MNI EUROPEAN MARKETS ANALYSIS: BoJ Tightening Hasn't Tempered USD/JPY Gains

US TSYS: Treasury Futures Edge A Touch Higher Ahead of FOMC

• Jun'24 10Y futures have done very little today, with volumes very low and ranges tight we made lows of 110-04 during the morning session and trade just of highs of 110-07 at 110-06+ up +02 since NY closed.
• Looking at technical levels: Initial resistance is seen at 110-26 (20-day EMA), while above here 110-30+ (Mar 14 high) yesterday’s move lower to 109-24+ and piercing of the bear trigger at 109-25+ (Feb 23 low) could signal further weakness and has opened up a potential retest of 109-14+ (Nov 28 low).
• There has been little in the way of headlines other than the US is weighing up sanctioning Huawei's chipmaking network
• Looking ahead: MBA Mortgage Applications later Today, while all eyes will be on the FOMC on Thursday.

UK DATA: XpertHR: Pay Awards Lowest Since Sep '22; Survey Indicates Further Falls

• XpertHR median basic pay award in the 3 months to the end of February 2024 fell for the second consecutive month to +4.8%Y/Y (vs a revised +5.0%Y/Y prior - originally 5.1%Y/Y) - the lowest level since September 2022.
• On top of the normal monthly rolling quarter, XpertHR conducted a survey of 213 pay award forecasts for 2024, representing close to a quarter of a million UK employees from 158 organisations in the run-up to the April period. The median pay award forecast for 2024 is 4% with the modal forecast at 5% (with most in the 3-5% range).
• XpertHR notes that "Close to half (47%) of forecast pay awards are expected to be lower than the 2023 award employees received. Around one-third (34%) are expected to be the same, whilst just 19% are expected to be worth more than the previous settlement."
• Coupled with the second consecutive in the quarterly rolling data, this points to the start of a more meaningful downward trend for wage data. Last week's official ONS wage data softened a little more than expected.
• There is still a fair amount of variability in pay awards with lower quartile at +4.0%, and upper quartile at +6.0%. It will be interesting to watch the upper quartile when the NLW is increased by 9.8% in April - and whether that pulls up the median awards, too.
• Data were collected between 1st December 2023 and 29th February 2024, based on 94 pay settlements covering 181,174 employees.

AUSSIE BONDS: Subdued Session Ahead Of FOMC Decision

ACGBs (YM flat & XM +2.0) sit slightly richer after dealing in relatively narrow ranges in today’s Sydney session. With the domestic calendar empty today, trading has been all about consolidating yesterday’s post-RBA rally ahead of the FOMC Decision later today.

• Cash ACGBs are flat to 2bps richer, with the AU-US 10-year yield differential 2bps higher at -23bps.
• Swap rates are 1-3bps lower.
• The bills strip is slightly mixed, with pricing +1 to -1.
• RBA-dated OIS pricing is little changed. Given that OIS pricing aligned with the unanimous consensus among Bloomberg analysts, expecting a status quo decision yesterday, minimal market reaction in front meetings was anticipated. Likewise, year-end easing expectations have only slightly softened to 38bps compared to 36bps before the decision.
• Where there has been a notable reaction has been in terminal rate expectations. Before yesterday's meeting, the anticipated terminal rate stood at the effective cash rate of 4.32%. However, following the RBA's decision to remove the explicit tightening bias, there has been a softening of 5bps to 4.27%.
• Tomorrow, the local calendar sees the February Employment Report along with Judo Bank PMIs (Mar P). Consensus expects a 40k increase in Jobs, with the Unemployment Rate falling from 4.1% to 4.0%.

STIR: RBA Dated OIS Terminal Rate Expectations Soften With RBA’s Removal Of Tightening Bias

RBA-dated OIS pricing is 1-2bps softer across meetings today after yesterday’s RBA Policy Decision.

• Given that OIS pricing aligned with the unanimous consensus among Bloomberg analysts, expecting a status quo decision yesterday, minimal market reaction in front meetings was anticipated.
• Likewise, year-end easing expectations have only slightly softened to 38bps compared to 36bps prior to the decision.
• Where there has been a notable reaction has been in terminal rate expectations. Before yesterday's meeting, the anticipated terminal rate stood at the effective cash rate of 4.32%. However, following the RBA's decision to remove the explicit tightening bias, there has been a softening of 5 basis points to 4.27%.

Figure 1: RBA-Dated OIS Expected Terminal Rate Versus Expected Cash Rate End-24

Source: MNI – Market News / Bloomberg

NZGBS: Strong Session, Plays Catch-Up With ACGBs, Focus Turns To FOMC Decision

NZGBs closed at the session’s best levels, with benchmark yields 7bps lower. With domestic data printing better than expected (Q4 Current Account Deficit narrower and Q1 Consumer Confidence higher), the intraday richening appears linked to offshore influences, namely the stronger lead from US tsys overnight and the post-RBA rally in ACGBs.

