MNI EUROPEAN MARKETS ANALYSIS: BoJ Tweak Speculation Sees Japan & US Yield Trends Diverge

US TSYS: Marginally Pressured In Asia

TYU3 deals at 112-29+, -0-04, a 0-07+ range has been observed on volume of ~80k.

• Cash tsys sit flat to 1bp cheaper across the major benchmarks, light bear flattening is apparent.
• Tsys were pressured in early dealing as an offer in JGBs spilled over into the wider space.
• Fedspeak from Gov Waller this morning noted that he sees two more 25bp increases this year and that policy will need to remain restrictive for some time. Waller also said that September is a live meeting for rate policy.
• The move lower didn't follow through and tsys dealt in a narrow range for the remainder of the session after marginally paring losses.
• There is a thin docket in Europe today, further out we have Terms of Trade and the latest UofMich consumer sentiment. A reminder that the Fed blackout period starts at midnight EDT today.

Fed's Waller Wants Two More Rate Hikes This Year

The Federal Reserve should raise interest rates twice more this year to bring U.S. inflation back down to the central bank’s 2% goal, Fed Governor Chris Waller said Thursday. (See this link for more details).

• “I see two more 25-basis-point hikes in the target range over the four remaining meetings this year as necessary to keep inflation moving toward our target,” Waller said in prepared remarks to the Money Marketeers of New York University.
• “Furthermore, I believe we will need to keep policy restrictive for some time in order to have inflation settle down around our 2% target. Waller said he supported the decision to hold rates steady at 5-5.25% in June in large part because of uncertainty about the possible credit market effects from the March banking turmoil, something he no longer sees as a major concern.
• Waller said the decline in U.S. consumer prices to 3% in the year to June, the lowest level since March 2021, is welcome news. But one data point does not make a trend. Inflation briefly slowed in the summer of 2021 before getting much worse, so I am going to need to see this improvement sustained before I am confident that inflation has decelerated,” he said.

JGBS: Futures Cheaper But Off Worst Levels Sparked By YCC Tweak Speculation

In the Tokyo afternoon session, JGB futures are weaker, -21 compared to settlement levels, but have dramatically pared the cheapening seen in the morning session. As previously flagged, early weakness centred on speculation about a possible tweak to YCC at the BoJ’s late July meeting.

• Just released, industrial production for May printed -2.2% m/m and +4.2% y/y versus -1.6% and +4.7% previously. Capacity utilisation printed -6.3% m/m versus +3.0% in April.
• Japan’s Government Pension Investment Fund boosted its holdings of Treasuries to a three-year high as the dollar’s strength against the yen offset losses on the securities. (See link)
• Cash JGBs are mixed with yield movements ranging from -1.4bp (1-year) to +2.0bp (40-year). The benchmark 10-year yield is unchanged at 0.475%, below the BoJ's YCC limit of 0.50%. The intraday high so far has been 0.485%.
• The swap curve has also bear steepened with swap spreads wider out to the 20-year and tighter beyond.
• Next week the local calendar sees the Marine Day public holiday on Monday followed by the Tertiary Industry Index on Tuesday, Trade Balance and Machine Orders on Thursday and National CPI and International Investment Flow data on Friday.
• Liquidity Enhancement Auctions are scheduled for Wednesday (1-5-year) and Friday (5-15.5-year).

AUSSIE BONDS: Sharply Richer, At Bests, RBA Minutes & Employment Data Next Week

ACGBs are holding sharply higher (YM +9.0 & XM +7.0), near session highs, as US tsys regain losses seen early in the Asia-Pac session. There hasn’t been much domestic news flow other than the previously outlined appointment of RBA Deputy Governor Bullock as the new RBA governor when incumbent Philip Lowe’s term expires in September.

• DJ's Glynn writes the appointment of Michele Bullock represents continuity for financial markets, but it will also bring her career background in financial stability to the fore with household budgets teetering near collapse due to soaring interest rates. (See link)
• AFR's Joye writes that Bullock is the right choice for RBA at a critical time in the inflation fight (See link)
• Cash ACGBs are 7-10bp richer with the AU-US 10-year yield differential unchanged at +21bp.
• Swap rates are 7-9bp lower with the 3s10s curve steeper.
• The bill strip has bull flattened with pricing +4 to +11.
• RBA dated OIS is 4-5bp softer for meetings beyond November.
• Next week the local calendar sees the RBA Minutes for the July Meeting on Tuesday and NAB Business Confidence (Q2) and Employment data on Thursday.
• The AOFM has announced that it plans to sell A$800mn of the 3.5% December 2034 bond on Wednesday.

