MNI EUROPEAN MARKETS ANALYSIS: Fed Sentiment Dominates, EU Central Banks Up Next

US TSYS: The Massive Post-FOMC Rally Extends Into Asia-Pac Dealings

TYH4 is trading at 112-10+, +0-14 from NY closing levels.

• Cash tsys are 2-6bps richer, with the curve steeper, in today’s Asia-Pac session as local participants digest the clearest signal yet that the Fed has finished its aggressive monetary-tightening campaign, by forecasting a series of rate cuts next year.
• The yield on 10-year has fallen below 4% for the first time since August.

STIR: $-Bloc Prices An Aggressive Easing In 2024 After A Dovish Hold From The Fed

STIR markets within the $-bloc are set for a pronounced easing cycle in 2024, propelled by the dovish stance maintained by the Fed in yesterday's decision. The US, Canada, and NZ are all indicating expectations for at least a 100bp reduction in policy rates.

• In the press conference, Chair Powell delivered little to no pushback to market expectations of significant rate cuts next year, and in fact, ensured that future easing was the main topic of the day. Whereas in previous press conferences, he has dismissed questions about rate cut speculation out of hand, he entertained several of them today.
• His commentary and tone seemed at odds with his final speech before the FOMC blackout: "It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when the policy might ease."
• The Dot Plot pointed to a 2024 median of 75bp of rate cuts, a sharper pace than indicated in September’s projections, with reductions expected by 17 of 19 members.
• Nov’24 expectations and the cumulative easing across the $-bloc stand at: 3.89%, -145bps (FOMC); 3.78%, -122bps (BOC); 3.79%, -53bps (RBA); and 4.50%, -100bps (RBNZ).

JGBS: Bull-Flattening Unwound After Poor 20Y Auction

JGB futures are +15 position compared to settlement levels in afternoon dealings, having scaled back their post-FOMC gains after a disappointing 20-year auction. The outcome revealed a low-price print that fell short of dealer expectations, a reduced cover ratio compared to last month’s auction, and a considerably extended tail.

• There hasn’t been much in the way of domestic data drivers to flag, outside of the previously outlined weekly international investment flows and core machine orders. The recently released final read of IP for October showed +1.3% y/y versus 1.0% prior.
• The pronounced decline in JGB performance during the afternoon session occurred despite the extension of yesterday’s post-FOMC rally in cash US tsys into today’s Asia-Pac session. At the time of writing, cash tsys were dealing off session highs but 3-5bps richer, with the curve steeper. Local participants are likely digesting the clearest signal yet that the Fed has finished its aggressive monetary-tightening campaign, by forecasting a series of rate cuts next year. The yield on 10-year has fallen below 4% for the first time since August.
• Cash JGBs are dealing mixed, with yield movements bounded by +/-2bps. The benchmark 10-year yield is 0.8bp lower at 0.686%. The 20-year is 0.2bp lower on the day but 7bps above the session’s low.
• Tomorrow, the local calendar sees Flash Jibun Bank Japan PMI and Tertiary Industry Index data.

AUSSIE BONDS: Holding The Post-FOMC Rally Despite Jobs Data Beat

ACGBs (YM +22.0 & XM +18.2) remain sharply richer but little changed after a comfortable headline job beat of +61.5k versus +11.5k forecast. Most of the jobs created were full-time as well. The u/e rate ticked up to 3.9%, (3.8% forecast) but this reflected a bounce in the participation rate to 67.2% (66.9% forecast).

• Meanwhile, Melbourne Institute consumer inflation expectations eased to 4.5% in December from 4.9%, the lowest since January 2022.
• Cash US tsys are dealing 3-8bps richer in today's Asia-Pac session after yesterday's strong post-FOMC rally. Local participants are likely digesting the clearest signal yet that the Fed has finished its aggressive monetary-tightening campaign, by forecasting a series of rate cuts next year.
• Cash ACGBs are 18-21bps richer, with the AU-US 10-year yield differential 4bps wider at 13bps.
• Swap rates are 18-21bps lower, with the 3s10s curve steeper.
• The bills strip has bull-flattened, with pricing +12 to +28.
• RBA-dated OIS pricing is 9-29bps softer on the day across meetings beyond Feb’24. There has been little net movement since the data release. 63bps of easing is priced by Feb’25.
• Tomorrow, the local calendar sees Flash Judo Bank PMI data.
• ICYMI, based on MYEFO forecasts, the issuance of Treasury Bonds has been reduced to around A$50bn ($23.6bn has been completed): AOFM.

