MNI EUROPEAN MARKETS ANALYSIS: April RBA Cut Priced In

• Aussie and kiwi underperformed during APAC trading today giving up some of yesterday’s gains and AUDUSD is now below 64c following the more dovish RBA statement.
• Cash ACGBs are 5-8bps richer on the day after the RBA on hold decision versus 4-5bps cheaper this morning. The AU-US 10-year yield differential at -4bps from +5bps this morning. A 25bps rate cut is now fully priced by April versus May pre-RBA.
• China equities were stronger following news that 2025 is likely to see more stimulus. This was timely given that exports slowed in November, while imports sank - a sign of weak domestic demand.

MARKETS
US TSYS: Little Changed After Yesterday’s Bear-Steepener, Focus On CPI/PPI

TYH5 is trading at 111-00+, -0-01+ from NY closing levels. 

• According to MNI’s technical team, a bull cycle in Tsy futures remains in play and last week’s gains reinforce current bullish conditions. The contract has traded through the 50-day EMA, at 111-12. A clear break of this average would strengthen a bullish theme and signal scope for a stronger recovery. Sights are on 111-24 next, a Fibonacci retracement. For bears, a reversal lower would highlight the end of the bull cycle and open the key support at 109-02+, the Nov 15 low.
• Cash bonds are ~1bp richer in today’s Asia-Pac session after Monday’s bear-steepener.
• The focus remains on this week's CPI and PPI inflation data on Wednesday and Thursday respectively.
• Analysts’ forecasts for November CPI imply remarkably steady sequential inflation versus October, with the MNI median and average for core expected to show an unchanged 0.28% M/M. Combined with Thursday’s estimates for PPI inputs, core PCE is in turn seen moderating to between 0.18-0.25% M/M in November, vs 0.27% in October. (See MNI CPI Preview here)
• As a reminder, the Federal Reserve entered its self-imposed blackout at midnight Friday through December 19.

JGBS: Cash Bonds Cheaper But Strong 5Y Auction Assists Market

JGB futures are weaker but in the middle of today’s range, -21 compared to settlement levels.

• Outside of the previously outlined M2 & M3 Money Stock, there hasn't been much by way of domestic drivers to flag. Machine Tool Orders data is due soon.
• Cash bonds are ~1bp richer in today’s Asia-Pac session after Monday’s bear-steepener. The focus remains on this week's CPI and PPI inflation data on Wednesday and Thursday respectively.
• Analysts’ forecasts for November US CPI imply remarkably steady sequential inflation versus October, with the MNI median and average for core expected to show an unchanged 0.28% M/M. Combined with Thursday’s estimates for PPI inputs, core PCE is in turn seen moderating to between 0.18-0.25% M/M in November, vs 0.27% in October. (See MNI CPI Previewhere)
• Cash JGBs are flat to 2bps cheaper across benchmarks beyond the 1-year. The benchmark 5-year yield is 0.6bps higher at 0.728% after today’s supply.
• Today’s 5-year bond auction demonstrated robust demand, with the auction price surpassing dealer expectations, the cover ratio rising significantly and the auction tail narrowing slightly.
• Swap rates are little changed out to the 10-year and 3bps higher beyond. Swap spreads are tighter out to the 10-year and wider beyond.
• Tomorrow, the local calendar will see PPI data and BSI Large All Industry Survey results.

JGBS AUCTION: 5-Year Supply Shows Strong Demand Metrics

Today’s 5-year bond auction demonstrated robust demand, with the auction price surpassing dealer expectations and exceeding the Bloomberg poll projection of 99.81. The cover ratio rose significantly to 4.4177x from 3.8070x, while the auction tail narrowed slightly compared to last month.

• The strong results sharply contrasted with the weaker demand seen in this month’s 10-year bond auction.
• ids were likely bolstered by the offering’s outright yield at a cyclical peak.
• The 5-year JGB has richened by approximately 1bp in early afternoon trading, with JGB futures strengthening and recovering from session lows.

AUSSIE BONDS: Richer After RBA Softens Guidance

ACGBs (YM +7.2 & XM +4.6) gap 6-8bps stronger after the RBA decision and statement. 

