MNI EUROPEAN MARKETS ANALYSIS: BoJ & Weaker China PMIs Boost USD/Weigh On Equities

US TSYS: Marginally Richer In Asia

TYZ3 deals at 106-08, +0-01, a 0-11 range has been observed on volume of ~140k.

• Cash tsys sit ~2bps richer across the major benchmarks.
• Tyss firmed off session lows as mild risk off tone took hold in Asia. The USD firmed and US Equity futures ticked lower. A mixed Chinese PMI print added a layer of support.
• Gains extended in volatile trade as a bid in JGBs as the BOJ decision spilled over into the wider space. Tsys held onto some of the gain dealing in a narrow range for the remainder of the session.
• Eurozone CPI and GDP data headlines in Europe today. Further out we have the US Conference Board consumer confidence and employment cost index.

JGBS: BOJ Decision Largely As Expected, Futures Pare Losses

JGB futures spiked sharply higher early in the Tokyo afternoon session after the BOJ left policy unchanged at -0.1% in a unanimous vote. However, it has subsequently unwound that move.

• JGB futures re-opened, spiking to 144.24 from the lunchtime level of 143.88, -36 compared to settlement levels. Earlier, JBZ3 hit 143.57. It is currently 143.86, -39 compared to settlement levels.
• The BOJ has also maintained the upper limit of the Yield Curve Control (YCC) at 1%. This decision drew significant market attention, especially in light of overnight Nikkei headlines that suggested the BOJ might consider adjusting the YCC framework. However, it's noteworthy that the BOJ now labels the upper limit as a "reference." The concept of a 1% upper boundary being regarded as a "reference" implies the possibility of allowing it to slightly exceed 1%, though the extent of flexibility the BOJ has introduced remains subject to debate. We'll need to monitor the BOJ's interventions to determine how far they are willing to let it rise.
• In summary, the decision aligns with general expectations. It involves a minor adjustment in the wording to provide room for flexibility regarding the upper limit for long-term yields while maintaining its accommodative monetary policy stance.
• The cash JGB curve has retained its bearish steepening in post-BOJ trading, but the yield rises have been pared. Yields are 1.9 to 4.7bps higher across benchmarks. Notably, the benchmark 10-year yield is at 0.932% after reaching 0.963% earlier, a new cycle high. At lunch, it was4.2bps higher at 0.936%.
• The swaps curve has maintained its bull-flattening, with rates 0.6bp to 4.4bps lower. Swap spreads sharply tighter across maturities.

BOJ: BOJ Delivers Dovish YCC Tweak

The BoJ policy meeting has largely come out in line with market expectations. None of the major policy parameters were shifted, with the policy rate kept at -0.10%, the 10yr yield target at 0%, both maintained. Most of the focus was on the language tweak around YCC, with the 1% upper bound referred to as a reference point. This suggests we may see yields move beyond this level, but the BoJ will still step in to curb excessive moves.

• The BoJ has also decided to scrap its daily fixed rate bond buying operations. It indicated this could result in 'large side effects". The central bank stated it may increase JGB bond purchases nimbly and it will continue with large scale bond buying operations.
• The forward guidance wasn't changed, whilst the central bank also stands ready to ease again if needed.
• On the inflation forecasts the current fiscal year forecast was raised to 2.8% from 2.5%, but importantly by 2025 inflation is still expected to back under the 2% target (1.7% versus the 1.6% prior forecast).
• All in all the market is seeing this as a dovish YCC tweak. USD/JPY has rallied in response. We got to highs of 150.10, but now sit a little lower, last near 149.95/00.
• Note Ueda's press conference comes later, 3:30pm Tokyo time.

JAPAN DATA: Job Market Steady, IP Weaker Than Expected

Japan's unemployment rate ticked down to 2.6% from 2.7% prior, but this was in line with consensus. The job to applicant ration was 1.29, also in line with consensus and unchanged from August.

• The number of employed ticked modestly higher by 60k. Whilst the data suggests stabilization in labor market trends, in terms of the job to applicant ratio, we saw fairly weak new job offer trends, down -1.8%y/y, while off -5.7% m/m.
• Other data showed retail sales fell 0.1% m/m (0.2% m/m forecast), while in y/y terms, we rose 5.8%, close to expectations.
• On the factory side, IP Sep growth was +0.2% m/m, down -4.6% y/y. This was below expectations. Solid production was still evident for capital goods and durable goods. Weakness was evident in terms of non-durable consumer goods.

AUSSIE BONDS: Cheaper But Off Session Lows After The BOJ’s Dovish Tweak

ACGBs (YM -4.0 & XM -6.0) sit cheaper but have pared earlier losses after the BOJ delivered a dovish Yield Curve Control (YCC) tweak. Overall, the BOJ decision aligned with general market expectations. It involved a minor adjustment in the wording to provide room for flexibility regarding the upper limit for long-term yields while maintaining its accommodative policy stance.