AUSTRALIAN DATA: Economy Almost Able To Keep Up With Labour Force Growth

November employment growth was significantly stronger than expected and above the highest forecasts. There were 61.5k new jobs up from October’s downwardly revised 42.7k. While the unemployment rate is gradually shifting higher, the economy is still strong enough to create job growth of 3.2% y/y, where it has been on average since June, despite 425bp of tightening and a slowing economy. This data keeps the February 6 RBA decision “live”.

• The labour market remains tight but continued to ease in November with metrics the RBA looks at all deteriorating on the month.
• The labour market again was able to absorb most of the 0.5% m/m increase in the labour force but not all of it and so the unemployment rate ticked up 0.1pp to 3.86%. October was revised up to 3.75% and so a rounded 3.8%. It remains very low but is now 0.4pp higher than a year ago.
• The participation rate rose to a new record high of 67.2%. Labour force growth is currently exceeding job growth by around 0.5pp, which if maintained suggests further rises in the unemployment rate going forward.

• Full-time employment (FT) outpaced part-time (PT) in November at +57k versus +4.5k but the 6-month averages show that there has been a shift towards PT (PT +26.7k vs FT +8.6k) given the slower economy and uncertain outlook. Hours worked also reflect this trend – they were flat in November to be down 1.5% 3m-annualised.

Source: MNI - Market News/ABS

AUSTRALIAN DATA: Labour Metrics Continue Gradual Easing

The RBA has pointed to a number of labour market variables that it is monitoring in particular. They eased in November signalling that the labour market is still gradually easing but the levels suggest it remains tight. The key to the February 6 decision is the January 31 Q4 CPI but today’s November jobs data have left a rate hike on the table at that meeting.

• The unemployment rate rose 0.1pp in November to 3.9% to be 0.4pp higher compared with a year ago. It is now at its highest in a year and a half but has been driven by an increase in labour supply rather than fewer jobs. The RBA sees the youth unemployment rate as an early signal and it rose a further 0.4pp to 9.6% to be up 2pp y/y to highest since the Covid-impacted November 2021.

Source: MNI - Market News/ABS

• The underemployment rate is a bit volatile but it rose +0.2pp to 6.5% to be up 0.7pp y/y. The 3-month average was stable at 6.4% though where it has been since July.
• Vacancies-to-unemployment continues to fall. In November the ratio eased to 45.4% from 47% and down over 10pp on a year ago. It does remain above its historical average of 33% though, signalling that the labour market remains tight.

Source: MNI - Market News/Refinitiv/ABS

AUSTRALIAN DATA: Expectations Ease And Signal Further Inflation Moderation In Q4

Melbourne Institute consumer inflation expectations eased to 4.5% in December from 4.9%, the lowest since January 2022. The result is not surprising given the almost 8% drop in national petrol prices since mid-November, the larger than expected moderation in the October CPI (which received a lot of press coverage), and the RBA on hold at the start of December. While inflation was the main concern of households in the latest Westpac survey, the RBA will be pleased to see expectations continuing to trend lower. Q4 CPI on January 31 will be key to the February meeting outcome, and the MI data suggests it should moderate further.

Australia quarterly CPI y/y% vs MI consumer inflation expectations

Source: MNI - Market News/Refinitiv

NZGBS: FOMC Decision & GDP Miss Sparks A Ferocious Rally

NZGBs closed 22-29bps richer across benchmarks, with the 5-year leading, after Q3 GDP surprised on the downside printing -0.3% q/q (-0.6% y/y) versus expectations of +0.2% (+0.5%). Q2 was revised down 0.4pp to 0.5% q/q and 0.3pp to 1.5% y/y.

• The expenditure measure of GDP was weak falling 0.7% q/q but this was after a strong +0.9%. All of the main components fell with private consumption down 0.6% q/q, government spending -1.8%, GFCF -3.4% and the net export contribution -0.5pp.
• While the RBNZ predicted +0.3% q/q in its November update, it did have -0.3% in August. This outcome is likely to mean that the risk of another hike, which the RBNZ threatened at its last meeting, is highly unlikely as demand is moving more in line with supply.
• NZGBs were 13-20bps richer in post-GDP dealings.
• Swap rates closed 21-29bps lower, with the 2s10s curve steeper.
• RBNZ dated OIS pricing shunted 6-40bps softer across meetings, with Nov’24 leading. The market now prices 103bps of easing by Nov’24.
• Tomorrow, the local calendar sees BusinessNZ Manufacturing PMI.

