MNI EUROPEAN MARKETS ANALYSIS: JPY On The Defensive In Asia

US TSYS: Block Flow Applies Light Pressure Overnight

Cash Tsys run 0.5-2.0bp cheaper across the curve into London hours. Meanwhile, TYZ2 sits -0-02 at 112-02, 0-01+ off the base of a narrow 0-06+ range.

• Ranges were contained, with a modest bid linked to a slight tweak in liquidity focus from the PBoC unwound. The light cheapening was aided by block sales in TY futures (-5K & -~3.8K).
• G20-related communique, including comments from Chinese President Xi & source reports pointing to continued differences re: the Russia-Ukraine war, albeit with a draft statement seemingly in the offing, failed to provide any meaningful impetus from the space.
• The same held true for softer than expected monthly economic activity data out of China.
• Finally, there were no headlines released surrounding the latest appearance from NY Fed President Williams, who moderated a panel at the Economic Club.
• PPI data, the Empire m’fing survey and Fedspeak from Cook, Barr & Harker will cross in NY hours on Tuesday.

JGBS: Long End Supported By Soft GDP Data

Cash JGBs run ~1bp cheaper to 3.5bp richer as the curve twist flattens.

• JGB futures added to their modest overnight bid, which was linked to the post-Tokyo move in U.S. Tsys and some Monday richening in the likes of the German FI market, with softer than expected domestic GDP data providing further support.
• That left the contract +17 into the bell, just shy of early session highs.
• The bid in the long end was relatively sticky, also linked to the previously outlined moves in the wider core global space in post-Tokyo Monday trade and the soft domestic data.
• Headlines covering comments from Japanese Economy Minister Nishimura & BoJ Governor Kuroda were not market movers.
• 5-Year JGB supply was fairly non-descript, with average internal metrics observed.
• Looking ahead, Wednesday will see the release of core machine orders data.

AUSSIE BONDS: Curve Twist Flattens, After Downtick From Early Highs

YM finished -2.0, with XM +0.5 at the bell, as the wider ACGB curve twist flattened, with a pivot around 10s.

• It seemed that the ACGB space struggled on the back of spill over from (limited) weakness in different bond markets during Wednesday’s Sydney session, which manifested into some ACGB underperformance on the day.
• Some trans-Tasman weakness, linked to NZGB supply, provided weakness in the early rounds of Sydney dealing, with a subsequent post-syndication rally in NZGBs doing little for the space.
• This saw ACGBs pull away from early session highs linked to overnight session moves in futures/Monday’s light post-Sydney bid in U.S. Tsys.
• Some modest cheapening in U.S. Tsys then applied some light pressure.
• In local news, RBA communique included the minutes from the latest monetary policy meeting, which failed to provide anything fresh and meaningful owing to post-meeting appearances from Governor Lowe & Deputy Governor Bullock.
• We also got the Bank’s review of its forward guidance scheme, which pointed to a preference towards a more qualitative brand of forward guidance, when appropriate, in the RBA’s future.
• Bills were -2 to +1 through the reds, twist flattening.
• Wednesday’s docket will see the release of Q3 WPI data, the Westpac leading index & A$900mn of ACGB Nov-33 supply.

NZGBS: Early NZGB Cheapening More Than Reversed As Supply Goes Well

NZGBs finished 4.5-6.5bp richer across the curve, with swap spreads running mixed as longer dated swap spreads tightened and shorter dated swap spreads ran flat to a touch wider.

• The early cheapening in the space more than reversed as the pressure from the pricing of the green NZGB May-34 syndication ebbed, with the amount issued at the top end of the pre-prescribed range, while pricing was at the tighter end of the initial guidance. Most of the paper went offshore (56%), with a relatively even split allotted to Australia, Europe & North America (16-17% apiece).
• Solid demand at the auction and the removal of supply-related pressure seemed to underpin the space through the remainder of the day, even as core global FI moved off firmest levels of the session.
• Long end receiver side flow in swaps would have aided the bid further.
• Local news flow saw REINZ house price data pull lower as the housing market continues to adjust to the rapidly increasing interest rate environment.
• Elsewhere, there wasn’t much to flag in the way of movement surrounding household inflation expectations data released by the RBNZ.
• RBNZ dated OIS pricing of the terminal OCR remained little changed on the day, hovering a little shy of 5.10%, with a steady ~65bp of tightening priced for next week’s RBNZ gathering.
• Non-resident bond holdings data headlines the domestic docket on Wednesday.

FOREX: Yen Goes Offered On Japan's Surprise GDP Contraction, Uptick In U.S. Tsy Yields

The yen was the worst G10 performer after preliminary data showed a surprise contraction in the Japanese economy, with higher U.S. Tsy yields adding pressure to Asia's main safe haven currency. Gotobi Day flows may have exacerbated JPY weakness.

