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NZ yields climbed in response to the government's fiscal update - slippage in returning to surplus and greater borrowing than previously expected. Yields have been relatively steady elsewhere.
Headlines crossed from Reuters that China would target 5% GDP next year, and a 4% fiscal deficit (this was in line with onshore expectations). USD/CNH has been steady, while China and Hong Kong equities have been volatile. The decline in China CGB yields has paused today.
The USD has mostly been supported on dips against the majors. AUD and NZD are weaker.
Later US November retail sales, IP and December NY Fed services are released as well as Germany’s December Ifo/ZEW surveys, UK labour market data, euro area October trade and Canadian November CPI. ECB’s Buch and Elderson speak.
Tsys futures doing very little today, ranges narrow while volumes are well below recent averages. Looking at flows most of the action has been in SOFR ahead of the FOMC later this week. TU is +00⅛ at 102-27⅞, while TY is +00+ at 109-28 where it has been at throughout the session.
Overnight, in Tsys options, demand emerged for upside protection, including trades targeting a 10-year yield drop to around 4% by the end of January. While in fed funds futures, larger flows were skewed toward buys ahead of Wednesday’s Fed interest-rate decision.
Cash tsys curves have bull-steepened, yields are flat to 1bps lower. The 2yr is -0.8bps at 4.241%, while the 10yr is -0.2bps. The 2s10s is +1bps at 15.20, still off the overnight highs of 16.23.
Fed funds futures have held steady to start the week, with the market pricing in a 94% chance of a 25bps cut this week. There has been little change further out the curves either with 72.5bps of cumulative cuts priced in through to December 2025.
Later today we have Retail Sales & Industrial Production.
JGB futures are little changed post the lunch time break. We are mostly maintaining modest gains from the first part of the session. The March 2025 future was last 142.31, close to unchanged versus settlement levels.
The 20yr debt auction has come and gone with little meaningful market reaction. The bid to cover ratio was slightly lower compared to the Nov auction, but the tail also fell to 0.05 from 0.13 seen in the Nov auction.
US Tsy futures are a touch higher, but aggregate moves are very muted.
In the cash JGB space, yields are close to unchanged. The 10yr last near 1.075%. For swaps, the 10yr is back under 1.04%, but likewise, aggregate moves have been modest in this space.
Tomorrow, we have Nov trade balance figures, before Thursday's BoJ meeting outcome.
Aussie bonds saw a bull-steepening move occur following the worsening of WBC Consumer confidence data earlier, dropping 2% for December to 92.8 points, following a gain of 5.3% in the previous month.
Australia's consumer confidence fell 2% in December to 92.8, as persistent inflation, high interest rates, and global uncertainties dampened sentiment, according to a Westpac survey. Confidence in the economic outlook weakened sharply, with the 12m and 5yr expectations sub-indexes dropping 9.6% and 7.9%, respectively. Housing sentiment also deteriorated, with the "time to buy a dwelling" index falling 6% amid softer price expectations. The decline comes despite the RBA signaling progress on inflation and a surprise fall in unemployment to 3.9%.
ACGBs have traded richer today, the curve has bull-steepened with the 2s10s is 39.25 although off earlier highs of 41. The 2yr is trading -2.2bps at 3.892%, the 3yr is outperforming today -2.5bps at 3.838%, while the 10yr is -1.9bps at 4.295%.
ACGB futures are currently YM +2.8, VTA +1.8, XM +2.3
Swap curves have flattened, better buying occurring through the belly of curve, last -2bps to -4bps
Bill strip is +5 to +3, front -end outperforming.
RBA-dated OIS pricing is little changed today for the Feb meeting, with 14bps of cuts price, pricing has firmed for an April cut with 28.5bps currently priced, up from 22.5bps on Monday morning. Looking out to November 2025 the market is currently pricing in 76bps of cumulative cuts
Tomorrow, we have Westpac Leading Index, although this is expected to have little impact on the market, there is little else on the calendar for the rest of the year, however the RBA minutes are out on the 20th
Westpac’s consumer confidence fell 2% to 92.8 in December, driven by forward-looking components, after rising 5.3%. Through the volatility the Q4 average is up 9.9% q/q. While Q3 consumption was soft, monthly data this quarter have strengthened and the current conditions in the Westpac survey rose solidly, which suggests that there could be a possible improvement. The RBA continues to expect the economy to recover. Westpac is forecasting the first rate cut in May.
Confidence on the economic outlook weakened in December as Q3 GDP, reported at the start of the month, grew only 0.8% y/y. Uncertainty over the global and rates outlook probably also weighed, according to Westpac.
After falling for the last two months, unemployment expectations rose 2.7% in December but they remain below the series average in line with the low unemployment rate.
Responses to news topics were less unfavourable than in September. Reports on inflation remained the most recalled and there was only a slight improvement in respondents’ assessment of them. There were “more material improvements” on news related to rates, the economy, employment and budget & taxation. Year-ahead mortgage rate expectations ticked up but are around “historical lows”.
