MNI EUROPEAN MARKETS ANALYSIS: JGBs Pressured Post-BOJ

US TSYS: Curve Steeper, See-Saws On BOJ

TYU3 deals at 1110-30+, -0-02, a 0-17 range has been observed on volume of ~293k

• Cash tsys sit 2bps richer to 2bps cheaper, the curve has twist steepened pivoting on 5s.
• Tsys have see-sawed in recent dealing as JGBs provide the lead in Asia. Tsys initially firmed alongside JGBs in the aftermath of the BOJs rate decision, as they adjusted YCC, before falling sharply from session highs. Losses have been marginally pared in recent dealing.
• Earlier in the session participants faded yesterday's cheapening perhaps using the opportunity to close out short positions.
• Flow wise a block seller in FV, 5,655 lots, was the highlight.
• In Europe today regional German CPI provides the highlight. Further out we have US consumer income, employment cost index and University of Michigan consumer sentiment.

JGBs: Futures Sharply Lower As BoJ Effectively Widens YCC Band

JGB futures are just off session lows, -125 compared to settlement levels, after the BoJ's decision to maintain the policy balance rate at -0.1% and the 10-year JGB target at about 0% but adjust YCC to be flexibly managed.

• In effect, the BOJ said that the +/- 0.5% range around 0% in the 10-year JGB will be a “reference, not a rigid limit”. However, there will be a strict yield cap for fixed rate operations at 1.0%. That effectively makes the band the 10-year JGB can trade in much wider than anyone expected.

• Amidst a strong consensus leaning towards no policy change, echoing recent statements from BOJ Governor Ueda, the BoJ has adhered to the principle of not indicating the timing of any policy adjustments beforehand, as previously acknowledged by officials.

• The BoJ’s reasoning for this change is to “enhance the sustainability of monetary easing under the current framework by conducting yield-curve control with greater flexibility and nimbly responding to both upside and downside risks to Japan’s economic activity and prices.”
• Cash JGBs are 0.1bp to 13bp cheaper with the futures-linked 7-year zone leading. The benchmark 10-year yield is 10.5bp higher at 0.554%, above BoJ's YCC (now soft) limit of 0.50%.
• The swap curve has bear steepened with rates 0.1bp to 12.0bp higher. Swap spreads are wider apart from the 7-year.
• On Monday the local calendar sees Retail Sales, Industrial production, Consumer Confidence and Housing Starts.

AUSSIE BONDS: Sharply Weaker Despite Retail Sales Miss After BoJ Surprises

ACGBs (YM -10.0 & XM -14.5) sit sharply weaker, just above worst levels, as the local market’s attention turn to the surprise decision by the BoJ to tweak its yield curve control (YCC) policy.

• While the BoJ maintained its policy balance rate at -0.1% and the 10-year JGB target at about 0%, it adjusted YCC to be flexibly managed. In effect, the BOJ said that the +/- 0.5% range around 0% in the 10-year JGB will be a “reference, not a rigid limit”.
• Earlier in the day, ACGBs had pared morning weakness after retail sales printed significantly below expectations.
• Cash ACGBs are 9-15bp cheaper with the 3/10 curve steeper and the AU-US 10-year yield differential -2bp at +6bp.
• Swap rates are 8-11bp higher with EFPs 3bp narrower.
• The bills strip bear steepens with pricing flat to -9.
• RBA-dated OIS pricing is 2-5bp firmer for meetings beyond December.
• (AFR) An unexpected fall in spending has given the RBA more reasons to pause raising interest rates. (See link)
• On Monday, the local calendar sees the MI Inflation Gauge, Private Sector Credit and CoreLogic House Prices data.
• Nevertheless, the week’s highlight will be the RBA Policy Decision on Tuesday. Bloomberg consensus expects a 25bp hike to 4.35%.

NZGBS: Cheaper With $-Bloc Bonds After Surprise YCC Tweak From BoJ

NZGBs closed 4-9bp weaker, but off session cheaps, as $-bloc bonds react to the surprise decision by the BoJ to tweak its yield curve control (YCC) policy. The BoJ maintained the policy balance rate at -0.1% and the 10-year JGB target at about 0% but adjusted YCC to be flexibly managed. In other words, the BoJ said that the +/- 0.5% range around 0% in the 10-year JGB will be a “reference, not a rigid limit”.