• Japan's economy shrank 1.2% Y/Y in Q3 versus expectations of a 1.2% growth, according to preliminary data from the Cabinet Office, as the historic yen sell-off sent import costs soaring. The yen was unfazed in the first minutes after the release, but weakened gradually as the session progressed.
• U.S. Tsy yields sit 0.6-1.5bp higher at typing, with 10-year U.S./Japan yield spread 1bp wider as a result. Expectations of continued tightening from the Fed stands in contrast with the BoJ's ultra-dovish resolve.
• Offshore yuan showed a limited reaction to a slew of China's economic activity indicators, which were broadly weaker than forecast. CNY fixing bias was closed to neutral today, with the reference rate set just shy of the expected level.
• The kiwi dollar caught a bid on the back of better risk sentiment, with U.S. e-minis and Chinese/HK benchmarks tracking higher. AUD/NZD traded on a heavier footing, ignoring a round trip in Australia/New Zealand 2-year swap spread.
• There's a wealth of economic data coming up after Asia hours, including flash EZ GDP, German ZEW Survey, UK unemployment, Swedish CPI, as well as U.S. Empire M'fing & PPI. Comments are due from Fed's Barr, Cook & Harker, ECB's Villeroy & Elderson, as well as Riksbank's Floden.

FX OPTIONS: Expiries for Nov15 NY cut 1000ET (Source DTCC)

• EUR/USD: $0.9935-55(E1.2bln), $1.0075(E844mln), $1.0175-00(E1.2bln)
• USD/JPY: Y139.00($500mln), Y140.00($663mln)
• AUD/NZD: N$1.1000(A$511mln)
• USD/CNY: Cny7.0000($1.1bln)

ASIA FX: Consolidation After Recent Strong Gains

USD/Asia pairs have been mixed today. Some stability in US yields has likely curb downside USD momentum in the region, while equity trends have also been mixed. China activity data for October was weaker than expected, but didn't appear to impact sentiment a great deal. Tomorrow, China house price data is due, but otherwise the calendar is fairly quiet.

• USD/CNH has been range bound. Weaker activity data for October only weighed on sentiment briefly, while China equities have continued to recover. The pair has been largely in a 7.03/7.06 range, although CNH has outperformed a firmer USD backdrop against the majors, notably JPY. The CNY fixing came close to market expectations.
• USD/KRW has tracked recent ranges, with the 1 month NDF supported ahead of 1320, while moves above 1327 have drawn selling interest. Equities have been flat, with more interest in the Taiex today.
• USD/TWD tried to move lower at the open but found support close to 31.00, we were last at 31.07. The 1 month NDF has rebounded, back to 30.76, +0.60% above NY closing levels. Onshore equities have surged another 2.5%, after reports of Berkshire Hathaway building a position in TSMC through Q3. Last Friday and yesterday delivered the strongest 2-day sum of net equity inflows since end 2005.
• Spot USD/IDR has added 55 figs and last trades at 15,571 on tighter U.S./Indonesia yield spreads. A better than expected trade surplus for October ($5.67bn, versus $4.5bn forecast), hasn't aided FX sentiment. Foreign investors sold a net $66.05mn in Indonesian equities Monday. The Jakarta Comp faltered ~1%, but sits around flat levels today.
• Spot USD/PHP has edged higher after finding a base at 57.150 two days earlier and last changes hands +0.10 at 57.398. The Philippines overseas cash remittances rose 3.8% Y/Y in September, beating the consensus forecast of +3.6%. In absolute terms, September remittances were $2.840bn in September versus $2.721bn in August. The BSP guided that it will raise the policy rate by 75bp this week and is widely expected to make good on this promise.
• Spot USD/THB refreshed its cyclical lows this morning after a bearish inside day on Monday. The rate has trimmed losses since and last deals -0.18 at 35.73. For bears, the next technical target is provided by Aug 11 low/200-DMA at 35.160/35.133. Conversely, bulls keep an eye on the 100-DMA, which kicks in at 36.663. A shift away from CZS by China, albeit with an uncertain timetable, is likely buoying THB sentiment on the prospect of renewed tourism inflows from China.

CNH: Outperforming US Yield Stability, But Positive Equity Sentiment Is Helping

USD/CNH has been more range bound through today's session, unable to make new lows (7.0293 today versus just under 7.02 yesterday). Upside gains have also been limited though, with selling interest emerging above 7.0600. Softer activity data outcomes haven't helped sentiment, although follow through pressures have been limited. The USD is finding some support against the majors (most notably JPY) as US yields have stabilized, which could also be generating some stability in USD/CNH.

• The chart below overlays USD/CNH against the 2yr US-CH government bond differential. The two series don't move one for one, particularly over the longer term, but CNH has outperformed the rate differential recently.