The assessment of “family finances vs a year ago” rose 6.9% m/m, the sixth straight improvement, helped by unchanged rates, tax cuts, lower inflation and cost-of-living relief. The outlook a year ahead remains above the breakeven 100-mark.
The “time to buy a major household item” rose 4.8% to 89.2, the seventh consecutive rise and highest since June 2022. While improving, it remains below its historical average.
Both housing sentiment and house price expectations deteriorated this month with “time to buy a dwelling” down 6% and prices down 5.3%.
Focus in New Zealand today was on the on the Half-Year Economic & Fiscal Update, NZGBs curve bear-steepened following the release, with yields at one point trading 1-5bps cheaper, the move has been partially reversed as the markets closes, focus will now turn to GDP on Thursday.
New Zealand's government faces prolonged budget deficits, with the operating balance (OBEGAL) now projected to remain in deficit until at least 2029, a year later than previously forecast. Weaker economic growth, poor productivity, and lower tax revenues have sharply downgraded the fiscal outlook, with GDP expected to grow just 0.5% in the year through June 2025. To address rising debt and widening deficits, Finance Minister Nicola Willis has announced spending cuts and introduced an alternative OBEGALx measure, which is forecast to return to surplus by 2029. Net debt is projected to remain elevated at around 45% of GDP over the forecast period.
Non Resident government bond holding ticked slightly lower in November to 61.2% from 62.0% October, however still holds well above the 5 year average of 56.5
US tsys have done very little throughout the session, however are slightly outperforming NZGBs. The US 10yr is -0.2bps at 4.395%.
NZGBs curve has bear-steepened again today, the 2yr still hovers near yearly lows at 3.750%, +0.2bps for the session, while the 10yr is +0.9bps at 4.439%, after hitting a session high of 4.489%. The 5s10s is 1bps higher at 49.30 and now trades at its steepest levels for the year and almost 40bps steepening since August.
The OIS market has firmed 2bps to 43bps of cuts priced in for the Feb erasing Monday's, although still slightly off recent highs of 46bps made on Dec 3th. There is a cumulative 110bps of cuts priced in through to October 2025.
Tomorrow we have Westpac Consumer Confidence & BoP Current Account Balance tomorrow, followed by GDP on Thursday.
NZ Treasury has revised down its growth expectations for the current financial year. Growth is then forecast to slow from FY27 to 2.4% due to limits on the supply side, especially from soft labour productivity (which has been revised down). The budget deficit widens this financial year but then improves from FY26 as the economy recovers but the surplus is delayed a year to FY29.
Treasury projects its adjusted budget deficit to be 3% of GDP this financial year up from 2.2% in May and 2.3% in FY26 up from 1.1%. A 0.1% deficit is expected in FY28 following a forecast 0.9% surplus in May. The revisions are unlikely to alter the RBNZ’s near-term easing path though, given much of the deterioration is cyclical. It will incorporate Treasury’s updated forecasts in its February statement.
There has been a pickup in the core expense-to-GDP ratio due to automatic stabilisers, increased education expenditure and higher debt servicing costs, but it should decline from FY26 as government constrains “Budget operating allowances”.
The core revenue ratio is forecast to rise 1pp over the forecast horizon but has been revised lower as the weaker expected improvement in productivity detracts almost 1.1% from nominal GDP and results in a smaller tax base.
The net debt ratio has been revised higher starting this financial year. FY25 is now expected to be 45.1% of GDP up from 43.5% in the May budget with FY26 in line. It doesn’t begin to decline until FY28.
Growth has been revised down to 0.5% in FY25 from 1.7% but the remaining years are little changed with the economy forecast to pickup to 3.3% in FY26. The peak unemployment rate in FY25 has been revised 0.2pp higher to 5.4%. Treasury notes that the risks to its projections are “broadly balanced” but there are significant uncertainties around them, especially productivity and the global economy.
FY25 inflation has been revised down 0.4pp to 1.8% y/y with it returning to 2% thereafter, the RBNZ’s target mid-point.
Earlier yen weakness on crosses has reversed somewhat as the Tuesday session unfolds. Aggregate moves are modest though. The yen is up around 0.10/15% against both AUD and NZD. The USD BBDXY index is little changed at 1288.4.
USD/JPY was last near 154.15, maintaining recent ranges. Earlier lows were at 153.80, so still above Monday lows for the pair. We saw some slight US yield weakness, but there has been no follow through. This has likely capped yen gains.
EUR/JPY got close to 162.50 in earlier dealings, but sits back near 162.00 currently, little changed for the session.
Japan news flow has been light ahead of Thursday's BoJ meeting outcome, where market pricing odds remain low for a further tightening.
AUD and NZD have both ticked lower. AUD/USD was last near 0.6360/65, still within striking distance of recent cycle lows at 0.6337. The Westpac Consumer sentiment index report fell for Dec, amid a challenging economic backdrop and uncertainty around the RBA outlook. Also be mindful of a near A$1bn option expiry for Dec 1 with a 0.6350 strike, which could influence spot.