MNI RBNZ Review: July 2023 - A High Bar For Further Hikes

• As widely expected, the RBNZ left rates on hold at 5.50% earlier this week. The RBNZ appears happy with its current policy stance.
• The restrictive stance is expected to be maintained for the foreseeable future. Further tightening is likely to be dependent on upside inflation/growth surprises, particularly in terms of risks that inflation doesn’t move back into the target range of 1-3% by the second half of next year. The RBNZ is also likely to be mindful of a further tightening in financial conditions - with average mortgage rates expected to reach around 6% in early 2024 based off current bank pricing.
• Note we get Q2 inflation data next Tuesday. The market expects a further easing in headline inflation pressures to 5.9% y/y from 6.7%. The q/q headline is projected at 1.0% versus 1.2% prior. Note the May RBNZ MPS had Q2 inflation at 1.1% q/q and 6.1% y/y.
• See the full review here:

FOREX: Yen Firms In Asia

The yen has continued its recent gains in Asia on Friday, USD/JPY is down ~0.3% Thursday's lows have been breached. Elsewhere in G-10 ranges have been narrow with little follow through.

• USD/JPY prints at ¥137.60/70, the next resistance level for the pair is ¥137.36 50.0% retracement of Mar 24 - Jun 30 bull leg. The Yen benefited from speculation from a report in Yomiuri that the BoJ will likely raise the FY23 Inflation forecast above 2%.
• Kiwi is marginally firmer, benefitting from some spillover in the Yen bid and higher regional equities. Local markets have been closed for the observence of a national holiday today. NZD/USD sits a touch above the $0.64 handle having marginally pared gains.
• AUD/USD is little changed, The pair last prints at $0.6885/90, resistance comes in at $0.69 and support is at $0.6784 the low from Jul 13. There has been little reaction thus far to the appointment of Michele Bullock as the next RBA Governor.
• Elsewhere in G-10 EUR is marginally firmer and GBP is a touch pressured.
• Cross asset wise; BBDXY is down ~0.1% and Hang Seng is up ~0.3%. US Tsy Yields are a touch firmer across the curve.
• There is a thin docket in Europe today, further out the latest UofMich Consumer Sentiment headlines.

EQUITIES: Regional Equities Track Higher, PBoC Pledges Policy Support

Regional equities are tracking higher, albeit with less positive impetus compared to recent sessions. US equity futures are mixed, with Eminis down a touch to 4541, although we are above session lows of 4534.50. Nasdaq futures are a touch higher, last 15724.

• The HSI started higher, but is back sub 19400 at the break, still +0.25% above closing levels from Thursday. The tech sub index is down -0.40%, possibly ending the strong positive run seen this week.
• The PBoC had a press confidence where it pledged to support the economic recovery with available policy tools. The authorities also stated that it would tailor support for the property sector.
• The CSI 300 is +0.17% at the break, holding above 3905.
• Elsewhere, the Kospi and Taiex are both +1% higher, buoyed by recent tech gains amid the core yield pull back. The Kospi is now back above the 2600 level. We aren't too far off early June highs around 2650.
• The ASX 200 has climbed 0.83%, with the Australian Government picking Deputy Governor Bullock to replace Phil Lowe as Governor, which should ensure policy continuity.
• SEA markets are in the green, except for the Philippines (-0.50%). Thai stocks are +1% firmer, despite continuing uncertainty as to who will be the new PM.

OIL: Tracking Higher For The 3rd Straight Week, Brent Close To 200-day MA Resistance

Current Brent levels, $81.45/bbl, are little changed to NY closing levels from Thursday. We aren't too far off session lows ($81.35/bbl), with Brent consolidating so far in the Asia Pac session. Earlier highs were at $81.70/bbl. We are tracking firmly higher for the week though, ~+3.75% at this stage. This follows the 4.77% gain last week and would be the 3rd straight week of gains. WTI was last around $77/bbl, and tracking +4.15% firmer for the week.

• For Brent, focus remains on late April highs, just above $83/bbl, which would also coincide with a test of the simple 200-day MA (close to $82.50/bbl). Note the 200-day EMA is slightly lower around $82.30/bbl.
• The combination of the USD pull back, tighter supply (with disruptions in Libya announced on Thursday), coupled with China pledges of policy support, have been supportive of recent gains.
• Looking ahead, the G20 meetings kick off this Sunday in India and continue to the 18th.
• On Monday we get an update on China's economic backdrop, with 2Q GDP out, along with June monthly activity figures.

GOLD: On Track For Best Week Since April

Gold remains steady in the Asia-Pacific session, following a relatively unchanged closing on Thursday. This occurred despite the US dollar dropping below 100 for the first time since April 2022 and a significant rally in US Treasury yields. Nevertheless, bullion is on track to achieve its best week since April, as investors solidify their belief that the Federal Reserve is nearing the end of its interest rate hikes, supported by recent US data indicating a slowdown in inflation.