• There have been few domestic drivers other than the previously outlined private sector credit data.
• US tsys initially reacted positively to the BOJ decision, although like JGBs, there has been a paring of the initial gains. Cash US tsys are 2-3bps richer in Asia-Pac trade.
• Cash ACGBs are 3-6bps cheaper, with the AU-US 10-year yield differential 6bps wider at +6bps.
• Swap rates are 3-6bps higher, with the 3s10s curve steeper.
• The bills strip has bear-steepened, with pricing flat to -3.
• RBA-dated OIS pricing is flat to 2bps firmer across meetings. Terminal rate expectations jump to 4.54%.
• Tomorrow, the local calendar sees CoreLogic House Prices, Building Approvals and Judo Bank PMIs.
• Tomorrow, the AOFM plans to sell A$800mn of the Apr-33 bond.
• SAFA priced an A$1bn increase of the 4.75% 24 May 2038 Line. It priced at 116.5bps over the 10-year futures contract at a yield of 6.15%.

NZGBS: Closed With A Twist-Steepening, Q3 Employment Data Tomorrow

NZGBs closed with a twist-steepening of the curve. Interestingly, the 2-year benchmark concluded at its highest level of the session, while the 10-year benchmark ended the day at its lowest point. It's worth noting that the BOJ's decision was released just three minutes before the local market's closing, so there is potential for some market adjustments to become evident in early trade tomorrow.

• Overall, the BOJ decision aligned with general market expectations. It involved a minor adjustment in the wording to provide room for flexibility regarding the upper limit for long-term yields while maintaining its accommodative policy stance.
• US tsys initially reacted positively to the BOJ decision, although like JGBs, there has been a paring of the initial gains. Cash US tsys are 1-3bps richer in Asia-Pac trade.
• Swap rates closed flat to 6bps higher, with the 2s10s curve steeper.
• RBNZ dated OIS pricing closed little changed.
• Business confidence rose to 23.4 in October from 1.5. Inflation expectations were little changed at 4.94%. “Inflation pressures are gradually waning but there hasn’t been a great deal of progress in the last couple of months. It’s still a very long way back to the inflation target”: ANZ
• Tomorrow, the local calendar sees CoreLogic House Prices and Q3 Employment data. The RBNZ will also publish its Financial Stability Report.

NEW ZEALAND: Election Boost To Sentiment, Price Indicators Too High For Target

ANZ business confidence for October rose to 23.4 from 1.5. This is its highest level since June 2017. The activity outlook improved to 23.1 from 10.9. The prospect and then the actual change in government during the month buoyed NZ businesses although activity and confidence have been trending higher all year. Price components though didn’t continue their gradual improvement and are too high to achieve the inflation target.

• ANZ divides the responses into early and late October and there was a strong rise in business confidence, export & investment intentions in late October following the October 14 election. There were increases in confidence and the outlook early in the month too but then polls had been signalling for some time that the labour government was unlikely to be re-elected. November will be key in determining if this optimism will be sustained.
• ANZ notes that respondents can overestimate the impact of a change in government.

Source: MNI - Market News/Refinitiv

• Inflation expectations over the coming 3-months remained elevated at 4.94% little changed from September. Pricing intentions eased less than a point to 46.3 with cost expectations still high at 76% and 82% in services. 81.3% expect to increase wages down slightly from 82.2% but in manufacturing it rose to 90.9%. According to ANZ, these figures remain too high for inflation to return to target “any time soon” but past wage settlements are moving in the right direction.

Source: MNI - Market News/Refinitiv

• Employment intentions rose to 5.6 in October from 1.2, the highest in just over a year. They were particularly strong in manufacturing.
• See ANZ’s report here.

FOREX: Yen Pressured After BOJ Delivers YCC Tweak

The Yen has been after the latest monetary policy decision from the BOJ. Policy was left unchanged however the focus was on the language tweak around YCC, with the 1% upper bound referred to as a reference point.

• USD/JPY is ~0.5% firmer, however the pair is below the ¥150 handle for now after briefly breaching the handle in the aftermath of the BOJ decision. Technically the uptrend remains intact. Resistance comes in at ¥150.78, high from Oct 26, and ¥151.95, high from Oct 21.
• AUD is pressured, extending falls seen after a mixed Chinese PMI report as the bid in USD/JPY spills over into wider USD strength. AUD/USD is down ~0.4% at $0.6345/50. Technically the trend outlook is bearish, support comes in at $0.6270 low from Oct 26 and key support.
• Kiwi is down ~0.3% last print at $0.5825/30, NZD/USD sits a touch off session lows however ranges do remain relatively narrow.
• Elsewhere in G-10; EUR and GBP are down ~0.2% reflecting the broader move in the USD. BBDXY is up ~0.2%.
• Eurozone GDP data provides the highlight in Europe today.