NZD/USD is back around 0.5775, still up from recent YTD lows. Focus today has been on the half-year fiscal and economic update. The return to surplus will take longer, while economic growth is forecast to just remain positive to June next year. NZ yields are higher but this hasn't benefited the NZD.
Later US November retail sales, IP and December NY Fed services are released as well as Germany’s December Ifo/ZEW surveys, UK labour market data, euro area October trade and Canadian November CPI. ECB’s Buch and Elderson speak.
Asian markets are trading mixed today, influenced by weak economic data from China and expectations surrounding major central bank decisions this week. Chinese stocks are under pressure, however there has been a decent spike in volumes for some of the benchmarks, signaling the National team may be involved, however concerns over disinflation and soft retail sales, reinforcing the need for more stimulus have weighed on local stocks. Broader sentiment remains muted as markets await the Federal Reserve's decision, with a quarter-point rate cut widely anticipated, alongside policy announcements from Japan and Europe later this week.
Japanese shares are mixed today slightly weaker today, the weaker yen and gains in US technology stocks did see some earlier support for export-oriented sectors like automakers and electronics, with the Topix & Nikkei are both now trading 0.10%, with traders cautious ahead of the Bank of Japan's policy decision.
Australia’s ASX 200 rose 0.8%, supported by gains in financial and health-care stocks, while New Zealand’s NZX 50 is 0.90% higher after the release of the Economic and Budget forecast earlier, Industrials leading the market higher.
China & Hong Kong equities are mixed today, CSI 300 is 0.40% higher, however most other benchmark indices are trading lower, Shanghai A Shares is -0.65% lower, while B Shares are down 2.30%. In Hong Kong, all major benchmarks are in the red, with the HSI down 0.55%, Mainland Property Index trading 1.2% lower, while the HSTech Index is 0.65% lower.
Taiwan's TAIEX is trading just 0.15% higher, paring earlier gains after TSMC saw some selling, to now trade down 0.50%, Hon Hai is trading 1.40% higher, following a 2% rise in the SOX index overnight. South Korean equities continue to struggle, The KOSPI is 1.30% lower, as Samsung resumes its slide, last down 2.35%. Foreign investors have continued to sell South Korea equities today, with a net outflow of $350m.
It has been a slow session for data, New Zealand released Half-Year Economic & Fiscal Update which saw NZGBs yields rise, while Australia released Westpac Consumer Confidence, which showed a 2% drop m/m, after rising 5.3% in November.
US equity futures are trading little changed today, following NASDAQ rising 1.45% to record highs overnight.
Taiwan ended four days of outflows, as semiconductor prices rise.
South Korea: Recorded outflows of $380m yesterday, with a 5-day total of -$570m. YTD flows remain positive at +$3.45b. The 5-day average is -$114m, worse than the 20-day average of -$125m and the 100-day average of -$158m.
Taiwan: Saw inflows of $305m yesterday, but a 5-day total of -$866m. YTD flows remain deeply negative at -$17.02b. The 5-day average is -$173m, worse than the 20-day average of -$95m and the 100-day average of -$161m.
India: Posted inflows of $346m yesterday, with a 5-day total of +$240m. YTD flows are positive at +$1.08b. The 5-day average is +$48m, lower than the 20-day average of +$157m but better than the 100-day average of -$22m.
Indonesia: Recorded outflows of $39m yesterday, with a 5-day total of -$226m. YTD flows remain positive at +$1.33b. The 5-day average is -$45m, worse than the 20-day average of -$31m, but still better than the 100-day average of +$15m.
Thailand: Saw outflows of $37m yesterday, with a 5-day total of -$212m. YTD flows are negative at -$4.08b. The 5-day average is -$42m, worse than the 20-day average of -$19m and the 100-day average of -$8m.
Malaysia: Experienced outflows of $40m yesterday, with a 5-day total of -$218m. YTD flows are negative at -$715m. The 5-day average is -$44m, close to the 20-day average of -$47m but worse than the 100-day average of -$8m.
Philippines: Posted outflows of $8m yesterday, with a 5-day total of -$11m. YTD flows remain negative at -$351m. The 5-day average is -$2m, better than the 20-day average of -$7m and the 100-day average of +$1m.
Oil prices have been trading in a very narrow range during the APAC session as markets wait for the Fed’s decision tomorrow. They have held onto Monday’s losses with Brent down 0.1% to $73.82/bbl after a high of $73.98 and a low of $73.77. WTI is 0.2% lower at $70.60/bbl following a peak of $70.72 and trough of $70.52. The USD index is slightly lower.
Crude sold off on Monday following mixed China data which showed a fall in apparent oil demand and refining output. Authorities have promised stimulus to support the economy but markets are waiting for details. There are concerns that with rising non-OPEC supply, weak China demand will drive a significant surplus.
