MNI EUROPEAN MARKETS ANALYSIS: Limited Spillover From Further China Equity Gains, ECB Up Later

US TSYS: Tsys Yields Opened Higher Only to Reverse, Busy Night Ahead for US Data

TYH4 is trading at 111-03, + 03+ from NY closing levels.

• Cash Tsys yields opened higher this morning, however those moves were quickly reversed in early trading. There has been a small flattening of the curve, as the 10yr is currently 1.9bps lower, while the 2y trades 1.2bps lower.
• Outside of the Fed news flow of ceasing the BTFP (see below), news flows has been light. We did see US 10y futures get close to the Jan 19 lows, only to quickly reverse course, so that could be a factor in broader moves seen so far today.
• The Federal Reserve Board Wednesday announced that its Bank Term Funding Program will cease making new loans as scheduled on March 11, and adjusted the program's interest rate higher for loans made before the deadline. (MNI Policy Team, see this link for more details, https://marketnews.com/mni-brief-fed-says-bank-term-funding-program-to-end-in-march).
• Later tonight in the US: GDP, PCE, Weekly Claims and Treasury Sec Yellen Outlook

JGBS: Cheaper After 40Y Supply, Tokyo CPI Tomorrow

JGB futures are holding weaker but above session lows, -16 compared to settlement levels. JGB futures pushed to a new session low in early afternoon trade after the 40-year supply received only tepid demand.

• The actual high yield surpassed dealer expectations and the cover ratio witnessed a decline, dropping to 2.148x from 2.208x observed in the late-November auction. This outcome marked consecutive declines in cover. The cover ratio had steadily increased from May to September. Notably, today's ratio represented the lowest level at a 40-year auction since March 2011.
• There hasn’t been much in the way of domestic drivers to flag, outside of the previously outlined Weekly International Investment Flow data. Later today, the local calendar sees Tokyo Condominiums for Sale, Dept Store Sales and Machine Tool Orders data.
• Cash JGBs are dealing mostly cheaper, with yields 0.5bp lower (2-year) to 5.0bps higher (20-year). The benchmark 10-year yield is 2.5bps higher at 0.743% versus the Nov-Dec rally low of 0.555%.
• The 40-year is 0.7bps higher at 2.089% versus a pre-auction low of 2.069%.
• The swaps curve has bear-steepened, with rates 1-4bps higher. Swap spreads are tighter across maturities, apart from the 40-year.
• Tomorrow, the local calendar sees Tokyo CPI, PPI Services and Coincident & Leading Indices data, along with BOJ Minutes of Dec. Meeting.

AUSSIE BONDS: Slightly Cheaper, RBA Consulted On Tax Cut Changes, Aus. Day Holiday Tomorrow

ACGBs (YM -1.0 & XM -1.0) are cheaper but near Sydney session highs after today’s news flow surrounding the government’s proposed changes to the already-legislated tax cuts.

• In his speech at the National Press Club, PM Albanese said that the tax cut all taxpayers will receive was “broadly revenue neutral” and “won’t add to inflation pressures”. RBA Governor Bullock was consulted on the new tax package and apparently, she doesn’t expect any implications from the changes to RBA forecasts.
• ICYMI, In MNI Tax Cuts, Fiscal Policy Seen Complicating RBA's Job, our policy team speak to economic commentators. They say that the tax cuts will keep inflation high and are worth 50-75bp of monetary easing. Given the shift to people who are more likely to spend, the revised program may result in an upward revision to the RBA’s projections, which are scheduled on February 6. (See here)
• Cash ACGBs are flat to 1bp cheaper, with the AU-US 10-year yield differential 3bps tighter at +8bps.
• Swap rates are flat to 1bp higher.
• The bills strip is slightly cheaper, with pricing flat to -1.
• RBA-dated OIS pricing is little changed.
• Tomorrow, the local market is closed for Australia Day celebrations.
• QTC priced a new A$2.75b 4.75% Feb-34 fixed rate green bond, with a spread of 53.85bps over the ACGB 3.00% Nov-33.