• US tsys sit 2bp richer to 2bp cheaper as the curve twist steepens, pivoting on 5s. US tsys have see-sawed in recent dealing as JGBs provide the lead in Asia. Tsys initially firmed alongside JGBs in the aftermath of the BoJs rate decision. Losses have been marginally pared in recent dealing.
• Swap rates are 7-12bp higher with the 2s10s curve steeper.
• RBNZ dated OIS pricing closed flat to 7bp firmer across meetings, with Jul’24 leading. Terminal OCR expectations sit at 5.66%.
• Next week the local calendar sees ANZ Business Confidence (Jul) on Monday, CoreLogic House Prices (Jul) and Building Permits (Jun) on Tuesday and Q2 Employment and Wages data on Wednesday.
• Later today, the US calendar sees the release of the Q2 Employment Cost Index along with the June PCE deflator.

GOLD: Pressured By Stronger US Data As USD & US Tsy Yields Move Higher

Gold is +0.3% in the Asia-Pac session, after closing -1.35% at $1946 on Thursday as the US dollar surged on a combination of strong data and a dovish ECB.

• US data releases included much stronger than expected GDP, lower than projected jobless claims, a pop in durable goods orders, a bounce in pending home sales, and a narrowing in the goods trade deficit.
• The ECB delivered the well-anticipated 25bps hike that took the deposit rate to 3.75%, a record high for the Euro area. However, forward guidance by the ECB was seen by the market as more dovish than expected. EGBs finished 1-5bp richer with the curve steeper.
• Treasury yields also climbed strongly with an added tailwind from BoJ YCC speculation ahead of the upcoming decision.
• Bullion cleared support at the 50-day EMA of $1951.2 with a low of $1942.65, after which lies further support at $1924.5 (Jul 11 low).

OIL: Crude Set To Finish Week Higher Again, WTI Struggles To Break $80

Oil prices are down around 0.5% today after the optimism-driven +1% rise on Thursday, but they have been trading in a narrow range. WTI is around $79.71/bbl after reaching a high of $79.88, as it is still struggles to break $80. It is currently up 3.4% on the week. Brent is around $83.75 following a high of $83.92. The USD index is flat.

• Better US Q2 GDP, possibility Fed may be close to done, economic measures in China and signs of reduced output have supported crude this week and this month. Lower crude inventories in Cushing, down 7.5mn barrels over last 4 weeks, are also helping. As a result some forecasters, such as Standard Chartered and UBS, are revising up prices, according to Bloomberg.
• Exxon and Chevron report today which will include their assessment of the outlook.
• Russia has said that it will meet its OPEC+ output reduction commitments fully in August. Shipping data has shown lower output this month. Saudi Arabia has also said that it will extend its voluntary cuts to next month.
• Later the US Q2 employment cost index, June spending/income including core PCE deflator, and final Michigan consumer survey for July print. There are also preliminary German Q2 GDP and July European Commission survey data.

FOREX: Yen Firmer In Volatile Trade Post-BOJ

The Yen is now sitting firmer in post-BOJ trade after see-sawing as participants digested the decision. The BOJ tweaked YCC to be flexibly managed, in effect, the BOJ says that the +/- 0.5% range around 0% in the 10-year JGB will be a “reference, not a rigid limit”. However, there will be a strict yield cap for fixed rate operations at 1.0%. That effectively makes the band the 10-year JGB can trade in much wider than anyone expected.

• USD/JPY see-sawed on the decision initially falling printing a low at ¥138.63 before firming to a high of ¥141.94. The pair now sits ~1.8% below its post meeting peak, however has ticked away from session lows and sits at ¥138.35/45.
• AUD is pressured, the post BOJ flows have spilled over into risk off flows seeing the AUD extend early losses. June Retail Sales fell 0.8% vs a 0.0% expected print. The pair has broken support at $0.6651, the low from July 11 and last prints at $0.6645/50.
• Kiwi is also pressured, NZD/USD is down ~0.5% as risk off flows weigh. The next support level is $0.6051 the low from 29 June.
• Cross asset wise; 10-Year US Tsy Yields are ~3bps higher and e-minis are down ~0.1% having been up as much as 0.3% early in the session.
• French CPI and Regional CPI from Germany provide the highlight in todays European session.