On the supply-side, US industry data on inventories are released later today.
Geopolitics remain an issue with more stringent sanctions on Russian oil exports and increased instability in the Middle East.
Later US November retail sales, IP and December NY Fed services are released as well as Germany’s December Ifo/ZEW surveys, UK labour market data, euro area October trade and Canadian November CPI. ECB’s Buch and Elderson speak.
Following yesterday's China data outcomes, the Citi China economic surprise index has ticked lower. The surprise index had a strong run higher through Oct/Nov of this year, see the chart below. The other lines on the chart are the markets consensus GDP forecast for 2024 and 2025 (sourced from Bloomberg). The consensus expectations haven't shifted in recent month despite the better data outcomes relative to market expectations.
Fig 1: Citi China EASI & 2024 and 2025 GDP Growth Expectations
Source: Citi/MNI - Market News/Bloomberg
Broader market skepticism/concern around China stimulus efforts (which have aided data outcomes at the margins) to boost the growth outlook is likely helping keep growth forecasts steady. Stimulus measures have been steady rather than a big bang stimulus, which the authorities still appear to be wary of.
China’s Political Bureau of the CPC Central Committee held a meeting on December 9, resetting the tone for monetary policy to ‘moderately loose’ from ‘prudent’.
Historically this tone has only been used when there is pressure to stabilize domestic prices and the Federal Reserve is in an easing cycle, both of which are, in the opinion of the committee, likely to exist next year.
As usual with the output from these meetings, it is about setting the tone, not the execution of the policy.
Still, onshore media is stressing the need to speed up economic policy implementation (see this link). At the same time, the Economic Daily has reinforced the need for certainty around meeting economic targets to stabilize broader economic conditions (see this link). An actual growth target for next year wasn't specified though.
Such a backdrop suggests further policy support is on the way, with RRR and rate cuts to potentially feature early in 2025. This could leave local bonds the best expression for the mix of policy support/growth concern that the market may see.
The China currency may also depreciate, particularly if the tariff threat is realized, but the pace of depreciation is still likely to be managed. For local equities, the authorities have introduced support via the PBoC swap facility, which may curb downside risks for the major benchmark indices.
The second chart plots the J.P. Morgan Growth forecast revision index for China (FRI), against the 10yr government bond yield. Until growth expectations move materially higher, the market may feel comfortable expecting lower yields.
The main risk at this stage is likely to be the pace of bond yield falls prompts intervention/jaw boning from the authorities, but this is unlikely to change the yield trend over the longer term.
Fig 2: J.P. Morgan China Forecast Revision Index & 10yr CGB Yield
In North East Asia, FX moves have been relatively muted. USD/CNH dips have been supported, but a test above 7.300, has note eventuated. We were last unchanged at 7.2920. Reuters reported that the GDP target for next year would be maintained at 5%, while the fiscal deficit would be at 4% of GDP, up from this year's initial target of 3%. These figures won't be officially confirmed until March next year. The fiscal deficit at 4% is what onshore analysts were expecting.
Onshore yields have paused in China in terms of downside momentum. Equities have been volatile, with some potential national team support in play.
Spot USD/KRW has also been relatively steady, last in the 1437/38 region. Headlines around Yoon's impeachment and fallout from that continue but haven't impacted the won. Local equities are down over 1%.
USD/TWD spot is close to 32.50/55 so very much within recent ranges.
The December Bank Indonesia (BI) rate decision is likely to be close reflected by the 18 analysts on Bloomberg expecting rates to be held at 6.0% and 13 forecasting a 25bp rate cut.
USDIDR reaching 16000 probably means that BI will remain on hold as it focuses on FX and financial stability. It is likely to continue to use its macroprudential tools to support growth through increased lending and jobs rather than lower rates while the rupiah is at this level.
The stronger US dollar following Trump’s US election victory has been a large part of the FX story but concerns that his trade policies will impact Asian economies and uncertainties around the fiscal policy of Indonesia’s new President Prabowo have also contributed.
BI has said that further easing will depend on movements in the currency and the inflation outlook as well as other data and “emerging dynamic conditions”: Those conditions will likely need to stabilise somewhat.
We expect the Bank of Thailand (BoT) to leave rates at 2.25% given Governor Sethaput said that the bar is “reasonably high” for further easing and BoT’s desire to keep policy at neutral and consistent with the growth and inflation outlook.
BoT expects headline inflation to reach the bottom of its 1-3% band by the end of this year and for it to average 1.2% in 2025 up from 0.5% in 2024. Updated forecasts will be included in the meeting statement.
Growth has trended higher over the last year driven by exports and government spending. Private consumption is expected to recover supported by fiscal stimulus and stronger tourist arrivals. With exports an important source of growth, the uncertain trade outlook is a downside risk though.
With inflation still low and risks around the growth outlook, further easing in H1 2025 is possible.
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.
Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
MNI (SYDNEY)
NZ yields climbed in response to the government's fiscal update - slippage in returning to surplus and greater borrowing than previously expected. Yields have been relatively steady elsewhere.
Headlines crossed from Reuters that China would target 5% GDP next year, and a 4% fiscal deficit (this was in line with onshore expectations). USD/CNH has been steady, while China and Hong Kong equities have been volatile. The decline in China CGB yields has paused today.
The USD has mostly been supported on dips against the majors. AUD and NZD are weaker.
Later US November retail sales, IP and December NY Fed services are released as well as Germany’s December Ifo/ZEW surveys, UK labour market data, euro area October trade and Canadian November CPI. ECB’s Buch and Elderson speak.
Tsys futures doing very little today, ranges narrow while volumes are well below recent averages. Looking at flows most of the action has been in SOFR ahead of the FOMC later this week. TU is +00⅛ at 102-27⅞, while TY is +00+ at 109-28 where it has been at throughout the session.
Overnight, in Tsys options, demand emerged for upside protection, including trades targeting a 10-year yield drop to around 4% by the end of January. While in fed funds futures, larger flows were skewed toward buys ahead of Wednesday’s Fed interest-rate decision.
Cash tsys curves have bull-steepened, yields are flat to 1bps lower. The 2yr is -0.8bps at 4.241%, while the 10yr is -0.2bps. The 2s10s is +1bps at 15.20, still off the overnight highs of 16.23.
Fed funds futures have held steady to start the week, with the market pricing in a 94% chance of a 25bps cut this week. There has been little change further out the curves either with 72.5bps of cumulative cuts priced in through to December 2025.
Later today we have Retail Sales & Industrial Production.
JGB futures are little changed post the lunch time break. We are mostly maintaining modest gains from the first part of the session. The March 2025 future was last 142.31, close to unchanged versus settlement levels.
The 20yr debt auction has come and gone with little meaningful market reaction. The bid to cover ratio was slightly lower compared to the Nov auction, but the tail also fell to 0.05 from 0.13 seen in the Nov auction.
US Tsy futures are a touch higher, but aggregate moves are very muted.
In the cash JGB space, yields are close to unchanged. The 10yr last near 1.075%. For swaps, the 10yr is back under 1.04%, but likewise, aggregate moves have been modest in this space.
Tomorrow, we have Nov trade balance figures, before Thursday's BoJ meeting outcome.
Aussie bonds saw a bull-steepening move occur following the worsening of WBC Consumer confidence data earlier, dropping 2% for December to 92.8 points, following a gain of 5.3% in the previous month.
Australia's consumer confidence fell 2% in December to 92.8, as persistent inflation, high interest rates, and global uncertainties dampened sentiment, according to a Westpac survey. Confidence in the economic outlook weakened sharply, with the 12m and 5yr expectations sub-indexes dropping 9.6% and 7.9%, respectively. Housing sentiment also deteriorated, with the "time to buy a dwelling" index falling 6% amid softer price expectations. The decline comes despite the RBA signaling progress on inflation and a surprise fall in unemployment to 3.9%.
ACGBs have traded richer today, the curve has bull-steepened with the 2s10s is 39.25 although off earlier highs of 41. The 2yr is trading -2.2bps at 3.892%, the 3yr is outperforming today -2.5bps at 3.838%, while the 10yr is -1.9bps at 4.295%.
ACGB futures are currently YM +2.8, VTA +1.8, XM +2.3
Swap curves have flattened, better buying occurring through the belly of curve, last -2bps to -4bps
Bill strip is +5 to +3, front -end outperforming.
RBA-dated OIS pricing is little changed today for the Feb meeting, with 14bps of cuts price, pricing has firmed for an April cut with 28.5bps currently priced, up from 22.5bps on Monday morning. Looking out to November 2025 the market is currently pricing in 76bps of cumulative cuts
Tomorrow, we have Westpac Leading Index, although this is expected to have little impact on the market, there is little else on the calendar for the rest of the year, however the RBA minutes are out on the 20th
Westpac’s consumer confidence fell 2% to 92.8 in December, driven by forward-looking components, after rising 5.3%. Through the volatility the Q4 average is up 9.9% q/q. While Q3 consumption was soft, monthly data this quarter have strengthened and the current conditions in the Westpac survey rose solidly, which suggests that there could be a possible improvement. The RBA continues to expect the economy to recover. Westpac is forecasting the first rate cut in May.
Confidence on the economic outlook weakened in December as Q3 GDP, reported at the start of the month, grew only 0.8% y/y. Uncertainty over the global and rates outlook probably also weighed, according to Westpac.
After falling for the last two months, unemployment expectations rose 2.7% in December but they remain below the series average in line with the low unemployment rate.
Responses to news topics were less unfavourable than in September. Reports on inflation remained the most recalled and there was only a slight improvement in respondents’ assessment of them. There were “more material improvements” on news related to rates, the economy, employment and budget & taxation. Year-ahead mortgage rate expectations ticked up but are around “historical lows”.