• There have been no cash US tsy dealings in Asia today, with Japan out for a public holiday.
• ACGBs are dealing 5-6bps richer than their levels at yesterday's local close. The local market was closed when the RBA delivered its decision.
• The NZ-AU 10-year yield differential closed 1bp tighter than yesterday’s closing level at +47bps.
• Swap rates closed 5-7bps lower, with the 2s10s curve steeper.
• RBNZ dated OIS pricing closed is 4-7bps softer for meetings beyond July. A cumulative 62bps of easing is priced by year-end.
• Tomorrow, the local calendar will see Q4 GDP.
• Before then, the market focus will be on the FOMC Decision.
• Tomorrow, the NZ Treasury plans to sell NZ$250mn of the 1.5% May-31 bond and NZ$250mn of the 3.5% Apr-33 bond.

NEW ZEALAND: Tourism Recovery Drives Material Current Account Deficit Improvement

New Zealand’s current account deficit narrowed significantly in 2023 compared with the previous year. As a share of GDP the deficit in the year to Q4 2023 was 6.9% down 1.9pp and $5.6bn from Q4 2022. The Q4 deficit narrowed to -$7.84bn from -$10.97bn in Q3. 2022 saw NZ post one of the worst current account deficits in the OECD and its worst result since the series began in 1988, and so the improvement last year is significant.

• The progress in the year to Q4 was driven by the services deficit which saw a $6.1bn improvement as the tourism sector continued to recover from the pandemic.
• The goods deficit narrowed $0.3bn, as imports fell more than exports, but the primary income deficit widened $0.8bn.

NEW ZEALAND: Consumer Confidence Improves But Households Cautious

Westpac consumer confidence rose 4.3points in Q1 to 93.2. While it is still below the breakeven-100 level (pessimists exceed optimists), it is the highest reading since Q4 2021. The move higher was driven by households being more positive on their financial situation. The OCR has been on hold since May last year and with payment pressures no longer rising, inflation easing and wages increasing consumers are starting to feel less pessimistic.

• The pickup in confidence was predominantly in the perception of present conditions which rose 8 points to 85.1 with expected conditions rising 1.9 points to 98.6, but both remain well below historical averages.
• The improvement in financial conditions has led to more people saying it is a good time to make a major purchase. Westpac notes that households remain cautious and retailers are reporting that spending is concentrated on essentials. It may still be too early to expect a pickup in consumer spending.
• Most households still expect “tough economic times over the year ahead” but they are becoming cautiously more optimistic about the outlook.

FOREX: Yen Weakness Continues, Fed Up Next

Outside of fresh yen weakness, overall G10 FX moves have been fairly muted. The BBDXY sits marginally higher, last near 1241, largely on account of fresh weakness.

• USD/JPY pushed through 151.00 in the first part of Wednesday trade. We have held above that level since and as we approach the cross over with EU/London the pair has hit fresh highs for the session at 151.45./50
• The is nearly 0.40% weaker in yen terms versus end levels in NY on Tuesday. Focus remains on 2023 highs at 151.91, although this may raise fresh intervention risks. Japan markets have been closed today for a local holiday, which has likely kept rhetoric absent.
• Depressed vol levels and the sharp push higher in risk reversals in the pair points to upside USD/JPY pressures, with markets not expecting an aggressive BoJ tightening cycle and still accommodative financial conditions.
• EUR/JPY continues to track higher, the pair last at 164.60, fresh highs back to 2008.
• NZD/USD is a little lower sub 0.6050, despite better current account data for Q4. We also had a rise in consumer confidence. We sit marginally above recent lows, while headlines crossed from the IMF stating there is scope for the RBNZ to cut later this year.
• AUD/USD has outperformed NZD at the margins, last near 0.6530, close to unchanged for the session. Higher commodity prices, coupled with weaker NZ dairy prices likely helping the move. The AUD/NZD cross is above 1.0800, to fresh highs back to late Jan.
• The main focus coming up later we will be the FOMC.

ASIA EQUITIES: HK & China Equities Edge Higher As Markets Await FOMC Later

Hong Kong and China equities have opened lower, but have for the most part reversed those losses to trade unchanged to slightly higher. There has been little in the way of market headlines or drivers today. Earlier, China kept 1yr & 5yr LPR unchanged at 3.45% & 3.95%, respectively. Chinese data-tech companies rose after the nation plans to improve cross-border data flows as part of the initiative to further attract foreign investment, while the US weighs sanctioning Chinese Chip manufacturers. Overall it has been a very subdue day as investors in the region take a break post BoJ the RBA yesterday, Japan is also out and finally ahead of the FOMC later Today.