NEW ZEALAND DATA: Weak Growth To Keep RBNZ On Hold

Q3 GDP came in significantly lower than analyst and RBNZ projections shrinking 0.3% q/q and -0.6% y/y. Q2 was revised down 0.4pp to 0.5% q/q and 0.3pp to 1.5% y/y. While the RBNZ predicted +0.3% q/q in its November update, it did have -0.3% in August. This outcome is likely to mean that the risk of another hike, which the RBNZ threatened at its last meeting, is highly unlikely as demand is moving more in line with supply.

• The expenditure measure of GDP was weak falling 0.7% q/q but this was after a strong +0.9%. All of the main components fell with private consumption down 0.6% q/q, government spending -1.8%, GFCF -3.4% and the net export contribution -0.5pp. Residential capex fell 1.1% q/q and -6.3% y/y and so is yet to rebound given increased demand from strong migration, which the RBNZ was concerned about. Consumption is up only 0.3% on a year ago while investment is down 4.6%.

Source: MNI - Market News/Refinitiv

• Underlying consumption was probably stronger than the numbers implied as Q3’s weakness was due to durables particularly motor vehicles. Stats NZ notes that changes to fees and rebates on July 1 brought vehicle spending forward into Q2. This factor also weighed on transport investment.

Source: MNI - Market News/Refinitiv

• Inventories posted a large 2.7pp contribution to growth, but it is prone to large swings.
• Goods exports fell 4.1% q/q, due to lower food, fuel and agriculture, but services rose 8.8% because of the tourism recovery. Total imports fell 0.3% q/q to be up only 0.5% y/y, signalling soft domestic demand.
• Manufacturing drove the weakness in the production measure of GDP and softer goods exports weighed on the transport sector. Services were a bright spot with 8 of the 11 industries posting increases.
• There were changes to benchmarking and methodology in this release which resulted in backward revisions and were going to make this quarter difficult to forecast.

FOREX: Post FOMC Dollar Losses Extend In Asia Pac Trade

The BBDXY is off a further 0.35% in Thursday Asia Pac trade, as continuing US yield losses weigh on dollar sentiment. The index got to a low of 1225.35, fresh lows back to the first half of August, but we sit slightly higher now, just near 1227.

• Following Wednesday's US yield plunge post the FOMC, weakness has extended in Asia Pac trade, with a further -2.5 to -6.5bps in yield losses, against dominated by the front end.
• USD/JPY got sub 141.00 (lows 140.97) fresh lows back to end July before stabilizing. The pair last near 141.60, still 0.90% stronger in yen terms.
• NZD/USD is up by around the same amount, largely shrugging off a much weaker than expected Q3 GDP print. From 0.6170 we got close to 0.6250 (last near 0.6230/35).
• The A$ was buoyed by stronger jobs data. AUD/USD got near 0.6730, but we now sit back at 0.6710/15, still above the technical bull trigger (near 0.6690).
• EUR/USD is back above 1.0900, while GBP has lagged somewhat, last near 1.2640.
• Looking ahead, the BoE and ECB meet and both are expected to leave rates unchanged. The SNB and Norges Bank also meet. Later, there US November retail sales will be watched closely. There are US jobless claims and trade prices.

JAPAN DATA: Local Investors Dump Offshore Bonds

Japan weekly investment flows saw offshore investors retreat once again from local equities. There was -¥990.6bn in fresh outflows. This was the 2nd consecutive week of outflows after last week ended a 9 week run of inflows. Offshore investors returned to buying local bonds (+¥621.6bn), although this wasn't enough to offset last week's outflow. Since the start of Nov though, net inflows into this space have been positive.

• In terms of Japan outbound flows, local investors were heavy net sellers of offshore bonds (-¥1080bn). This was the largest weekly outflow since Oct last year.
• Local investors also sold offshore equities for the 3rd straight week (-¥500.8bn).

Fig 1: Japan Weekly Investment Flows

Source: MNI - Market News/Bloomberg

EQUITIES: Broad Based Gains (Ex Japan), China Markets Lagging

Asia Pac equities are mostly higher, although Japan weakness is a notable exception, while China markets have generally lagged firmer gains elsewhere. US futures have tracked higher, posting solid further gains. We sit down a touch below session highs, with Eminis last near 4779, +0.38%, while Nasdaq futures are around 0.54% higher.