Fig 1: USD/CNH & US-CH 2yr Yield Differential

• A positive offset for CNH comes via the recent outperformance of China related equities. The second chart below overlays USD/CNH (inverted on the chart) against the ratio of China to global equities (MSCI basis).
• Further outperformance of equity plays may be needed to drive a further recovery in China FX, particularly as it may take time for evidence to emerge that recent policy shifts (around CZS and the property sector) are gaining traction in the economy. The next round of PMI survey prints are not due until the end of the month.

Fig 2: USD/CNH (Inverted) Against China/World Equity Ratio

Source: MNI - Market News/Bloomberg

CHINA: Activity Data Disappoints, Limited Follow Through For Domestic Asset Sentiment

China activity data for October was weaker across the board relative to expectations. IP growth moderated to 5.0% y/y, (5.3% expected, 6.3% prior), while retail sales fell -0.5% (0.7% expected, 2.5%) prior. Fixed asset investment was 5.8% YTD y/y, (5.9% expected and prior outcome same), with property investment remaining a drag -8.8% YTD y/y. Property sales remained around recent lows at -28.2%. The unemployment rate was steady at 5.5%, in line with forecasts.

• The IP detail showed slowing in commodity related sectors (coal, steel etc), while the tech related computer segment continued to weaken.
• For retail sales, spending related to outdoor activities fell sharply, in line with covid-related restrictions. A lot of other categories recorded negative y/y prints though signifying a weaker consumer backdrop. The chart below overlays the services PMI against y/y retail sales.
• Private sector FAI was weak (+1.6% y/y, we were at 8.4% y/y in March), with the slack being picked up by state owned enterprises (10.8% y/y). The jobless rate held steady at 5.5% in an encouraging sign for labor market dynamics.
• As the China statistics authorities stated post the release of the data, the foundation for economic recovery is not solid yet. It remains to be seen if the recent policy shifts show up in the next round of survey data (like PMIs etc).
• The impact on China asset sentiment hasn't been large though. USD/CNH spiked above 7.0600 post the data, but is now back to around 7.0470, while China equities are recovering, but overall gains are modest so far.

Fig 1: China Retail Sales Versus Non-Manufacturing PMI

Source: MNI - Market News/Bloomberg

EQUITIES: China/HK Sentiment Continues To Recover

The focus remains on China/HK trends, which have remained positive today, despite weaker October activity data for China. Trends elsewhere have been more mixed, although losses haven't been large in markets which are down. US futures have mostly tracked higher (+0.40/+0.60%) for the major indices, offsetting part of the negative lead from overnight.

• The HSI is up over 3.5% at this stage, now clear of the 18000 level, while the tech sub-index is +8%. Developer, Country Garden, has weighed, with shares in the company down sharply, after announcing it will place shares to raise funds for offshore debt payments.
• Still, the Shanghai property sub-index is still up a further 1.12%, the 8th straight session of gains. The CSI 300 is +1.47% at this stage.
• Some thawing in tensions between the US and China, post the meeting between the two presidents late yesterday in Bali, has likely aided broader sentiment. October activity data was weaker across the board, but hasn't impacted market sentiment too much.
• The Taiex is up 2.4%, led by TSMC gains, as it was revealed Berkshire Hathaway added shares of the company during Q3. The Kospi has been around flat levels for most of the session.
• The ASX 200 is down smalls (-0.1%), but is away from worst levels as better HK/China equity sentiment spilled over this afternoon.

GOLD: Holding Near Recent Highs

Gold is holding near recent highs, last close to $1771, down slightly on NY closing levels ($1771.40). Upside impetus has been curbed to a degree by slightly firmer USD levels, although this is mostly evident against JPY at this stage.

• The precious metal has had very modest changes in recent sessions, largely sticking to a $1750/$1775 range, although the bias appears more to the upside rather than the downside.
• Gold continues to outperform US real yields, but is generally moving in line with USD momentum from a trend standpoint.
• Note we are already through the 200-day EMA ($1760.05), but the simple 200-day MA comes in at $1803.90, which like remains an upside target for bulls.

OIL: Prices Range Bound Close To November Lows, IEA Report Published Later

Oil prices have been trading in a very narrow range close to the November lows after falling over 3% overnight. Supply concerns are currently slightly outweighing tight supply as there has been little additional energy news. WTI has traded between $85-$86/bbl and is now just under $85.50 while Brent’s range has been $92.50-$93.50 and is now about $92.90.

• The weaker-than-expected October economic data out of China plus a growing number of Covid infections weighed on sentiment in the oil market today.
• News had not been good for either supply and demand with OPEC revising down oil demand expectations again for Q4, while for the first time in 2 years, the US fracked fewer wells than they had drilled. (Bloomberg)
• The International Energy Agency publishes its Oil Market Report for November later and any material change to its supply and demand forecasts could move the market. US API inventory data is also published tonight. Last week it showed a 5.6mn barrel inventory build.