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The USD has stayed on the front foot, although overall moves are modest. The dollar index is up comfortably for the week though. US Tsy yields have been steady. JGBs didn't move with the Q4 Tankan beat, with pricing for next week's BoJ meeting also little changed (and well off late Nov highs in terms of hike odds).
China bond yields continue to track sharply lower, as markets price in more easing risks post the CEWC. Still, China and Hong Kong equities are softer, with property related indices down.
Looking ahead, we have UK data headlined by monthly GDP. French CPI revisions are also due. In the US, only Nov trade prices are on tap.
German finance minster Kukies was interviewed by Die Welt and noted that plans to pass a bill countering inflation-induced tax creep (which initially was to be passed under the now-collapsed traffic light coalition) will not be possible in 2024.
Kukies says this is due to time constraints and the door for passing remains open ahead of the election on 23 February.
However, a passing of any tax creep relief before then appears unlikely after the CDU opposition leader appeared to withdraw support for the measures last weekend.
Additionally, "the decision has been made as to the basis on which the Federal Ministry of Finance will implement the provisional budget for 2025. ‘We will largely base our spending on the government draft for 2025 from the summer,’ said Kukies. However, the government draft only forms the basis for calculation and does not release the government from the decision as to which expenditure may be incurred in accordance with the Basic Law."
Note that the irrespective of when the provisional budget is confirmed, the DFA is expected to announce Germany's issuance plans on Tuesday 17 December.
There is little to mention for Tsys today, ranges have been very narrow volumes are below average, with little on the calendar tonight and fed speakers in blackout period ahead of the FOMC next week. TU is -00¾ at 102-31⅛, TY is -00+ at 110-11+.
Cash tsys have seen a decent steepening move over the week, with the 2s10s very briefly inverting on Dec 6 to trade at 13.152 now. The 2yr yield has risen 8bps over the past week to now trade 4.184%, while the 10yr is trading 16.5bps higher this week at 4.318%.
Michelle Neal, head of the New York Fed's markets group, will resign in March 2025 to join the private sector, marking the latest in a series of high-profile departures since 2022. Neal's exit comes at a critical time as the group handles liquidity withdrawal and monitors financial stability amid the US debt ceiling challenges. Anna Nordstrom will serve as interim head while a successor is sought, making Neal the third markets head to depart in under six years.
JGB futures have stayed within recent ranges in the first part of Friday trade. JBH5 (March 2025) was last 142.53, +.08 versus settlement levels. Earlier highs were at 142.62.
The Q4 Tankan survey came in mostly better than expected and points to a resilient growth/capex outlook. Inflation expectations were also solid.
Still, it wasn't robust enough to shift market expectations around next week's BoJ meeting. Market pricing is only giving close to a 16% chance of a hike next week. We were consistently above 60% in parts of late Nov.
The bias in JGB yields has been to edge lower, more so for short tenors, with swap rates behaving in a similar fashion. Japan bonds have outperformed the recent sell-off in US Tsy bond markets.
The 10yr JGB yield was last under 1.05%, slightly up from session lows. Yields have been slightly firmer in the 20-40yr tenor space.
Next week's main focus will rest on Thursday's BoJ meeting.
Japan's Q4 Tankan survey was mostly above market forecasts. The large manufacturing index at 14, versus 13 forecast (which was also the prior outcome). The outlook was at 13, versus 12 forecast and 14 prior. For large non-manufacturers we were at 33 and the outlook at 28, both in line with consensus. All industry capex was 11.3%, versus 10% forecast and 10.6% prior.
For smaller firms, we were better than expected. On the manufacturing side, we edged up to 1 (versus a -1 forecast), while the outlook was flat versus a -1 forecast. For non-manufacturing we rose to 16 from 14 prior and 12 forecast. This was the highest read since the early 1990s. The outlook was 8, against an 11 forecast for these firms.
Broadly the improvement or elevated nature of conditions for larger firms suggests a supportive GDP growth. The chart below plots the current index levels for large firms (manufacturers in white, non in green) against y/y GDP growth.
Fig 1: Tankan Large Firm Index Levels Versus Japan Real GDP Y/Y
Source: MNI - Market News/Bloomberg
The second chart is the Tankan capex reading against Japan capex in y/y terms. Again the Tankan result is presenting a solid outlook base.
The reading for smaller firms is also likely to please the authorities/encourage the BOJ around the resiliency of the growth backdrop.
Still, the results in aggregate, may not be enough to prompt a shift at the Dec meeting, with the policy outcome announced next Thursday. Recent media highlights have suggested the BoJ sees little risk in waiting until 2025 for further policy adjustments.
Aussie bonds are largely tracking moves made overnight in US tsys, with the majority of the curve now trading about 15-20bps cheaper over the past two sessions. There was nothing on the local data calendar today, however the RBA's Sarah Hunter did speak.
RBA Assistant Governor Sarah Hunter highlighted the central bank's focus on labor market and inflation trends, indicating policy adjustments might be needed if the unemployment rate and core inflation deviate from expectations. Despite Governor Michele Bullock's recent dovish tone, a surprising drop in unemployment to 3.9% complicates the outlook, with rates potentially staying at 4.35% for longer. Markets are now split, with swaps pricing the first rate cut in May, while currency traders anticipate an earlier easing.
ACGBs yields are off early morning highs, however are still trading 2.5bps to 5bps cheaper over the session. The 2yr is +2.8bps at 3.907%, after hitting lows of 3.76% post RBA on Tuesday, while the 10yr is +4.1bps at 4.302% vs weekly lows of 4.138%.