The assessment of “family finances vs a year ago” rose 6.9% m/m, the sixth straight improvement, helped by unchanged rates, tax cuts, lower inflation and cost-of-living relief. The outlook a year ahead remains above the breakeven 100-mark.
The “time to buy a major household item” rose 4.8% to 89.2, the seventh consecutive rise and highest since June 2022. While improving, it remains below its historical average.
Both housing sentiment and house price expectations deteriorated this month with “time to buy a dwelling” down 6% and prices down 5.3%.
Focus in New Zealand today was on the on the Half-Year Economic & Fiscal Update, NZGBs curve bear-steepened following the release, with yields at one point trading 1-5bps cheaper, the move has been partially reversed as the markets closes, focus will now turn to GDP on Thursday.
New Zealand's government faces prolonged budget deficits, with the operating balance (OBEGAL) now projected to remain in deficit until at least 2029, a year later than previously forecast. Weaker economic growth, poor productivity, and lower tax revenues have sharply downgraded the fiscal outlook, with GDP expected to grow just 0.5% in the year through June 2025. To address rising debt and widening deficits, Finance Minister Nicola Willis has announced spending cuts and introduced an alternative OBEGALx measure, which is forecast to return to surplus by 2029. Net debt is projected to remain elevated at around 45% of GDP over the forecast period.
Non Resident government bond holding ticked slightly lower in November to 61.2% from 62.0% October, however still holds well above the 5 year average of 56.5
US tsys have done very little throughout the session, however are slightly outperforming NZGBs. The US 10yr is -0.2bps at 4.395%.
NZGBs curve has bear-steepened again today, the 2yr still hovers near yearly lows at 3.750%, +0.2bps for the session, while the 10yr is +0.9bps at 4.439%, after hitting a session high of 4.489%. The 5s10s is 1bps higher at 49.30 and now trades at its steepest levels for the year and almost 40bps steepening since August.
The OIS market has firmed 2bps to 43bps of cuts priced in for the Feb erasing Monday's, although still slightly off recent highs of 46bps made on Dec 3th. There is a cumulative 110bps of cuts priced in through to October 2025.
Tomorrow we have Westpac Consumer Confidence & BoP Current Account Balance tomorrow, followed by GDP on Thursday.
NZ Treasury has revised down its growth expectations for the current financial year. Growth is then forecast to slow from FY27 to 2.4% due to limits on the supply side, especially from soft labour productivity (which has been revised down). The budget deficit widens this financial year but then improves from FY26 as the economy recovers but the surplus is delayed a year to FY29.
Treasury projects its adjusted budget deficit to be 3% of GDP this financial year up from 2.2% in May and 2.3% in FY26 up from 1.1%. A 0.1% deficit is expected in FY28 following a forecast 0.9% surplus in May. The revisions are unlikely to alter the RBNZ’s near-term easing path though, given much of the deterioration is cyclical. It will incorporate Treasury’s updated forecasts in its February statement.
There has been a pickup in the core expense-to-GDP ratio due to automatic stabilisers, increased education expenditure and higher debt servicing costs, but it should decline from FY26 as government constrains “Budget operating allowances”.
The core revenue ratio is forecast to rise 1pp over the forecast horizon but has been revised lower as the weaker expected improvement in productivity detracts almost 1.1% from nominal GDP and results in a smaller tax base.
The net debt ratio has been revised higher starting this financial year. FY25 is now expected to be 45.1% of GDP up from 43.5% in the May budget with FY26 in line. It doesn’t begin to decline until FY28.
Growth has been revised down to 0.5% in FY25 from 1.7% but the remaining years are little changed with the economy forecast to pickup to 3.3% in FY26. The peak unemployment rate in FY25 has been revised 0.2pp higher to 5.4%. Treasury notes that the risks to its projections are “broadly balanced” but there are significant uncertainties around them, especially productivity and the global economy.
FY25 inflation has been revised down 0.4pp to 1.8% y/y with it returning to 2% thereafter, the RBNZ’s target mid-point.
Earlier yen weakness on crosses has reversed somewhat as the Tuesday session unfolds. Aggregate moves are modest though. The yen is up around 0.10/15% against both AUD and NZD. The USD BBDXY index is little changed at 1288.4.
USD/JPY was last near 154.15, maintaining recent ranges. Earlier lows were at 153.80, so still above Monday lows for the pair. We saw some slight US yield weakness, but there has been no follow through. This has likely capped yen gains.
EUR/JPY got close to 162.50 in earlier dealings, but sits back near 162.00 currently, little changed for the session.
Japan news flow has been light ahead of Thursday's BoJ meeting outcome, where market pricing odds remain low for a further tightening.