AUSTRALIA: Revised Tax Cuts May Impact RBA Forecasts & Easing Cycle Start

Today at 1230 AEDT PM Albanese will announce changes to the promised stage 3 tax cuts. According to press reports, the amended package will now benefit lower- to middle-income earners more than the original legislation was going to, which was focussed on higher earners after parts 1 and 2 helped the former. The RBA has already factored in the original tax cuts into its forecasts but will now need to incorporate these changes as they will impact households with a higher propensity to spend.

• The return to target is already at the edge of the RBA’s “reasonable timeframe” and if it is pushed out into 2026, then another rate hike is likely, which would likely impact the government’s support. The updated forecasts and the January 31 Q4 CPI are key to the outcome of the February meeting. The tax cuts will be implemented on July 1 and so may not necessarily result in further tightening but could delay easing into 2025.
• In MNI: Tax Cuts, Fiscal Policy Seen Complicating RBA's Job, our policy team speak to economic commentators. They say that the tax cuts will keep inflation high and are worth 50-75bp of monetary easing. Given the shift to people who are more likely to spend, the revised programme may result in an upward revision to the RBA’s projections, which are scheduled on February 6.
• The Australian is reporting that the revised tax cut package will reduce tax revenue by $20bn over the coming 10 years, while the government is saying that the changes won’t be inflationary. Given this development, data watching in H2 this year will become even more important.
• The Australian is reporting that the 37% rate for those earning more than $135k will be retained in the PM’s revised plan, while it will be reduced to 30% for those earning $45k-135k. The top 45% band will now start at $190k down from $200k. The tax rate for those earning less than $45k will be reduced 3pp.

NZGBS: Cheaper But Off Worst Levels, Heavy US Calendar Tonight

NZGBs closed 1-2bps cheaper but better than the session’s worst levels. There wasn’t much in the way of domestic drivers to flag, outside of the previously outlined NZ government’s financial statements for five months ended Nov. 30, which came in NZ$1.15bn better than projected in the half-year fiscal update.

• Today’s weekly NZGB supply saw weak demand metrics for the Apr-27 and May-34 bonds, with cover ratios below 2.0x. Nevertheless, post-auction dealings have seen the lines richen. The Apr-37 bond saw a healthier 3.37x cover ratio.
• The move away from session cheaps was aided by US tsys, which have richened 1-2bps in today’s Asia-Pac session, ahead of Thursday's busy US calendar: GDP, PCE, Weekly Jobless Claims and Tsy Sec Yellen’s Outlook.
• Swap rates closed 2-6bps higher, with the 2s10s curve steeper. Implied long end swap spreads were wider.
• RBNZ dated OIS pricing closed little changed across meetings. A cumulative 87bps of easing is priced by year-end compared to 92bps before yesterday’s Q4 CPI data release.
• Tomorrow, the local calendar is empty. The Australian market is closed for the Australia day holiday tomorrow.

NZ STIR: RBNZ Dated OIS Sit Firmer After Yesterday’s Q4 CPI

RBNZ dated OIS pricing has firmed 3-6bps for meetings beyond February since the release of Q4 CPI.

• While the data printed in line with consensus and below the RBNZ’s forecast, the details showed that the central bank is likely to remain cautious given persistent domestically driven inflation.

Figure 1: RBNZ-Dated OIS – Today Vs. Pre-CPI

Source: MNI – Market News / Bloomberg

FOREX: Dollar Can't Sustain Early Positive Momentum, As Yields Off Wednesday Highs

The USD index has tracked relatively tight ranges in the first part of Thursday trade. The early impetus was to the topside, but the BBDXY couldn't sustain a move above 1237.20. We last track around the 1236.20 level, little changed versus end NY levels from Wednesday.