ACGB futures are currently YM -2.6 & XM -4.2
Swap curves have twist-flattened and are trading -8 to -1bps, with the short-end underperforming.
Bills strip is trading -2 to -7
RBA-date OIS pricing is steady today, however has cooled slightly over the week with Feb now pricing 12bps of cuts, from 14bps on Monday. There was 27bps of cuts priced in for the April meeting at the start of the week, and we last trade at 23bps of cuts, with the first full cut now price in for May, while the market has just 70bps of cuts priced out through to November 2025.
Next week there is little on the calendar as we head into Christmas, with just Westpac Consumer Confidence of note.
NZGBs continued the bear-steepening moves throughout the session, with yields closing 2bps to 3.5bps cheaper. New Zealand Finance Minister spoke to Bloomberg earlier, otherwise it has been a slow session, with yields largely tracking moves in us tsys overnight.
Fitch Ratings expects NZ councils' operating performance to improve over the medium term due to stable funding from property rates and effective budget balancing rules. However, rising infrastructure spending will lead to higher debt levels, with debt growth outpacing operating balance growth in the near term. Debt metrics are projected to stabilize by fiscal 2028 as rate increases rebalance finances.
NZ's FinMin spoke to BBG earlier, where she has instructed diplomats to advocate for exemption from potential US tariffs under President-elect Donald Trump, emphasizing the balanced and valuable trade relationship between the two countries. While New Zealand exports NZ$15.8b annually to the US, including beef, wine, and dairy, Willis is optimistic that tariffs will not target New Zealand given its strong partnership with the US.
The 2yr yield jumped earlier, on what seems like very little news it last trades +2.2bps at 3.733% at session highs although it still remains the best performing tenor over the past week. Elsewhere across the curve the 5yr is outperforming today's moves trading +1.7bps at 3.90% while the 10yr is +3.4bps at 4.406%, with the 5s10s +0.7bps at 47.20 just off recent highs of 49.00.
The OIS market has 43bps of cuts priced in for the Feb meeting this has held steady most of the week. There is a cumulative 107bps of cuts priced in through to October 2025.
Next week the NZ Treasury will release Half-Year Economic & Fiscal Update, followed by GDP on Thursday.
A positive USD bias has persisted for much of Asia Pac Friday trade to date, although aggregate moves aren't large at this stage. The USD BBDXY index is up a little, last above 1289.40. The index is tracking comfortably higher for the week and is now back to late Nov levels.
USD/JPY saw an initial move lower, printing 152.46 not long after the stronger Q4 Tankan printed. However, this was short lived, and we have since tested above 153.00.
The Q4 Tankan result, pointing to resilient economic activity/capex, along with solid inflation expectations, is not seen as shifting the near term BoJ outlook (next policy outcome announced Thursday Dec 19). Market pricing of a shift next week is just under 16% at this stage, we were above 60% in late November.
US-JP yield differentials continue to trend in favor of the USD. The next firm short-term resistance is at 153.66, a Fibonacci retracement.
AUD and NZD have also fallen, although losses are only close to 0.10% at this stage. We were weaker as China and Hong Kong markets opened weaker, amid disappointment from the CEWG (around no new stimulus details) but we sit slightly above these lows now. AUD/USD was last 0.6360/65, NZD around 0.5760/65.
US yields sit close to flat, while US equity futures are in the green, but away from best levels. Regional softness led by China/HK a likely weight.
EUR/USD is tracking lower, last under 1.0460.
Looking ahead, we have UK data headlined by monthly GDP. French CPI revisions are also due. In the US, only Nov trade prices are on tap.
Chinese equities are under pressure today as investors reacted cautiously to the government's signal of increased public borrowing and a higher fiscal deficit target for 2025 to bolster consumption. While the Central Economic Work Conference highlighted support for consumption, markets remained wary due to a lack of concrete measures. The CSI 300’s performance remains crucial heading into the weekend, with any disappointment potentially setting a negative tone through year-end.
Property Stocks have continued to sell-off through the mornings sessions after China's Central Economic Work Conference disappointed investors with a lack of concrete measures to address key economic challenges, including the property market slump. While the government emphasized fiscal spending to boost consumption and stabilize urban village renovation, no actionable strategies were outlined.
Hong Kong equities are lower across the board, with property indices the worst performing, Mainland Property Index is down 3.88%, the HS Property Index is 3% lower, while the wider HSI is down 1.65%.
Similar in China mainland equities with the BBG China Property Index falling 4.45%, while the CSI 300 is 1.80%, while similar across the wider Asian region today small-cap are outperforming large cap stocks with the CSI 2000 trading down just 0.75%.
Asian markets have retreated so far today, as risk sentiment weakened ahead of the Fed's meeting next week. Japanese and Australian equities fell, and Hong Kong futures signaled further declines following Wall Street’s overnight losses. Chinese markets focused on the government’s pledge to increase fiscal borrowing in 2025 to support consumption, though the lack of detailed measures limited optimism. South Korean stocks were flat, Meanwhile, the stronger USD and rising Treasury yields continued to weigh on Asian currencies, with concerns over limited room for further rate cuts in China adding to cautious sentiment.