• Hong Kong equities are slightly higher today, with the Mainland property Index being the top-performing sector, up 0.65% although the index is off 7.90% from its recent highs made on March 14th, the HSTech Index is up 0.40%, after opening the morning down 1%, while the HSI is now up 0.18% In China, equities markets are slightly higher, with the smaller cap CSI1000 the best performing, up 0.31%, while the large cap CSI300 is up 0.20%
• China Northbound flows were -7.0 billion yuan on Tuesday, with the 5-day average at 2.80 billion, while the 20-day average sits at 3.31 billion yuan.
• China's property-debt crisis has intensified, with developers facing court battles over debt restructuring plans and potential liquidation orders. At least 23 companies have received wind-up petitions in Hong Kong, with five ordered to wind up. The crisis has particularly impacted China Evergrande Group, fined for falsely inflating revenue, while other smaller peers like Redsun Properties Group Ltd. and Kaisa Group Holdings Ltd. are also facing legal challenges amid a backdrop of substantial defaults totaling $111 billion in onshore and offshore bonds.
• Siemens warns of a persistent China slowdown after flagging disappointing demand in China for its key digital industries division. This comes on the back of Apple recently announcing their sales to China had slumped by 24%.
• Hong Kong's fast-tracked approval of domestic security legislation has raised concerns from the US, European Union, and UK about potential limitations on open discussion in the global finance hub. Despite Chief Executive John Lee's assertion that the move is a patriotic endeavor, critics worry it could further erode fundamental freedoms and political pluralism in Hong Kong.
• The Biden administration is contemplating blacklisting several Chinese semiconductor firms, including those linked to Huawei Technologies Co., to further restrict Beijing's access to semiconductor technology, with a focus on companies producing chips or semiconductor manufacturing gear. This move is part of a broader US campaign to curtail China's semiconductor and AI ambitions, and it could impact companies like Qingdao Si’En, SwaySure, Shenzhen Pensun Technology Co. (PST), ChangXin Memory Technologies Inc., Shenzhen Pengjin High-Tech Co., and SiCarrier.
• Looking ahead, the calendar is light for the remainder of the week.

ASIA PAC EQUITIES: Regional Equities Mixed, Japan Out, FOMC Later Today

Regional Asian equities are mixed today, following a slow start post BoJ and RBA decisions yesterday, with Japan observing a public holiday. Meanwhile, markets are awaiting the FOMC meeting later today, where it's widely expected to keep rates on hold, and attention will be largely focused on the dot plot, which has become the de facto monetary policy forecast. There have been few market headlines this morning.

• Japanese equities are closed today for Vernal Equinox Day.
• South Korean equities have opened higher on Wednesday, tracking gains made overnight in the US. There have been very few market headlines, other than South Korea announcing it will ease the tax burden for companies enhancing returns for shareholders, following up on its pledge to improve valuations and boost the local stock market. Meanwhile, Samsung shares jumped 4% as shareholders gathered for the AGM; the Kospi is up 1.25%.
• Taiwanese equities are slightly lower today, down 0.06%. The Philadelphia SE Semiconductor Index was down 0.94% on Tuesday, weighing on some semiconductor names in the region. Later today, Taiwan has export order data due out with expectations of a decline from the prior month to 1.2% for February, while tomorrow the Central Bank meets and is expected to keep rates on hold at 1.875%.
• Australian equities have closed lower today, after spending most of the day up as miners dragged the market lower while the financial sector was the top-performing sector, Looking ahead, tomorrow Australia has employment data out. Chinese Foreign Minister Wang Yi met with Australia's Foreign Minister Wong earlier in hopes of ending a bitter three-year trade war. The ASX200 closed down 0.10%.
• Elsewhere in SEA, New Zealand equities closed higher today, up 0.13% ahead of GDP data tomorrow. Singapore equities are 0.25% higher, while Malaysian equities are down 0.25%, Thailand equities are down 0.26% after their largest foreign investment outflow on record on Tuesday and finally Indonesian equities are unchanged ahead of the BI rate decision later today.