EQUITIES: Japan Stocks Higher Post BoJ, Weaker China PMIs Hurt Sentiment Elsewhere

Regional equities are mostly down in Tuesday trade to date. Japan shares have been volatile around the BoJ decision but are in positive territory as the dust has settled on the central bank's dovish YCC tweak. The Topix was last ~1.0% higher. Weakness is evident elsewhere in NEA as China PMIs disappointed. US futures are weaker, although away from session lows. Eminis last near 4173, off ~0.30%, Nasdaq futures are down -0.50%.

• Headlines crossed from the WSJ that US tech curbs on China may see tech bellwether Nvidia cancel $5bn worth of orders (see this link). This has likely weighed on US tech sentiment and tech sensitive plays in NEA.
• Japan markets have been volatile, but are ultimately tracking higher at this stage. The BoJ dovish hold has weighed on yen (lats 150.00) which will boost exporters, but bank stocks are unwinding earlier gains, given only modest YCC tweaks and no end in sight to easier policy settings.
• The official China PMI prints for October were much weaker than expected, casting doubts on the recovery. At the break the CSI 300 is down 0.66%, while the HSI is off by 1.77%.
• In SEA, the Thailand SET is the worst performer, down around 1% at this stage. Indonesia's JCI is off by 0.70%. Australia's market is just a touch higher (0.1%).

CRUDE: Crude Flat After Losing Today’s Gains On Demand Worries & Stronger USD

Oil prices are flat today after falling sharply on Monday as the market focussed on demand again. They were already off intraday peaks when the disappointing China PMI data was released but then took another leg down and the stronger dollar has seen them now little changed on the day. China is the largest oil importer. The USD index is about 0.2% higher.

• Brent is around $86.38/bbl, close to the low of $86.30. It reached a peak of $86.98 early in the session. WTI is also unchanged at $82.38 following a low of $82.29. Its high before the China data was $82.93.
• Markets are now looking at the demand outlook again with the Fed and US payrolls this week and the conflict in Israel/Gaza seemingly contained in that region for now. The main concern for oil is if the confrontation spreads to Iran.
• Demand fundamentals are looking soft and without the war premium, oil prices may fall further. Gasoline demand in the US is looking weak, China is reducing refining and the IEA expects a sharp drop in German demand, according to Bloomberg.
• Baltic shipping data is showing that the cost of oil transport from the Middle East to China has risen to its highest since June 22 and that most other routes have also seen costs rise, according to Bloomberg.
• Later the US Q3 employment cost index, August house prices, October MNI Chicago PMI and conference board survey are released. There is also euro area Q3 GDP and preliminary October CPI and ECB’s de Guindos speaks. Oil markets will now be looking to Wednesday’s Fed meeting (see MNI Fed Preview).

GOLD: Steady After Being Pressured By Yields & Improving Risk Appetite On Monday

Gold is little changed in the Asia-Pac session, after closing 0.5% lower at $1996.10 on Monday. Bullion was pressured by higher US yields and improving risk appetite.

• US Treasuries were pressured through the NY session, with yields finishing 3-6bps higher on supply concerns and an improvement in risk appetite.
• The US Treasury expects to borrow $776bn in Q4 and an additional $816bn in Q1 2024. Both estimates would represent records for each respective quarter. However, the Q4 estimate was $76bn less than previously announced in July, due to projections of higher receipts.
• Nikkei headlines that posited the BOJ will consider tweaking the yield curve control framework at today’s policy meeting extended the selloff in US Treasuries on beliefs higher JGB rates could pull demand from US Treasuries.
• Risk appetite began the week on a positive note, with the market taking a sanguine view of indications that Israel was taking a less expansive approach to the invasion of Gaza. Wall Street finished up greater than 1%, while oil dropped ~4%.
• From a technical standpoint, gold remains far above support at $1937.6 (20-day EMA) after last week’s strength. MNI’s technicals team believes the precious metal is biased to further gains.

CHINA DATA: PMIs Disappoint, Employment Weak & Price Indices Softer

The downside surprise on the Manufacturing October PMI (49.5) takes us back to mid year levels, so not a disastrous result, but disappointing for those looking for a strong run into year end for the China economy. The employment and price indices were also weaker relative to recent trends.

• The detail showed some large swings in terms of the sub-components. Output remained positive at 50.9 (from 52.7), while new orders fell to 49.5 from 50.5. The employment sub-index dipped to 48.0, with little sign of improvement in this sub-index in recent months.
• New export orders fell to 46.8 from 47.8, which ended the recent run of improvement in this index and goes against some signs of greater resiliency in terms of the global outlook.
• The chart below overlays the y/y change in the manufacturing PMI against global IP growth (also y/y).
• Input prices slumped back to 52.6 from 59.4, while output prices also fell sharply to 47.7 from 53.5.
• Conditions softened across all of the large, median and small sized enterprises surveyed.
• On the non-manufacturing side new orders were down noticeably (to 46.7 from 47.8). The headline back to 50.6 from 51.7 (52.0 expected).
• While price metrics also fell sharply, input prices to 49.7 and selling prices to 48.6. Employment conditions also softened to 46.5 from 46.8.