Japanese equities are lower with the Nikkei 225 falling 0.7% and the Topix down 0.8%, as investors took profits following the index's climb past the 40,000 mark on Thursday. Weakness in U.S. markets weighed on electronics and precision equipment makers, while analysts noted that high valuations may temper further gains. Despite record share buybacks this year, investors are increasingly demanding more sustainable growth strategies, such as capital expenditure and M&A, to justify valuations.
South Korea equities are also slightly lower, with tech stocks dragging on the index, Samsung is trading 0.36% lower, while SK Hynix is down 1%, the KOSPI is 0.25% lower while small-cap stocks are trading higher with the KOSDAQ up 0.70%. Similar story in Taiwan with the TAIEX down 0.40%, flows in the region have been negative week on week.
Australian's ASX 200 has dropped 0.7%, led by declines in mining and financial stocks. Gold mining stocks also retreated as bullion prices slid 1.4% amid a selloff triggered by the economic uncertainty. Meanwhile, DigiCo Infrastructure REIT debuted on the Sydney exchange following Australia’s largest IPO in over six years, raising A$2b.
Flows were slightly negative on Thursday, however nothing major with outflows in both Taiwan & South Korea below their short-term averages, however there was a large outflow from Indonesian equities more than erasing all inflows from the past week.
South Korea: Recorded outflows of $36m yesterday, with a 5-day total of +$110m. YTD flows remain positive at +$3.91b. The 5-day average is +$22m, better than the 20-day average of -$105m and the 100-day average of -$155m.
Taiwan: Experienced outflows of $177m yesterday, with a 5-day total of -$855m. YTD flows are deeply negative at -$17.12b. The 5-day average is -$171m, worse than the 20-day average of -$112m and the 100-day average of -$188m.
India: Posted inflows of $23m yesterday, with a 5-day total of +$1.34b. YTD flows remain positive at +$1.15b. The 5-day average is +$268m, better than the 20-day average of +$169m but worse than the 100-day average of -$15m.
Indonesia: Recorded outflows of $137m yesterday, with a 5-day total of -$93m. YTD flows remain positive at +$1.45b. The 5-day average is -$19m, better than the 20-day average of -$29m but worse than the 100-day average of +$16m.
Thailand: Saw outflows of $45m yesterday, with a 5-day total of -$229m. YTD flows are negative at -$4.02b. The 5-day average is -$46m, worse than the 20-day average of -$21m and the 100-day average of -$7m.
Malaysia: Experienced outflows of $79m yesterday, with a 5-day total of -$221m. YTD flows are negative at -$665m. The 5-day average is -$44m, comparable to the 20-day average of -$45m but worse than the 100-day average of -$8m.
Philippines: Posted outflows of $7m yesterday, with a 5-day total of -$1m. YTD flows remain negative at -$332m. The 5-day average is $0m, better than the 20-day average of -$8m and the 100-day average of +$1m.
News of potential new Russian sanctions saw oil prices enjoy a three-day rally, but that ended overnight.
The IEA reiterated yesterday that they forecast large surpluses next year, even with OPEC+ confirming no increase to supply.
IEA estimates that on current output levels the oversupply expected could reach 950,000 barrels per day.
Having opened at US$70.43, WTI oscillated around those levels until the IEA statement before dropping to $69.14 only to finish at $70.02 and despite a sell off down to $69.87 in early Asia trading, has rallied back to $70.04.
WTI is set for a strong week thanks to the Russian sanctions news finishing +4.20% higher.
Brent followed a similar trading pattern, having opened at US$73.60, it quickly fell to $72.42 only to close at $73.40 where it has hardly moved all day and is on track to finish +3.30% up for the week.
US Treasury Secretary Janet Yellen said that ‘a softer global oil markets might create an opportunity for further action against Russia’s energy sector,’ whilst Donald Trump’s selection as National Security Advisor Mike Waltz reiterated that a ‘return to maximum pressure on Iran’ is a policy priority (as per BBG).
Canada has indicated that it is examining export taxes on oil to the US as a potential option should President Trump start a full-scale trade war. Export taxes would drive up the cost of oil for US consumption.
Mixed data overnight was enough for gold traders to square positions as year end approaches.
Data overnight saw producer price inflation pick up by more than expected in November, at +0.4% MoM vs 0.3% prior, though core prices moderated as ex-food/energy registered 0.2% (from 0.3% prior} and initial jobless claims were higher than expected at 242k (sa, cons 220k)
Gold opened the day at US$2,680.84 only to trade down post the data release to an intra-day low of $2,675.29, to finish at $2,681.21
The futures market is exhibiting some unusual patterns as traders seek to hedge positions out to February, fearing gold may be caught up in the crossfire of Trump’s tariffs.
February future prices traded up to $60 an ounce above spot prices overnight, as estimates suggest tariffs if implemented on gold, could see prices fall by $300 an ounce.
Following the Central Economic Work Conference in Beijing, state-run Xinhua News is reporting that officials have decided to raise the fiscal deficit in 2025.
Whilst policies announced year to date have had a tilt towards the property sector, the next phase for policy will focus on the consumer.
Consumer confidence has been in decline materially now for three years as a direct result of the decline in property sector.
Additional policy actions are being discussed that will include a focus on a variety of social policies such as increasing pensions and health care.
These meetings are about the tone of policy not execution and often market participants miss that and claim them to be disappointing.
This meeting has only ever delivered broad outcomes, not direct policy and this week was no different.
Over the last week we have seen the tone shift in monetary policy to ‘moderately loose’ from ‘prudent’.
The March legislative sessions is where ministries will present their execution strategies to meet the objectives discussed over the last week.