• Early USD gains were aided by a rise in US yields, a follow on from the NY session, as better US data pushed benchmark yields higher across the board. However. US TSY 10yr futures couldn't break sub Jan 19 lows, which has seen yield reverse earlier gains.
• USD/JPY has tracked relative tight range, the pair last near 147.60/65, slightly weaker in yen terms versus NY closing levels. US-JP 10yr yield differentials are modestly lower, as a poor 40yr bond auction has seen JGB yields firm (10yr last near 0.74%).
• AUD/USD sits near 0.6580, also tracking a tight range. PM Albanese has announced rejigged tax cuts (from July 1 this year), but stated they won't add to inflation pressures. The currency hasn't received support from higher China/HK equities, while iron ore also continues to recover ground (last above $136.50/ton).
• NZD/USD is near 0.6110, an earlier dip to 0.6100 supported. CHF has lost around 0.2%, reversing some of Wednesday's 0.86% gain.
• Looking ahead, Norges Bank and ECB meetings take focus. The US sees the Q4 advance release for GDP before the monthly PCE report for December on Friday.

EQUITIES: China Equity Rally Extends, Mixed Trends Elsewhere

Regional equities are largely in the green today with Japanese Equities the exception. US Equity futures are close to unchanged today after a pull back on stronger than expect PMI data overnight, outside any notable new headlines, equities are expected to trade sideways going into a busy night for data.

• Nasdaq futures, are lower by -0.05%, while Eminis were last unchanged, headlines out early around Boeing, being halted from any further 737 Max Aircrafts product increases, may be weighing on sentiment.
• Japan Equity indices are fluctuating a bit today with the Nikkei trading down 0.85% early only to sharply rebound. The yen is largely unchanged, while yields on JGBs continue to move higher on the back of weak auction data, as traders speculate the BoJ will move away from negative rates this year. The Nikkei 225 is down -0.10%, while the Topix is down -0.10% at this stage.
• Hong Kong continued its strong week as the announcement of a rescue package to boost China equity markets drove sentiment, Hang Seng currently trading 1.25% higher today.
• China mainland stocks are tracking well today CSI 300 up 1.80%, while the Shanghai Composite is trading 2% higher, after the PBoC announced it would cut the RRR, while also announcing a set of rules to govern property developers, pushing the mainland China property index higher for the third straight day, currently up 2.65%,
• In Korea, Sk Hynix, the world's second largest chipmaker, reported a surprise profit, revenue climbed to 11.3 trillion won, beating even the highest forecast. This didn’t help the share price though, trading lower by 2.40%, this has weighed on the Kospi trading unchanged currently.
• The Taiwan Taiex index has continued its winning streak, chipmakers lead the way as ASML reports orders have more than tripled last quarter for its High-End Chip Machines. Taiex is currently up 0.70%
• In Australia, the ASX 200 continues its winning streak trading 0.40% higher today on the back of strong gains from the miners, as Iron Ore futures rallied after the PBoC announced cuts to RRR. In SEA, markets are mixed with the Nifty 50, Philippines PSEi off roughly 0.50%, while Indonesia and Malaysia trade 0.50% higher.

JAPAN DATA: Offshore Buying Of Local Equities Continues, Albeit At A Reduced Pace

Offshore purchases of Japan stocks and bonds continued last week, albeit at a reduced pace compared to the previous week. Inflows into stocks were ¥286.7bn, while net bond inflows totaled ¥348.6bn. This continued the run of inflows into local stocks since the start of this year (the third straight week). For bond inflows it was the second consecutive week, but the trends have been more mixed in terms of flows into this segment since late 2023.

• In terms of Japan domestic flows, local residents were modest net sellers of offshore bonds, but this only modestly offset the strong outflows seen in the prior week.
• Purchases of offshore equities continued, but at a reduced pace compared to the prior week.

Table 1: Japan Weekly Investment Flows

Source: MNI - Market News/Bloomberg

OIL: Crude Rises Further On US Stock Drawdown & China Stimulus

Oil prices are moderately higher during APAC trading after rising around a percent on Wednesday on news of a large US crude inventory drawdown. The US data and China’s RRR cut plus possible stimulus have supported crude markets today. WTI is up 0.4% to around $75.40/bbl after a low of $75.16 earlier. Brent has traded above $80 and is 0.3% higher at $80.27. After range trading through January, oil has been trending higher for the last week. The USD index is flat.