Fig 1: China Manufacturing PMI Versus Global IP Y/Y

Source: MNI - Market News/Bloomberg

SOUTH KOREA: South Korea IP Beats On Chip Rebound

South Korea's September IP growth was stronger than expected at 1.8% m/m, versus -1.0% forecast (prior was revised down a touch to 5.2%). The y/y print rose to 3.0% (forecast at -0.8% and prior -0.7%). Y/Y momentum is now the highest since mid 2022 and suggests the recovery in the sector continues to take hold.

• Looking at the detail, we had a 12.9% m/m rise in chip production. This follows a strong gain in August. Other data showed retail sales rising in the month (the first gain in 3 months), while facilities investment rose 8.7% after a 4% gain in August.
• The cyclical leading index change rose 0.1 in Sep versus flat in August.
• Note we get October trade figures tomorrow.

THAILAND: Manufacturing Still Weak, Tomorrow PMI & Confidence Data Print

Manufacturing production for September fell 6.1% y/y an improvement from August’s -7.75% but not as good as expected. Capacity utilisation rose slightly to 58% from a downwardly-revised 57.9%. On Wednesday the S&P Global manufacturing PMI and Bank of Thailand business confidence data for October will be released. The PMI has been trending down since its record high in April and has implied output contracted in August/September. Business confidence has painted a more positive outlook though and merchandise export growth improved over Q3.

Thailand manufacturing

Source: MNI - Market News/Bloomberg/Refinitiv

ASIA FX: Yen Dip & Weaker Equities Weigh On Asia FX

USD/Asia pairs are mostly higher. Twin headwinds from a weaker yen (post BOJ) and generally softer equity sentiment, particularly in tech sensitive countries, has weighed today. USD/CNH has maintained very low volatility and by default has outperformed the stronger USD trend. PHP is another outperformer. Still to come today is Q3 Taiwan GDP. Tomorrow, the Caixin manufacturing PMI is out in China, along with South Korean October trade data. Indonesia CPI is also out, along with some PMIs around the region.

• USD/CNH vol remains very low. The pair last near 7.3280, little changed for the session. The PMI misses earlier weighed on the yuan, but we found selling interest above 7.3300. Onshore and Hong Kong equities have faltered and have continued to weaken after the break, although this hasn't impacted FX sentiment.
• 1 month USD/KRW tracks near 1349 in recent trade, down from earlier highs near 1351.60. Earlier lows were close to 1344. The weaker equity backdrop (-1.50% for the Kospi), amid a softer regional trend, has weighed. The other headwind has been from the USD/JPY spike post the BOJ. For the won these moves keep us well within recent ranges.
• The Ringgit has observed narrow ranges this morning, there has been little follow through on moves. The local docket is empty today and the Ringgit looked through the Chinese PMI print. The Malaysian PM Anwar has said in parliament today that there was no reason for benchmark interest rates to increase further. Noting that “We only raise it when the economy demands it. Right now there is no need for that." (BBG). He also said that the Ringgits movements were affected by the US Federal Reserve's actions which is why the medium and long term solution was to decouple from the USD. Anwar said that Malaysia has begun talks with some Arab countries to move towards decoupling from the greenback.
• The SGD NEER (per Goldman Sachs estimates) is marginally firmer in early trade this morning and sits a touch off the touch of recent ranges. The measure sits ~0.3% below the top of the band. USD/SGD fell ~0.5% from peak to trough yesterday as wider greenback flows dominated on Monday. The pair found support at the 50-Day EMA ($1.3636) and pared losses. We sit at $1.3670/75 this morning.
• USD/THB is up sharply from earlier lows, last near 36.09 (highs of 36.135). Earlier lows were at 35.88, which was under the 50-day EMA, which comes in at 36.01. Baht has faltered due to a weaker equity backdrop, the SET is down over 1% at this stage, amid broader regional equity losses (ex Japan). Higher USD/JPY levels are also a factor, with THB typically have a stronger correlation with respect to yen moves compared to some other parts of SEA FX. Thailand IP for Sep was slightly weaker than expected. Still to come is Sep trade data.
• Philippines markets have returned from yesterday's holiday. USD/PHP sits lower at 56.81, around 0.25% stronger in PHP terms versus Friday closing levels from the end of last week. This keeps us within well worn ranges of recent months in the 56.50-57.00 region. Note we ended last Friday at 56.96.