China’s Economic Work Conference’s vow to raise the fiscal deficit in 2025 just days after the Politburo alters the tone on monetary policy to ‘moderately loose’ has seen China’s bond yields drop lower again today.
The 10YR yield shifted below 1.8% for the first time.
Yet the reality is the bullish sentiment has been in charge of the China government bond market for some time.
Even the spectre of CNY10tn of new issuance was unable to stop the relentless charge lower in yields.
Bonds have seen support not just from monetary policy but from an asset allocation perspective for Chinese investors where the alternative (equities weighed down by the threat of tariffs) or real estate (in its third year of decline) offer sub standard return profiles relative to bonds.
Earlier this week we discussed the merits of China bonds versus Japanese Bonds and suggested the inflection point in the 10-year could be 1.50%.
Today’s move brings that suggestion closer, and it is something to continue to monitor.
USD/CNH has tracked higher in the first part of Friday trade, last just above 7.2825, but we remain within recent ranges. Highs this week rest at 7.2927, while earlier Dec highs were at 7.3148. Dips sub 7.2500 have been supported, with breaks the 20-day EMA support zone proving to be buying opportunities. This support zone currently rests near 7.2540. The RSI (14) is elevated but sub overbought levels, last near 60.0.
Onshore yields are continuing to trend lower. The take away from the CEWG being more monetary stimulus is coming (reinforced by the PBoC's policy stance shift earlier this week).
In turn this has helped push US-CH government bond yield differentials higher. The 10yr spread to fresh record highs, close to +254bps, see the green line on the chart blow.
Such a backdrop, particularly with next week's Fed meeting fully priced for a cut, is likely to be supportive for the USD/CNH backdrop and could reinforce a buy on dips strategy.
Still, the authorities appear to be guarding depreciation risks we approach Trump's inauguration in early 2025. If the USD/CNY fix is held just under 7.2000 between now and then, the maximum spot upside (is just above 7.3400). Hence further yield momentum in the USD's favor may see only a muted CNH response in the near term.
Outside of next week's Fed meeting, there will also be focus on China's monthly activity drop on Monday, which also includes Nov home prices.
Fig 1: USD/CNH & US-CH Government Bond Yield Differentials
Steam came out of India's November inflation report, rising just +5.48%, down from October’s 1-year high of +6.21% and still significantly above the RBI target of 4%. (source: MNI – Market News).
This week saw the announcement of Sanjay Malhotra as the new central bank Governor, succeeding Shaktikanta Das who has completed his term and markets have sought to assess Malhotra’s intentions at a time where a growing divide exists between the views from the government and the views from the central bank when it comes to interest rates. (source: MNI – Market News)
India’s NIFTY has opened up Friday weaker again, down -0.65% and is on track to finish over 1% down for the week.
INR: despite broader USD trends re-asserting, the RBI’s continued support for the INR steady, and is finishing the week at 84.84, down -0.18% today
Bonds:speculation that the new RBI governor has seen 10YR bond yields move lower earlier in the week only to give those gains back and on track to finish flat.
South Korea Support for Yoon Hits Record Low Before Key Vote (source: BBG)
S.Korea Lawmaker Cho’s Successor To Vote on Impeachment: Chosun (source: BBG)
South Korea’s equity benchmark set to recover losses triggered by failed bid to impose martial law. (source: BBG)
South Korea’s KOSPI was up 0.63% today and on track to finish the week almost 3% better, thanks to the injection of funds by authorities.
KRW as broader USD trends add to the political uncertainty the Won was weaker on the week, down -0.70%
Bonds: bond yields have given back some of the move lower in yield since the Political crisis unravelled and the 10YR today at 2.70%, up from Tuesday’s low of 2.64%.
South East Asia currencies are on the backfoot to varying degrees in the first part of Friday trade. Negative spill over is likely form higher USD/CNH and USD/JPY levels. The rebound in real US yields this past week has been a clear headwind for sentiment in the space as well.
This is most evident for USD/IDR, where spot today is closing in on the 16000 level. We haven't been above this figure level since August of this year. BI was on the wires stating it was conducting quite bold intervention to curb rupiah weakness (per BBG). A clean break higher could see 16200 targeted, last seen in early August this year.
The BI meets next week (meeting outcome announced on Wednesday). The economic consensus is for a 25bps cut, although continued FX weakness in the near term could see rates left on hold.
Spot USD/THB has rallied, up around 0.50% to be back above the 34.00 figure level. We are still sub the key EMAs, with the 50-day near 34.15 the closest. Recent lows in the pair rest at 33.66.
USD/PHP is up around 0.30%, last near 58.40/45. This puts this pair back above all key EMAs.
USD/MYR is around 4.4520. The Ringgit has broken through the key technical being the 20-day EMA of 4.4358 with next resistance being the 200-day EMA at 4.4932.
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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)
The USD has stayed on the front foot, although overall moves are modest. The dollar index is up comfortably for the week though. US Tsy yields have been steady. JGBs didn't move with the Q4 Tankan beat, with pricing for next week's BoJ meeting also little changed (and well off late Nov highs in terms of hike odds).
China bond yields continue to track sharply lower, as markets price in more easing risks post the CEWC. Still, China and Hong Kong equities are softer, with property related indices down.
Looking ahead, we have UK data headlined by monthly GDP. French CPI revisions are also due. In the US, only Nov trade prices are on tap.