• The RBA Board held the cash rate at 4.35% amid signs of easing inflationary pressures. Inflation remains above target, with underlying inflation at 3.5%, and is not expected to sustainably reach the 2.5% target midpoint until 2026.
• Economic growth is weak, with output rising just 0.8% over the past year, the slowest pace since the early 1990s (excluding COVID-19). Labour market conditions remain tight but are gradually easing, while wage growth has slowed more than anticipated.
• The Board highlighted uncertainties in domestic and global outlooks and reiterated its commitment to bringing inflation back to target while monitoring economic and market trends.
• Overall, the guidance has softened with the Board “gaining” some confidence inflation will return to target.
• Cash ACGBs are 5-8bps richer on the day after the decision versus 4-5bps cheaper this morning. The AU-US 10-year yield differential at -4bps from +5bps this morning.
• Swap rates are 5-8bps lower, 6-9bps lower than pre-RBA levels.
• The bills strip has shunted richer, with pricing +1 to +9 after the decision.
• RBA-dated OIS pricing is 2-10bps softer across 2025 meetings, with later  meetings leading. A 25bps rate cut is now fully priced by April versus May pre-RBA.

STIR: RBA Dated OIS Pricing For Sep-2025 ~50bps Softer Than Mid-Nov

RBA-dated OIS pricing is 2-9bps softer across 2025 meetings after today's RBA policy decision. While the RBA Board held the cash rate at 4.35%, guidance was softened with the Board “gaining” some confidence inflation will return to target.

• A 25bps rate cut is now fully priced by April versus May pre-RBA.
• Market expectations for the September meeting are now 45-50bps softer than mid-November, driven by concerns over weakening domestic economic growth.
• Notably, in mid-November, a full 25bps cut wasn’t expected until August, marking a significant shift toward earlier rate cuts.
• The probability of a rate cut at today’s meeting had been low, with markets assigning only an 8% chance. 

Figure 1: RBA-Dated OIS – Today Vs. Mid-November

 Source: MNI – Market News / Bloomberg

RBA: Rates Unchanged, Dovish Shift

We said in our RBA Preview that the first step for a move towards easing would be the removal of the phrase “not ruling anything in or out”. The Board did that in its December statement as well as its vigilance to upside inflation risks. It now appears to have gained “some confidence” that inflation is “moving sustainably towards target”. However, underlying price pressures remain “too high” and it is likely to be “some time before inflation is sustainably in the target range”.  

• The next RBA meeting is on February 18, which will include an updated outlook, and Q4 CPI will print on January 29 and Q4 retail sales volumes on February 3. Currently the RBA is forecasting trimmed mean at 3.4% y/y. A material downside surprise with services inflation trending lower may be enough for easing to start. The following meeting is April 1, after Q4 wages and GDP, which may make this date more likely.
• Q3 wages and growth printing below RBA expectations appear to have driven the Board’s dovish shift. As a result, there seem fewer uncertainties over the effectiveness of monetary policy “working”.
• The removal of “vigilant to upside risks” has been replaced with “risks remain”, so we’re not there yet. In terms of those risks, the commentary on the labour market was unchanged noting recent stabilisation and conditions remaining tight. Weak productivity is still a concern.
• The Board observed that Q3 growth was the “slowest” since the early 1990s, except for Covid. Aggregate consumption being “more resilient” was removed but while Q3 consumption was “slower than forecast”, October/November data are signalling a “pick-up”.
• See full statement here.

RBA: No Rate Change Discussed, Inflation "Risks Haven't Gone Away"

Governor Bullock has held the post-meeting press conference and stated that a shift in rates was not discussed but if the policy stance was “appropriate” and also scenarios that would require a response. She noted that the economy is developing broadly in line with the RBA’s forecasts, which has given them confidence, but inflation “risks haven’t gone away”. 