• Some traders are now cautioning about the potential for disinflation, considering the cooler-than-expected US CPI and PPI figures released this week.
• Gold's recent gains indicate a turnaround from the loss of momentum experienced in June, which was fueled by successive reports suggesting elevated price pressures.
• Having previously cleared resistance at the 50-day EMA, resistance is next eyed at $1968.0 (Jun 16 high), according to MNI’s technicals team. Key resistance has been defined at $1985.3, the May 24 high where a break would highlight a stronger reversal. The key support and the bear signal is at $1893.1, the Jun 29 low. Initial support is at $1931.70, the 20-day EMA.

YUAN: USD/CNH Testing 50-day EMA Support, PBoC Will Use Policy Tools To Support The Recovery

USD/CNH is tracking lower, getting close to the 7.1300 level (lows near 7.1310, last back in the 7.1330/40 region). This is testing support at the 50-day EMA, which comes in around 7.1325. Broader USD sentiment remains softer, with the BBDXY down a further 0.2% to 1198. The onshore and HK equity tone remains positive, albeit not as firm as yesterday.

• Earlier we had a press briefing from the PBoC led by Deputy Governor Liu Guoqiang. It covered a wide range of issues, with the central bank pledging to undertake targeted and forceful monetary policy and strengthen counter-cyclical adjustments to spur the economic recovery. Facilities such as the RRR and MLF will be used, with ample policy room to deal with the challenges/unexpected factors.
• The authorities noted patience is required as the economy emerges from the pandemic.
• The central bank sees inflation ticking down further in July, but doesn't see deflationary risks in H2 (projecting CPI to firm closer to 1% by year end).
• The PBoC appeared relatively calm around the FX backdrop, reiterating previous guidance that FX based policy tools will be used as needed to prevent sharp swings in the yuan.
• Note we get an economic update next Monday, with Q2 GDP out, along with June activity prints.

ASIA FX: Mostly Strong Gains Against the USD, Except For THB & INR

Most USD/Asia pairs continue to trend lower, although THB and INR are notable exceptions. USD/CNH hit a fresh low sub 7.1300, while 1 month USD/KRW got back to lows last seen in mid-February. MYR rallied strongly, spot gaining over 1.3%, while Indonesian revamped its exporter conversion rules. On Monday next week the main focus will be on Q2 GDP from China, along with June monthly activity indicators. The 1yr MLF is also out, although no changes are expected.

• USD/CNH got to fresh lows sub 7.1300, before rebounding modestly, last back near 7.1340, which is very close to the 50-day EMA. The PBoC press briefing saw the central bank pledge more support to aid the economic recovery, and tailoring support for the property sector. The PBoC appeared relatively calm around the FX backdrop, reiterating previous guidance that FX based policy tools will be used as needed to prevent sharp swings in the yuan.
• 1 month USD/KRW got to fresh lows just under 1258, but we track slightly higher in recent dealings (near 1262). This was fresh lows in the pair back to mid-February. Equity sentiment remains positive amid on-going tech gains (as US real yields pull back). The Kospi has gained over 1% today, while offshore investors have added a further $161mn to local equities.
• USD/THB sits near 34.60 in latest dealings, which is slightly above Thursday closing levels. Support for the pair appears evident ahead of the 34.50 level. Recent highs came in in the 35.05/10 region, while a break of 34.50 would pave the way for a move towards May 22 lows at 34.25. The baht continues to underperform softer USD trends elsewhere. The Thai Chamber of Commerce has warned that a delay in forming the new government can hurt economic confidence. This comes after PM candidate Pita failed to secure enough parliament votes late yesterday.
• The Rupee has pared early gains and USD/INR now sits little changed from yesterdays closing levels. On the wires today we have June Wholesale Prices, a fall of 3.30% is expected. Wholesale Prices fell 3.48% in May. Also due to cross is June Trade Balance, a deficit of $20.22bn is forecast.
• USD/MYR is down ~1.14%, extending recent losses with the pair down over 3% in July to date as broad based greenback weakness weighs. The pair sits at its lowest level since 17 May and last prints at 4.5150/4.5250. Looking ahead the data local calendar is empty until June Trade Balance which crosses next Thursday.
• The SGD NEER (per Goldman Sachs estimates) printed a fresh cycle high in early dealing before paring gains to sit little changed. We sit ~0.3% below the top of the band. The Advance read of Q2 GDP, which crossed this morning, was firmer than expected printing at 0.3% Q/Q rising from -0.4% prior. A fall of 0.2% Q/Q had been expected. USD/SGD is ~0.2% softer, printing at $1.3185/95. The pair has breached Thursday's low and sits at its lowest level since mid-April as broader greenback trends weigh.
• USD/IDR sits slightly lower, the pair last at 14935, +0.22% firmer in IDR terms for the session. We are back to late June lows in the pair. The main macro news today has been the Indonesian authorities announcing revisions to exporter conversion rule. The country now requires a minimum of 30% of export earnings to be kept onshore for 3 months and the government may require conversion during periods of macroeconomic or financial market instability.