German finance minster Kukies was interviewed by Die Welt and noted that plans to pass a bill countering inflation-induced tax creep (which initially was to be passed under the now-collapsed traffic light coalition) will not be possible in 2024.
Kukies says this is due to time constraints and the door for passing remains open ahead of the election on 23 February.
However, a passing of any tax creep relief before then appears unlikely after the CDU opposition leader appeared to withdraw support for the measures last weekend.
Additionally, "the decision has been made as to the basis on which the Federal Ministry of Finance will implement the provisional budget for 2025. ‘We will largely base our spending on the government draft for 2025 from the summer,’ said Kukies. However, the government draft only forms the basis for calculation and does not release the government from the decision as to which expenditure may be incurred in accordance with the Basic Law."
Note that the irrespective of when the provisional budget is confirmed, the DFA is expected to announce Germany's issuance plans on Tuesday 17 December.
There is little to mention for Tsys today, ranges have been very narrow volumes are below average, with little on the calendar tonight and fed speakers in blackout period ahead of the FOMC next week. TU is -00¾ at 102-31⅛, TY is -00+ at 110-11+.
Cash tsys have seen a decent steepening move over the week, with the 2s10s very briefly inverting on Dec 6 to trade at 13.152 now. The 2yr yield has risen 8bps over the past week to now trade 4.184%, while the 10yr is trading 16.5bps higher this week at 4.318%.
Michelle Neal, head of the New York Fed's markets group, will resign in March 2025 to join the private sector, marking the latest in a series of high-profile departures since 2022. Neal's exit comes at a critical time as the group handles liquidity withdrawal and monitors financial stability amid the US debt ceiling challenges. Anna Nordstrom will serve as interim head while a successor is sought, making Neal the third markets head to depart in under six years.
JGB futures have stayed within recent ranges in the first part of Friday trade. JBH5 (March 2025) was last 142.53, +.08 versus settlement levels. Earlier highs were at 142.62.
The Q4 Tankan survey came in mostly better than expected and points to a resilient growth/capex outlook. Inflation expectations were also solid.
Still, it wasn't robust enough to shift market expectations around next week's BoJ meeting. Market pricing is only giving close to a 16% chance of a hike next week. We were consistently above 60% in parts of late Nov.
The bias in JGB yields has been to edge lower, more so for short tenors, with swap rates behaving in a similar fashion. Japan bonds have outperformed the recent sell-off in US Tsy bond markets.
The 10yr JGB yield was last under 1.05%, slightly up from session lows. Yields have been slightly firmer in the 20-40yr tenor space.
Next week's main focus will rest on Thursday's BoJ meeting.
Japan's Q4 Tankan survey was mostly above market forecasts. The large manufacturing index at 14, versus 13 forecast (which was also the prior outcome). The outlook was at 13, versus 12 forecast and 14 prior. For large non-manufacturers we were at 33 and the outlook at 28, both in line with consensus. All industry capex was 11.3%, versus 10% forecast and 10.6% prior.
For smaller firms, we were better than expected. On the manufacturing side, we edged up to 1 (versus a -1 forecast), while the outlook was flat versus a -1 forecast. For non-manufacturing we rose to 16 from 14 prior and 12 forecast. This was the highest read since the early 1990s. The outlook was 8, against an 11 forecast for these firms.
Broadly the improvement or elevated nature of conditions for larger firms suggests a supportive GDP growth. The chart below plots the current index levels for large firms (manufacturers in white, non in green) against y/y GDP growth.
Fig 1: Tankan Large Firm Index Levels Versus Japan Real GDP Y/Y
Source: MNI - Market News/Bloomberg
The second chart is the Tankan capex reading against Japan capex in y/y terms. Again the Tankan result is presenting a solid outlook base.
The reading for smaller firms is also likely to please the authorities/encourage the BOJ around the resiliency of the growth backdrop.
Still, the results in aggregate, may not be enough to prompt a shift at the Dec meeting, with the policy outcome announced next Thursday. Recent media highlights have suggested the BoJ sees little risk in waiting until 2025 for further policy adjustments.
Aussie bonds are largely tracking moves made overnight in US tsys, with the majority of the curve now trading about 15-20bps cheaper over the past two sessions. There was nothing on the local data calendar today, however the RBA's Sarah Hunter did speak.
RBA Assistant Governor Sarah Hunter highlighted the central bank's focus on labor market and inflation trends, indicating policy adjustments might be needed if the unemployment rate and core inflation deviate from expectations. Despite Governor Michele Bullock's recent dovish tone, a surprising drop in unemployment to 3.9% complicates the outlook, with rates potentially staying at 4.35% for longer. Markets are now split, with swaps pricing the first rate cut in May, while currency traders anticipate an earlier easing.
ACGBs yields are off early morning highs, however are still trading 2.5bps to 5bps cheaper over the session. The 2yr is +2.8bps at 3.907%, after hitting lows of 3.76% post RBA on Tuesday, while the 10yr is +4.1bps at 4.302% vs weekly lows of 4.138%.
ACGB futures are currently YM -2.6 & XM -4.2
Swap curves have twist-flattened and are trading -8 to -1bps, with the short-end underperforming.
Bills strip is trading -2 to -7
RBA-date OIS pricing is steady today, however has cooled slightly over the week with Feb now pricing 12bps of cuts, from 14bps on Monday. There was 27bps of cuts priced in for the April meeting at the start of the week, and we last trade at 23bps of cuts, with the first full cut now price in for May, while the market has just 70bps of cuts priced out through to November 2025.