AUD and NZD have both ticked lower. AUD/USD was last near 0.6360/65, still within striking distance of recent cycle lows at 0.6337. The Westpac Consumer sentiment index report fell for Dec, amid a challenging economic backdrop and uncertainty around the RBA outlook. Also be mindful of a near A$1bn option expiry for Dec 1 with a 0.6350 strike, which could influence spot.
NZD/USD is back around 0.5775, still up from recent YTD lows. Focus today has been on the half-year fiscal and economic update. The return to surplus will take longer, while economic growth is forecast to just remain positive to June next year. NZ yields are higher but this hasn't benefited the NZD.
Later US November retail sales, IP and December NY Fed services are released as well as Germany’s December Ifo/ZEW surveys, UK labour market data, euro area October trade and Canadian November CPI. ECB’s Buch and Elderson speak.
Asian markets are trading mixed today, influenced by weak economic data from China and expectations surrounding major central bank decisions this week. Chinese stocks are under pressure, however there has been a decent spike in volumes for some of the benchmarks, signaling the National team may be involved, however concerns over disinflation and soft retail sales, reinforcing the need for more stimulus have weighed on local stocks. Broader sentiment remains muted as markets await the Federal Reserve's decision, with a quarter-point rate cut widely anticipated, alongside policy announcements from Japan and Europe later this week.
Japanese shares are mixed today slightly weaker today, the weaker yen and gains in US technology stocks did see some earlier support for export-oriented sectors like automakers and electronics, with the Topix & Nikkei are both now trading 0.10%, with traders cautious ahead of the Bank of Japan's policy decision.
Australia’s ASX 200 rose 0.8%, supported by gains in financial and health-care stocks, while New Zealand’s NZX 50 is 0.90% higher after the release of the Economic and Budget forecast earlier, Industrials leading the market higher.
China & Hong Kong equities are mixed today, CSI 300 is 0.40% higher, however most other benchmark indices are trading lower, Shanghai A Shares is -0.65% lower, while B Shares are down 2.30%. In Hong Kong, all major benchmarks are in the red, with the HSI down 0.55%, Mainland Property Index trading 1.2% lower, while the HSTech Index is 0.65% lower.
Taiwan's TAIEX is trading just 0.15% higher, paring earlier gains after TSMC saw some selling, to now trade down 0.50%, Hon Hai is trading 1.40% higher, following a 2% rise in the SOX index overnight. South Korean equities continue to struggle, The KOSPI is 1.30% lower, as Samsung resumes its slide, last down 2.35%. Foreign investors have continued to sell South Korea equities today, with a net outflow of $350m.
It has been a slow session for data, New Zealand released Half-Year Economic & Fiscal Update which saw NZGBs yields rise, while Australia released Westpac Consumer Confidence, which showed a 2% drop m/m, after rising 5.3% in November.
US equity futures are trading little changed today, following NASDAQ rising 1.45% to record highs overnight.
Taiwan ended four days of outflows, as semiconductor prices rise.
South Korea: Recorded outflows of $380m yesterday, with a 5-day total of -$570m. YTD flows remain positive at +$3.45b. The 5-day average is -$114m, worse than the 20-day average of -$125m and the 100-day average of -$158m.
Taiwan: Saw inflows of $305m yesterday, but a 5-day total of -$866m. YTD flows remain deeply negative at -$17.02b. The 5-day average is -$173m, worse than the 20-day average of -$95m and the 100-day average of -$161m.
India: Posted inflows of $346m yesterday, with a 5-day total of +$240m. YTD flows are positive at +$1.08b. The 5-day average is +$48m, lower than the 20-day average of +$157m but better than the 100-day average of -$22m.
Indonesia: Recorded outflows of $39m yesterday, with a 5-day total of -$226m. YTD flows remain positive at +$1.33b. The 5-day average is -$45m, worse than the 20-day average of -$31m, but still better than the 100-day average of +$15m.
Thailand: Saw outflows of $37m yesterday, with a 5-day total of -$212m. YTD flows are negative at -$4.08b. The 5-day average is -$42m, worse than the 20-day average of -$19m and the 100-day average of -$8m.
Malaysia: Experienced outflows of $40m yesterday, with a 5-day total of -$218m. YTD flows are negative at -$715m. The 5-day average is -$44m, close to the 20-day average of -$47m but worse than the 100-day average of -$8m.
Philippines: Posted outflows of $8m yesterday, with a 5-day total of -$11m. YTD flows remain negative at -$351m. The 5-day average is -$2m, better than the 20-day average of -$7m and the 100-day average of +$1m.
Oil prices have been trading in a very narrow range during the APAC session as markets wait for the Fed’s decision tomorrow. They have held onto Monday’s losses with Brent down 0.1% to $73.82/bbl after a high of $73.98 and a low of $73.77. WTI is 0.2% lower at $70.60/bbl following a peak of $70.72 and trough of $70.52. The USD index is slightly lower.
Crude sold off on Monday following mixed China data which showed a fall in apparent oil demand and refining output. Authorities have promised stimulus to support the economy but markets are waiting for details. There are concerns that with rising non-OPEC supply, weak China demand will drive a significant surplus.