• The statement language was changed to show that the Board has “noticed” that the real economy is slower, but it is not an indication that it is about to cut rates. Bullock made it very clear that she doesn’t know when the easing discussion will begin and when it will cut. It will be in a position to consider easing if the economy continues to develop as expected but don’t know when that will be.
• It gained “some confidence that inflation is moving sustainably towards target” because the error band around forecasts narrows the closer we get to that forecast and underlying inflation is in line with the Q4 projection.
• Bullock clarified that the Board is not explicitly waiting for more than one quarterly CPI print but that it will need more information. With the Board remaining data driven, monthly jobs, inflation and consumption data plus the liaison programme will all be important before February.
• The RBA has begun to look at the impact of the Trump administration’s proposed tariffs. There is significant uncertainty given what is said may not be what is eventually done and the response of other countries is also unknown. The direct effect on Australia though is likely to be limited. It is the impact on China that will be important.
• The new two board structure will begin on March 1 2025 but Bullock didn’t have numbers yet on who would be shifting but reiterated the need for continuity.

AUSTRALIA DATA: NAB Business Survey Points To Another Weak Quarter

November NAB business survey came in weak with conditions down to 2.4 from 7.2, the lowest since end-2019 outside of Covid. Confidence fell to -2.8 from +5.3. There was weakness across components but cost pressures picked up while final product prices remained in line with the historical average. The data is suggesting another soft quarter, but little further progress on inflation. The RBA is widely expected to leave rates at 4.35% later today.

Australia NAB business conditions & outlook

• Labour cost growth remained at 1.4% 3m/3m but purchase costs increased to 1.1% from 0.9% but still below this year’s average. Final product prices rose at 0.6%, unchanged from October, but retail prices eased to 0.6% from 1.1%.
• Capacity utilisation remains above the series average implying that inflation pressures will only come down slowly.
• The RBA has been concerned about services inflation and NAB reported that services conditions were higher. 

Australia NAB price/cost components

Source: MNI - Market News/Refinitiv

• Employment moderated to 2.5 from 3.3 but remains above the low for 2024. November jobs data print Thursday and the unemployment rate is forecast to rise 0.1pp to 4.2%.
• Profitability fell to -0.8 in November from +5.2, the first negative since January 2022. Q3 profits fell again driven by the mining sector and that seems to have continued in Q4 given softer commodity prices. Trading fell to +5.4 from +13, the lowest since pandemic-impacted 2020.
• Forward-looking orders fell to -4.8 from -3.0, but remain in line with the 2024 average. The drop was driven by mining and retail. Exports also deteriorated.

BONDS: NZGBS: Closed Little Changed But At Session Bests

NZGBs closed at session bests, with benchmark yields 1bp lower. The local market opened weaker today following a negative lead-in from US tsys.

• It is also important to note that the local market was closed at the time of the RBA policy decision. With ACGBs substantially richer (benchmark yields 6-8bps lower at the time of writing) following a softening in guidance, the local market may receive a boost at tomorrow’s open.
• Cash US tsys are little changed in today’s Asia-Pac session after yesterday’s bear-steepener. The focus remains on Wednesday's CPI report and Thursday’s PPI data.
• The local calendar was empty today, ahead of Mfg Activity Volume tomorrow and Card Spending on Thursday.
• Swap rates closed flat to 2bps higher, with the 2s10s curve steeper.
• RBNZ dated OIS pricing closed flat to 3bps softer across meetings. A cumulative 44bps of easing is priced by February, with 107bps by year-end.
• Tomorrow, the NZ Treasury plans to sell NZ$250mn of the 0.25% May-28 bond, NZ$225mn of the 4.50% May-35 bond and NZ$25mn of the 2.75% Apr-37 bond.

FOREX: A$ Underperforming & Falls Sharply Following RBA Statement

Aussie and kiwi were G10 outperformers on Monday following the message from China’s Politburo that there will be more stimulus in 2025. However, during APAC trading today they were both underperforming giving up some of yesterday’s gains and AUDUSD is now below Monday’s close following the more dovish RBA statement. The BBDXY USD is off its low to be little changed.

• AUDUSD was down 0.4% to 0.6415 before the RBA decision to keep rates unchanged at 4.35%. It is now 0.8% lower at 0.6389 as the RBA noted that core inflation “remains too high” but it is “gaining some confidence that inflation is moving sustainably towards target”.
• NZDUSD is 0.6% lower at 0.5828, close to the intraday low. AUDNZD was up 0.1% at 1.0993 before the RBA decision with a high of 1.1002 but is now down 0.1% to 1.0969. It has struggled to hold gains above 1.10.
• After rising on Monday USDJPY is down slightly to 151.11 after falling to 151.04 earlier. AUDJPY is now down 0.8% to 96.63.
• European currencies are little changed with EURUSD around 1.0555 and GBPUSD 1.2745.
• Equities are mixed with the Hang Seng up 1.1% and CSI 300 +1.8% but ASX down 0.3% and TAIEX -0.6%. The S&P e-mini is moderately lower too. Oil prices are down with Brent -0.3% to $71.90/bbl. Copper is down 0.6% and iron ore is around $106.50/t.
• Later there is final US Q3 productivity/ULC and November NFIB small business optimism. The Eurogroup meeting is taking place.