Next week there is little on the calendar as we head into Christmas, with just Westpac Consumer Confidence of note.
NZGBs continued the bear-steepening moves throughout the session, with yields closing 2bps to 3.5bps cheaper. New Zealand Finance Minister spoke to Bloomberg earlier, otherwise it has been a slow session, with yields largely tracking moves in us tsys overnight.
Fitch Ratings expects NZ councils' operating performance to improve over the medium term due to stable funding from property rates and effective budget balancing rules. However, rising infrastructure spending will lead to higher debt levels, with debt growth outpacing operating balance growth in the near term. Debt metrics are projected to stabilize by fiscal 2028 as rate increases rebalance finances.
NZ's FinMin spoke to BBG earlier, where she has instructed diplomats to advocate for exemption from potential US tariffs under President-elect Donald Trump, emphasizing the balanced and valuable trade relationship between the two countries. While New Zealand exports NZ$15.8b annually to the US, including beef, wine, and dairy, Willis is optimistic that tariffs will not target New Zealand given its strong partnership with the US.
The 2yr yield jumped earlier, on what seems like very little news it last trades +2.2bps at 3.733% at session highs although it still remains the best performing tenor over the past week. Elsewhere across the curve the 5yr is outperforming today's moves trading +1.7bps at 3.90% while the 10yr is +3.4bps at 4.406%, with the 5s10s +0.7bps at 47.20 just off recent highs of 49.00.
The OIS market has 43bps of cuts priced in for the Feb meeting this has held steady most of the week. There is a cumulative 107bps of cuts priced in through to October 2025.
Next week the NZ Treasury will release Half-Year Economic & Fiscal Update, followed by GDP on Thursday.
A positive USD bias has persisted for much of Asia Pac Friday trade to date, although aggregate moves aren't large at this stage. The USD BBDXY index is up a little, last above 1289.40. The index is tracking comfortably higher for the week and is now back to late Nov levels.
USD/JPY saw an initial move lower, printing 152.46 not long after the stronger Q4 Tankan printed. However, this was short lived, and we have since tested above 153.00.
The Q4 Tankan result, pointing to resilient economic activity/capex, along with solid inflation expectations, is not seen as shifting the near term BoJ outlook (next policy outcome announced Thursday Dec 19). Market pricing of a shift next week is just under 16% at this stage, we were above 60% in late November.
US-JP yield differentials continue to trend in favor of the USD. The next firm short-term resistance is at 153.66, a Fibonacci retracement.
AUD and NZD have also fallen, although losses are only close to 0.10% at this stage. We were weaker as China and Hong Kong markets opened weaker, amid disappointment from the CEWG (around no new stimulus details) but we sit slightly above these lows now. AUD/USD was last 0.6360/65, NZD around 0.5760/65.
US yields sit close to flat, while US equity futures are in the green, but away from best levels. Regional softness led by China/HK a likely weight.
EUR/USD is tracking lower, last under 1.0460.
Looking ahead, we have UK data headlined by monthly GDP. French CPI revisions are also due. In the US, only Nov trade prices are on tap.
Chinese equities are under pressure today as investors reacted cautiously to the government's signal of increased public borrowing and a higher fiscal deficit target for 2025 to bolster consumption. While the Central Economic Work Conference highlighted support for consumption, markets remained wary due to a lack of concrete measures. The CSI 300’s performance remains crucial heading into the weekend, with any disappointment potentially setting a negative tone through year-end.
Property Stocks have continued to sell-off through the mornings sessions after China's Central Economic Work Conference disappointed investors with a lack of concrete measures to address key economic challenges, including the property market slump. While the government emphasized fiscal spending to boost consumption and stabilize urban village renovation, no actionable strategies were outlined.
Hong Kong equities are lower across the board, with property indices the worst performing, Mainland Property Index is down 3.88%, the HS Property Index is 3% lower, while the wider HSI is down 1.65%.
Similar in China mainland equities with the BBG China Property Index falling 4.45%, while the CSI 300 is 1.80%, while similar across the wider Asian region today small-cap are outperforming large cap stocks with the CSI 2000 trading down just 0.75%.
Asian markets have retreated so far today, as risk sentiment weakened ahead of the Fed's meeting next week. Japanese and Australian equities fell, and Hong Kong futures signaled further declines following Wall Street’s overnight losses. Chinese markets focused on the government’s pledge to increase fiscal borrowing in 2025 to support consumption, though the lack of detailed measures limited optimism. South Korean stocks were flat, Meanwhile, the stronger USD and rising Treasury yields continued to weigh on Asian currencies, with concerns over limited room for further rate cuts in China adding to cautious sentiment.
Japanese equities are lower with the Nikkei 225 falling 0.7% and the Topix down 0.8%, as investors took profits following the index's climb past the 40,000 mark on Thursday. Weakness in U.S. markets weighed on electronics and precision equipment makers, while analysts noted that high valuations may temper further gains. Despite record share buybacks this year, investors are increasingly demanding more sustainable growth strategies, such as capital expenditure and M&A, to justify valuations.
South Korea equities are also slightly lower, with tech stocks dragging on the index, Samsung is trading 0.36% lower, while SK Hynix is down 1%, the KOSPI is 0.25% lower while small-cap stocks are trading higher with the KOSDAQ up 0.70%. Similar story in Taiwan with the TAIEX down 0.40%, flows in the region have been negative week on week.