• A further pull back in US yields (rough -3-7bps lower across the curve) has weighed on the USD and boosted broader risk appetite, aiding equity markets in the region, as the market focuses in on potential Fed cuts next year.
• Japan markets are clear outliers though. The Topix off 1.65% at this stage, the Nikkei 225 down nearly 1%. Export names have struggled amidst a firmer yen backdrop. USD/JPY falling sub 141.00 at one stage before stabilizing.
• China markets have also struggled to post strong gains. At the break the CSI 300 is up 0.25%, but still comfortably sub 3400 in index terms. Earlier gains were as much as 0.9%. An ex Development Bank Vice President was arrested on bribery charges (BBG). Yesterday's weaker than expected aggregate financing data may be another headwind.
• Hong Kong markets are faring better, the HSI up 1.1% at the break.
• The Kospi has rallied 1.3%, while the Taiex is up 0.8%. The ASX 200 is up over 1.5%.
• In SEA, the pick of the markets is the Philippines, up over 2%. Indonesia and Thailand markets have also post +1% gains.

OIL: Prices Hold Onto Wednesday’s Gains, IEA Monthly Report Coming Up

While oil prices are up moderately on the day after rising almost 2% on Wednesday, they are off their early session highs despite a dovish Fed and continued dollar weakness (USD index -0.4%). Brent is up 0.4% to $74.56/bbl but down from the intraday high of $74.95. WTI is 0.3% higher at $69.69/bbl but it rose to just above $70 early in trading.

• Pessimism re the demand outlook, scepticism that OPEC members will comply with their new quotas and expected robust supply growth, especially from non-OPEC producers, aren’t far from the market’s mind and the move off today’s highs demonstrates that. But there may be a floor under the market if US inventories stay low.
• The IEA monthly report is published later today and it will be interesting to compare its demand projections with the more optimistic OPEC ones released yesterday. OPEC still expects a deficit in Q1 2024, while other indicators point to a surplus due to robust supply flows.
• Later the BoE and ECB meet and both are expected to leave rates unchanged. Also US November retail sales will be watched closely. There are US jobless claims and trade prices.

GOLD: Strong Post-FOMC Rally

Gold is 0.1% higher in the Asia-Pac session, after closing 2.4% higher at $2027.74 on Wednesday.

• Yesterday’s move came after the Federal Reserve gave the clearest signal yet that it had finished its aggressive monetary-tightening campaign, by forecasting a series of rate cuts next year. The Dot Plot pointed to a 2024 median of 75bp of rate cuts, a sharper pace than indicated in September’s projections, with reductions expected by 17 of 19 members.
• While the Fed held the funds rate steady, as expected, Fed Chair Powell delivered little to no pushback to market expectations of significant rate cuts next year.
• His commentary and tone seemed at odds with his final speech before the FOMC blackout: "It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease."
• Bullion’s rally on Wednesday unwound the slide seen since US payrolls on Friday. It also punched through resistance at $2003.9 (20-day EMA) to open $2041.3 (Dec 5 high), according to MNI’s technicals team.

ASIA FX: USD/Asia Pairs Lower, But CNH & KRW Can't Extend Wednesday Gains

Most USD/Asia pairs are down strongly, albeit away from earlier lows. CNH and the KRW 1 month NDF have struggled for further gains against the USD though. PHP has also lagged, while THB has been the strongest performer in spot terms. Regional equities are mostly higher, although China markets are lagging. Still to come today is the Philippines and Taiwan central bank decisions. Both are expected to remain on hold. Tomorrow, the main focus will be China's 1yr MLF decision and Nov activity prints.

• USD/CNH dipped below 7.1300 in early trade, as broader USD sentiment remained on the backfoot post FOMC. However, post the CNY fixing, which was within recent ranges, sentiment stabilized. The pair was last near 7.1440, so +0.10% above end Wednesday levels in NY. Local equities have struggled to post strong gains, which is also been a headwind for the local FX.
• 1 month USD/KRW wasn't able to break sub 1290 in earlier trade, and we now sit back near 1295, around 0.15% above NY closing levels. The authorities stated they will watch financial market volatility in the aftermath of the Fed. Local equities are higher, +1.2% for the Kospi.
• USD/SGD got back to late Nov lows, but couldn't get sub 1.3280. We last tracked near 1.3300. The pair is the only major SEA currency to be back close to late Nov lows. In the past week it is the third best performer in the Asia FX space behind KRW and THB.
• USD/THB threatened to break sub 35.00 in early trade, but found some support around 35.05/06, which also coincides with the simply 200-day MA. Onshore equities are +1.2% higher, but this follows a period of underperformance, where markets dropped more than 20% from recent highs.
• USD/PHP tracks at 55.76 in recent dealings, around 0.55% stronger for the session in PHP terms. This is lagging other SEA FX pairs, but the PHP NEER was at fresh highs recently, so this may reflect some pay back. The upcoming BSP meeting later should deliver no change.