On the supply-side, US industry data on inventories are released later today.
Geopolitics remain an issue with more stringent sanctions on Russian oil exports and increased instability in the Middle East.
Later US November retail sales, IP and December NY Fed services are released as well as Germany’s December Ifo/ZEW surveys, UK labour market data, euro area October trade and Canadian November CPI. ECB’s Buch and Elderson speak.
Following yesterday's China data outcomes, the Citi China economic surprise index has ticked lower. The surprise index had a strong run higher through Oct/Nov of this year, see the chart below. The other lines on the chart are the markets consensus GDP forecast for 2024 and 2025 (sourced from Bloomberg). The consensus expectations haven't shifted in recent month despite the better data outcomes relative to market expectations.
Fig 1: Citi China EASI & 2024 and 2025 GDP Growth Expectations
Source: Citi/MNI - Market News/Bloomberg
Broader market skepticism/concern around China stimulus efforts (which have aided data outcomes at the margins) to boost the growth outlook is likely helping keep growth forecasts steady. Stimulus measures have been steady rather than a big bang stimulus, which the authorities still appear to be wary of.
China’s Political Bureau of the CPC Central Committee held a meeting on December 9, resetting the tone for monetary policy to ‘moderately loose’ from ‘prudent’.
Historically this tone has only been used when there is pressure to stabilize domestic prices and the Federal Reserve is in an easing cycle, both of which are, in the opinion of the committee, likely to exist next year.
As usual with the output from these meetings, it is about setting the tone, not the execution of the policy.
Still, onshore media is stressing the need to speed up economic policy implementation (see this link). At the same time, the Economic Daily has reinforced the need for certainty around meeting economic targets to stabilize broader economic conditions (see this link). An actual growth target for next year wasn't specified though.
Such a backdrop suggests further policy support is on the way, with RRR and rate cuts to potentially feature early in 2025. This could leave local bonds the best expression for the mix of policy support/growth concern that the market may see.
The China currency may also depreciate, particularly if the tariff threat is realized, but the pace of depreciation is still likely to be managed. For local equities, the authorities have introduced support via the PBoC swap facility, which may curb downside risks for the major benchmark indices.
The second chart plots the J.P. Morgan Growth forecast revision index for China (FRI), against the 10yr government bond yield. Until growth expectations move materially higher, the market may feel comfortable expecting lower yields.
The main risk at this stage is likely to be the pace of bond yield falls prompts intervention/jaw boning from the authorities, but this is unlikely to change the yield trend over the longer term.
Fig 2: J.P. Morgan China Forecast Revision Index & 10yr CGB Yield
In North East Asia, FX moves have been relatively muted. USD/CNH dips have been supported, but a test above 7.300, has note eventuated. We were last unchanged at 7.2920. Reuters reported that the GDP target for next year would be maintained at 5%, while the fiscal deficit would be at 4% of GDP, up from this year's initial target of 3%. These figures won't be officially confirmed until March next year. The fiscal deficit at 4% is what onshore analysts were expecting.
Onshore yields have paused in China in terms of downside momentum. Equities have been volatile, with some potential national team support in play.
Spot USD/KRW has also been relatively steady, last in the 1437/38 region. Headlines around Yoon's impeachment and fallout from that continue but haven't impacted the won. Local equities are down over 1%.
USD/TWD spot is close to 32.50/55 so very much within recent ranges.
The December Bank Indonesia (BI) rate decision is likely to be close reflected by the 18 analysts on Bloomberg expecting rates to be held at 6.0% and 13 forecasting a 25bp rate cut.
USDIDR reaching 16000 probably means that BI will remain on hold as it focuses on FX and financial stability. It is likely to continue to use its macroprudential tools to support growth through increased lending and jobs rather than lower rates while the rupiah is at this level.
The stronger US dollar following Trump’s US election victory has been a large part of the FX story but concerns that his trade policies will impact Asian economies and uncertainties around the fiscal policy of Indonesia’s new President Prabowo have also contributed.
BI has said that further easing will depend on movements in the currency and the inflation outlook as well as other data and “emerging dynamic conditions”: Those conditions will likely need to stabilise somewhat.
We expect the Bank of Thailand (BoT) to leave rates at 2.25% given Governor Sethaput said that the bar is “reasonably high” for further easing and BoT’s desire to keep policy at neutral and consistent with the growth and inflation outlook.
BoT expects headline inflation to reach the bottom of its 1-3% band by the end of this year and for it to average 1.2% in 2025 up from 0.5% in 2024. Updated forecasts will be included in the meeting statement.
Growth has trended higher over the last year driven by exports and government spending. Private consumption is expected to recover supported by fiscal stimulus and stronger tourist arrivals. With exports an important source of growth, the uncertain trade outlook is a downside risk though.
With inflation still low and risks around the growth outlook, further easing in H1 2025 is possible.
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