Australian's ASX 200 has dropped 0.7%, led by declines in mining and financial stocks. Gold mining stocks also retreated as bullion prices slid 1.4% amid a selloff triggered by the economic uncertainty. Meanwhile, DigiCo Infrastructure REIT debuted on the Sydney exchange following Australia’s largest IPO in over six years, raising A$2b.
Flows were slightly negative on Thursday, however nothing major with outflows in both Taiwan & South Korea below their short-term averages, however there was a large outflow from Indonesian equities more than erasing all inflows from the past week.
South Korea: Recorded outflows of $36m yesterday, with a 5-day total of +$110m. YTD flows remain positive at +$3.91b. The 5-day average is +$22m, better than the 20-day average of -$105m and the 100-day average of -$155m.
Taiwan: Experienced outflows of $177m yesterday, with a 5-day total of -$855m. YTD flows are deeply negative at -$17.12b. The 5-day average is -$171m, worse than the 20-day average of -$112m and the 100-day average of -$188m.
India: Posted inflows of $23m yesterday, with a 5-day total of +$1.34b. YTD flows remain positive at +$1.15b. The 5-day average is +$268m, better than the 20-day average of +$169m but worse than the 100-day average of -$15m.
Indonesia: Recorded outflows of $137m yesterday, with a 5-day total of -$93m. YTD flows remain positive at +$1.45b. The 5-day average is -$19m, better than the 20-day average of -$29m but worse than the 100-day average of +$16m.
Thailand: Saw outflows of $45m yesterday, with a 5-day total of -$229m. YTD flows are negative at -$4.02b. The 5-day average is -$46m, worse than the 20-day average of -$21m and the 100-day average of -$7m.
Malaysia: Experienced outflows of $79m yesterday, with a 5-day total of -$221m. YTD flows are negative at -$665m. The 5-day average is -$44m, comparable to the 20-day average of -$45m but worse than the 100-day average of -$8m.
Philippines: Posted outflows of $7m yesterday, with a 5-day total of -$1m. YTD flows remain negative at -$332m. The 5-day average is $0m, better than the 20-day average of -$8m and the 100-day average of +$1m.
News of potential new Russian sanctions saw oil prices enjoy a three-day rally, but that ended overnight.
The IEA reiterated yesterday that they forecast large surpluses next year, even with OPEC+ confirming no increase to supply.
IEA estimates that on current output levels the oversupply expected could reach 950,000 barrels per day.
Having opened at US$70.43, WTI oscillated around those levels until the IEA statement before dropping to $69.14 only to finish at $70.02 and despite a sell off down to $69.87 in early Asia trading, has rallied back to $70.04.
WTI is set for a strong week thanks to the Russian sanctions news finishing +4.20% higher.
Brent followed a similar trading pattern, having opened at US$73.60, it quickly fell to $72.42 only to close at $73.40 where it has hardly moved all day and is on track to finish +3.30% up for the week.
US Treasury Secretary Janet Yellen said that ‘a softer global oil markets might create an opportunity for further action against Russia’s energy sector,’ whilst Donald Trump’s selection as National Security Advisor Mike Waltz reiterated that a ‘return to maximum pressure on Iran’ is a policy priority (as per BBG).
Canada has indicated that it is examining export taxes on oil to the US as a potential option should President Trump start a full-scale trade war. Export taxes would drive up the cost of oil for US consumption.
Mixed data overnight was enough for gold traders to square positions as year end approaches.
Data overnight saw producer price inflation pick up by more than expected in November, at +0.4% MoM vs 0.3% prior, though core prices moderated as ex-food/energy registered 0.2% (from 0.3% prior} and initial jobless claims were higher than expected at 242k (sa, cons 220k)
Gold opened the day at US$2,680.84 only to trade down post the data release to an intra-day low of $2,675.29, to finish at $2,681.21
The futures market is exhibiting some unusual patterns as traders seek to hedge positions out to February, fearing gold may be caught up in the crossfire of Trump’s tariffs.
February future prices traded up to $60 an ounce above spot prices overnight, as estimates suggest tariffs if implemented on gold, could see prices fall by $300 an ounce.
Following the Central Economic Work Conference in Beijing, state-run Xinhua News is reporting that officials have decided to raise the fiscal deficit in 2025.
Whilst policies announced year to date have had a tilt towards the property sector, the next phase for policy will focus on the consumer.
Consumer confidence has been in decline materially now for three years as a direct result of the decline in property sector.
Additional policy actions are being discussed that will include a focus on a variety of social policies such as increasing pensions and health care.
These meetings are about the tone of policy not execution and often market participants miss that and claim them to be disappointing.
This meeting has only ever delivered broad outcomes, not direct policy and this week was no different.
Over the last week we have seen the tone shift in monetary policy to ‘moderately loose’ from ‘prudent’.
The March legislative sessions is where ministries will present their execution strategies to meet the objectives discussed over the last week.
China’s Economic Work Conference’s vow to raise the fiscal deficit in 2025 just days after the Politburo alters the tone on monetary policy to ‘moderately loose’ has seen China’s bond yields drop lower again today.
The 10YR yield shifted below 1.8% for the first time.
Yet the reality is the bullish sentiment has been in charge of the China government bond market for some time.
Even the spectre of CNY10tn of new issuance was unable to stop the relentless charge lower in yields.
Bonds have seen support not just from monetary policy but from an asset allocation perspective for Chinese investors where the alternative (equities weighed down by the threat of tariffs) or real estate (in its third year of decline) offer sub standard return profiles relative to bonds.