OIL: Crude Holds Onto Most Of China-Driven Gains, EIA Report Later

Oil prices are moderately lower during APAC trading today after rising over a percent on Monday buoyed by China’s Politburo sending a clear message that there will be further stimulus in 2025. Increased uncertainty in the Middle East also provided support. WTI is down 0.4% today to $68.10/bbl, while Brent is 0.3% lower at $71.90. The USD index is down slightly.

• There is likely to be a moderate loosening of monetary policy in China next year with a more proactive fiscal policy resulting in the end to the 3% budget deficit ceiling. It is the world’s largest importer of crude.
• While the situation in the Middle East continues to be monitored closely, supply/demand fundamentals are the focus for oil markets given the expected surplus in 2025. US industry-based inventory data is released later today and the official EIA figures on Wednesday.
• November US CPI and the OPEC monthly report on Wednesday will be watched, in addition to today’s EIA Short-Term Energy Outlook and the IEA’s monthly report on Thursday.
• Later there is final US Q3 productivity/ULC and November NFIB small business optimism. The Eurogroup meeting is taking place. 

CHINA: Exports Up +6.7% y/y Below Expectations.

• November exports rise +6.7% y/y following October’s rise of +12.7%.
• Market estimates were for a +8.7% y/y.
• In CNY terms, exports rose +5.8%.
• China’s imports for November unexpectedly contract by -3.9% with market expecting a +0.9% expansion, following October’s contraction.
• China’s USD trade surplus remains robust at $97.44bn, no doubt catching the eye of the incoming administration in the White House, with the U.S contribution the largest by far at US$34.89bn.
• Exports to the US +7.3% y/y (from +8.1%).  

CHINA: Xinhua Reports that Bolder Stimulus Next Year Coming. 

• China’s Politburo meeting for December has sent a clear message to economy that bold economic support can be expected next year.
• The Politburo has vowed to ‘embrace a moderately loose monetary policy in 2025 (as per article on Xinhua).
• They have also indicated that a shift away from the last decades’ prudent strategy.
• To complement looser monetary conditions China’s leaders also pledge a more proactive fiscal policy.
• Yesterday it was reported that China is likely to abandon its long-held  3% fiscal deficit cap. 

UP TODAY (TIMES GMT/LOCAL) 

Date	GMT/Local	Impact	Country	Event
10/12/2024	0330/1430	***	AU	RBA Rate Decision
10/12/2024	0700/0800	***	DE	HICP (f)
10/12/2024	0700/0800	***	NO	CPI Norway
10/12/2024	0700/0800	**	SE	Private Sector Production m/m
10/12/2024	0900/1000	*	IT	Industrial Production
10/12/2024	1000/1000	*	GB	Index Linked Gilt Outright Auction Result
10/12/2024	1100/0600	**	US	NFIB Small Business Optimism Index
10/12/2024	-	***	CN	Trade
10/12/2024	-	***	CN	Money Supply
10/12/2024	-	***	CN	New Loans
10/12/2024	-	***	CN	Social Financing
10/12/2024	-		EU	ECB's De Guindos in ECOFIN meeting
10/12/2024	1330/0830	**	US	Non-Farm Productivity (f)
10/12/2024	1355/0855	**	US	Redbook Retail Sales Index
10/12/2024	1630/1130	*	US	US Treasury Auction Result for Cash Management Bill
10/12/2024	1700/1200	***	US	USDA Crop Estimates - WASDE
10/12/2024	1800/1300	***	US	US Note 03 Year Treasury Auction Result
11/12/2024	1000/1000	**	GB	Gilt Outright Auction Result
11/12/2024	1200/0700	**	US	MBA Weekly Applications Index