around positioning ahead of the BOJ's upcoming monetary policy decision due on Friday, noting that most expect the Bank to make no change to interest rates - although recent source reporting has pointed to the possibility of a modest reduction in the scale of monthly bond buys, while BOJ Gov Ueda is expected by some to telegraph rate hikes to come by as soon as the July meeting

The Business Sentiment Index (BSI) survey for Q2 is on tap on Thursday, coming alongside the usual round of weekly international security flow data. On the former, the BSI survey will provide updates on the current and planned investments of large businesses, while also containing forecasts on the economy from business leaders (around 4,500 companies are surveyed by the Japanese Cabinet Office, ESRI explainer here)

An enhanced liquidity auction for off-the-run 15.5- to 39-Year JGBs will also be held. 

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