FLOWS: Foreign Investors Sell Asia Equities As Tech Turns Lower

• China equities were lower on Tuesday, with tech stocks weighing on the market following Nvidia's AI event and WuXi AppTech dropping 7.50% after providing weak 2024 guidance. The property sector also traded lower amid regulators accusing China Evergrande of inflating their revenue by $78 billion in the two years before defaulting. Equity flows shifted from net inflows to an outflow of 7 billion yuan. The 5-day average now stands at 2.82 million, compared to the 20-day average of 3.3 billion and the longer-term 100-day average of just 0.30 billion yuan.
• South Korean equities were lower on Tuesday, driven by lower tech prices, with minimal other market headlines or economic data. Equity flows continued to slow and turn negative, with the 5-day average now at -$120 million compared to the 20-day average of $25 million.
• Taiwan equities were slightly lower on Tuesday, with semiconductor names weighing on the market. Taiwan's central bank is meeting on Thursday, with rates expected to hold steady at 1.875%. Taiwan Equities saw their largest outflow since January 17th, with a net outflow of -$799 million, taking the 5-day average to -$331 million, while the 20-day average now stands at $143 million and the longer-term 100-day average slightly higher at $170 million.
• Indonesian equities were the only ones in the region to see foreign investor inflows on Tuesday, with a net inflow of $48 million. The 5-day average sits comfortably above longer-term trends, with the 20-day at $22 million and the 100-day average at $19 million.
• Thailand equities witnessed a significant foreign investor outflow on Tuesday, with $521 million of net selling occurring, the largest outflow on record and almost five times the second-largest outflow. There was little catalyst for this, and with the market only dropping 0.25%, it could suggest domestic buyers picked up the slack, possibly due to an institutional fund leaving the market.

Table 1: EM Asia Equity Flows

OIL: Crude Range Trading Ahead Of Fed Decision

Oil prices have traded in a narrow range to be down moderately during APAC trading today but are still up more than 2% on the week. WTI is 0.2% lower at $82.57/bbl, close to the intraday high, and Brent is also down 0.2% to $87.25. The market is waiting for the Fed decision out later today. While it is widely expected to be on hold this month, concerns that rate cuts will be delayed and thus pressure demand have weighed on crude. The USD index is flat.

• Supply developments are being watched closely given geopolitical issues and the IEA’s shift to forecast a deficit this year.
• Bloomberg reported a 1.52mn barrel crude inventory drawdown last week, a lot more than expected, according to people familiar with the API data. While distillate stocks rose 500k, gasoline fell a further 1.6mn pointing to robust demand. The official EIA data is out later today.
• JP Morgan has estimated that Ukrainian attacks on Russian refineries have reduced its capacity by 900kbd and it could take weeks or even months for it to come back on line. As a result, Russia will increase its crude exports from western ports by almost 200kbd which may rise if there are further attacks. Lower refining demand in Russia would normally put downward pressure on oil prices, but the market has added a geopolitical risk premium as Ukraine continues to target energy infrastructure.
• Later the Fed decision and projections are announced (see MNI Fed Preview). Also, the ECB’s Lagarde, Lane and Schnabel all appear. In terms of data, UK CPI/PPI for February print.

GOLD: Consolidates Ahead Of FOMC Decision

Gold is slightly stronger in the Asia-Pac session, after closing 0.1% lower at $2157.59 on Tuesday.

• Recent price action in the yellow metal is best viewed as consolidation ahead of today’s FOMC meeting.
• Bullion was supported by US Treasuries, which finished with yields 1-5bps lower. The strength in US bonds indicates a market that is relatively unconcerned about the FOMC outcome. The consensus anticipates an unchanged policy stance, with the median dot indicating three rate cuts expected this year.
• According to MNI’s technicals team, the recent break above $2135.4, the Dec 4 high, reinforced bullish conditions and signaled scope for $2206.6 next, a Fibonacci projection. Short-term conditions are overbought and a deeper retracement would allow this set-up to unwind. Firm support is at $2117.4, the 20-day EMA.

EM DEBT: PHILIP Sov Debt Curve Flattens, President Says Too Early to Cut

The Philippines USD sovereign debt curve is slightly flatter on Wednesday, EM sovs have collectively under-performed moves made by the front-end US Treasury curves. Earlier BSP Chief says they have room to further cut the RRR, while Philippines President says it's too earlier to start cutting rates due to high inflation and finally late on Tuesday Philippines Balance Of Payments deficit narrowed to -$196m from -$740m the month prior.

• Curves are slightly flatter with yields 1-3bps lower. The 2Y yield is unchanged at 4.86%, 5Y yield is 1bp lower at 5.01%, the 10Y yield is 2bp lower at 5.08%, while 5yr CDS is 1.5bp lower at 58.5bps.
• The PHILIP to UST spread difference has significantly tighten over the past week, however Tuesday did see the PHILIP widen in the front end with yields underperforming 2-3bps, 2y is 17.5bps (+3.5bps), the 5yr is 71bps (+2bp), while the 10yr is 79.5bps (unchanged)
• Cross-asset moves: the USD/PHP is 0.28% higher, PSEi Index is up 0.18%, Corporate Credit curve is 4-6bps higher over the past week, while US Tsys yields are unchanged with Japan out.
• Bangko Sentral ng Pilipinas Governor Eli Remolona suggests the potential for further reduction in banks' reserve requirement ratio, emphasizing the need for thorough research on its impact. The central bank is closely monitoring rice prices due to their significant influence on inflation, although monetary policy decisions won't be solely based on them, Remolona highlights the importance of research-driven policymaking.
• Looking Ahead: Calendar is light for the remainder of the week.