Earlier this week we discussed the merits of China bonds versus Japanese Bonds and suggested the inflection point in the 10-year could be 1.50%.
Today’s move brings that suggestion closer, and it is something to continue to monitor.
USD/CNH has tracked higher in the first part of Friday trade, last just above 7.2825, but we remain within recent ranges. Highs this week rest at 7.2927, while earlier Dec highs were at 7.3148. Dips sub 7.2500 have been supported, with breaks the 20-day EMA support zone proving to be buying opportunities. This support zone currently rests near 7.2540. The RSI (14) is elevated but sub overbought levels, last near 60.0.
Onshore yields are continuing to trend lower. The take away from the CEWG being more monetary stimulus is coming (reinforced by the PBoC's policy stance shift earlier this week).
In turn this has helped push US-CH government bond yield differentials higher. The 10yr spread to fresh record highs, close to +254bps, see the green line on the chart blow.
Such a backdrop, particularly with next week's Fed meeting fully priced for a cut, is likely to be supportive for the USD/CNH backdrop and could reinforce a buy on dips strategy.
Still, the authorities appear to be guarding depreciation risks we approach Trump's inauguration in early 2025. If the USD/CNY fix is held just under 7.2000 between now and then, the maximum spot upside (is just above 7.3400). Hence further yield momentum in the USD's favor may see only a muted CNH response in the near term.
Outside of next week's Fed meeting, there will also be focus on China's monthly activity drop on Monday, which also includes Nov home prices.
Fig 1: USD/CNH & US-CH Government Bond Yield Differentials
Steam came out of India's November inflation report, rising just +5.48%, down from October’s 1-year high of +6.21% and still significantly above the RBI target of 4%. (source: MNI – Market News).
This week saw the announcement of Sanjay Malhotra as the new central bank Governor, succeeding Shaktikanta Das who has completed his term and markets have sought to assess Malhotra’s intentions at a time where a growing divide exists between the views from the government and the views from the central bank when it comes to interest rates. (source: MNI – Market News)
India’s NIFTY has opened up Friday weaker again, down -0.65% and is on track to finish over 1% down for the week.
INR: despite broader USD trends re-asserting, the RBI’s continued support for the INR steady, and is finishing the week at 84.84, down -0.18% today
Bonds:speculation that the new RBI governor has seen 10YR bond yields move lower earlier in the week only to give those gains back and on track to finish flat.
South Korea Support for Yoon Hits Record Low Before Key Vote (source: BBG)
S.Korea Lawmaker Cho’s Successor To Vote on Impeachment: Chosun (source: BBG)
South Korea’s equity benchmark set to recover losses triggered by failed bid to impose martial law. (source: BBG)
South Korea’s KOSPI was up 0.63% today and on track to finish the week almost 3% better, thanks to the injection of funds by authorities.
KRW as broader USD trends add to the political uncertainty the Won was weaker on the week, down -0.70%
Bonds: bond yields have given back some of the move lower in yield since the Political crisis unravelled and the 10YR today at 2.70%, up from Tuesday’s low of 2.64%.
South East Asia currencies are on the backfoot to varying degrees in the first part of Friday trade. Negative spill over is likely form higher USD/CNH and USD/JPY levels. The rebound in real US yields this past week has been a clear headwind for sentiment in the space as well.
This is most evident for USD/IDR, where spot today is closing in on the 16000 level. We haven't been above this figure level since August of this year. BI was on the wires stating it was conducting quite bold intervention to curb rupiah weakness (per BBG). A clean break higher could see 16200 targeted, last seen in early August this year.
The BI meets next week (meeting outcome announced on Wednesday). The economic consensus is for a 25bps cut, although continued FX weakness in the near term could see rates left on hold.
Spot USD/THB has rallied, up around 0.50% to be back above the 34.00 figure level. We are still sub the key EMAs, with the 50-day near 34.15 the closest. Recent lows in the pair rest at 33.66.
USD/PHP is up around 0.30%, last near 58.40/45. This puts this pair back above all key EMAs.
USD/MYR is around 4.4520. The Ringgit has broken through the key technical being the 20-day EMA of 4.4358 with next resistance being the 200-day EMA at 4.4932.
UP TODAY (TIMES GMT/LOCAL)
Date
GMT/Local
Impact
Country
Event
13/12/2024
0700/0800
**
SE
Unemployment
13/12/2024
0700/0700
**
GB
UK Monthly GDP
13/12/2024
0700/0700
**
GB
Index of Services
13/12/2024
0700/0700
***
GB
Index of Production
13/12/2024
0700/0700
**
GB
Output in the Construction Industry
13/12/2024
0700/0700
**
GB
Trade Balance
13/12/2024
0700/0800
**
DE
Trade Balance
13/12/2024
0745/0845
***
FR
HICP (f)
13/12/2024
0800/0900
***
ES
HICP (f)
13/12/2024
0930/0930
**
GB
Bank of England/Ipsos Inflation Attitudes Survey
13/12/2024
1000/1100
**
EU
Industrial Production
13/12/2024
-
***
CN
Money Supply
13/12/2024
-
***
CN
New Loans
13/12/2024
-
***
CN
Social Financing
13/12/2024
1330/0830
**
US
Import/Export Price Index
13/12/2024
1330/0830
**
CA
Monthly Survey of Manufacturing
13/12/2024
1330/0830
**
CA
Wholesale Trade
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