• The EIA reported a 9.23 mn barrel stock drawdown, a lot more than expected, as freezing temperatures resulted in production cuts and difficulties in unloading imports. The weather also impacted refining with refinery utilisation down 7.1pp, and reduced driving resulting in a gasoline inventory build of 4.91mn but distillate fell 1.42mn. The data will be monitored closely to see if the large crude draw is unwound as production normalises.
• Geopolitics remains important to oil market dynamics with Houthi rebels continuing to attack Red Sea shipping and the US defending vessels and its own troops in the region. There are also risks to Russian infrastructure from Ukraine.
• Later US Q4 GDP is released and is expected to rise 2% q/q saar. There are also US jobless claims, December durable orders and home sales. The ECB decision is today followed by President Lagarde’s press conference (see MNI ECB preview here). The German Ifo survey also prints.

GOLD: Weaker After Stronger US PMI Data

Gold is slightly stronger in the Asia-Pac session, after closing 0.8% lower at $2013.89 on Wednesday.

• Bullion traded poorly through the US cash equity open before extending declines on the solid US PMI data and a stabilisation of the greenback in FX markets.
• Stronger than expected US data cast doubt on prospects for an interest-rate cut by the Federal Reserve in March. The market is currently assigning around a 40% chance to a 25bp rate cut in March. This compares to the near 70% chance seen a week or so ago. Lower interest rates are typically positive for non-interest-bearing gold.
• Fed speakers are in blackout ahead of next week’s FOMC meeting.
• Investors now turn to Thursday’s heavy US calendar: GDP, PCE, Weekly Jobless Claims and Tsy Sec Yellen’s Outlook.
• Wednesday’s move takes a large step closer to support at $2001.9 (Jan 17 low), according to MNI's technicals team.

ASIA FX: Rupiah Slumps On Local Political Uncertainty

USD/Asia pairs are mixed in NEA, CNH losing ground modestly despite a firmer local equity backdrop (liquidity conditions have eased, so this has likely weighed). KRW is a little weaker, while TWD has risen. In SEA, FX weakness in THB and IDR remain focus points. The Indonesian authorities intervening to curb IDR weakness, amid local political uncertainty. Looking ahead, tomorrow we have Philippines Dec trade data, Thailand Dec trade figures as well, along with Singapore IP.

• USD/CNH has held above 7.1600 for much of the session, the pair last near 7.1650. This comes despite a decent rally in onshore equities, following yesterday's RRR cut and further support for onshore property developers. The CSI 300 currently up 1.3%. Still, liquidity conditions have eased further in CNH, the TN back into negative territory, which has worked the other way from a CNH standpoint.
• 1 month USD/KRW sits slightly higher, although hasn't been able to convincingly break above 1334, which is where we last track (we opened around 1331). This leaves the pair well within recent ranges. Earlier Q4 GDP came out close to expectations, with weaker consumer spending/construction activity offset by firmer exports/business investment. Onshore equities are tracking around flat for the Kospi.
• USD/TWD sits marginally lower but more so in terms of spot than the 1 month NDF. Spot was last sub 31.30, but we remain within recent ranges. Local equities continue to track higher, +0.60%, while offshore investors have so far accumulated +$2bn in local shares this week.
• USD/IDR spot spiked higher on reports that local ministers, including Finance Minister Sri Mulyani Indrawati, are looking at resigning (BBG). This is reportedly over current President Jokowi's support for Prabowo Subianto at the upcoming election. Spot currently sits at 15795, at session highs. Headlines later cross of BI intervention, but dips in USD/IDR have been shallow. The 1 month NDF is above 15820 in latest dealings, which is fresh highs back to early Nov last year.
• USD/THB has firmed, although we remain below Wednesday highs. The pair was last in the 35.70/75 range, against yesterday's high of 35.88, which was the highest print for the pair since mid-November last year. Headlines crossed earlier from the Deputy Thailand Finance Minister Julapun, stating the authorities are concerned about THB volatility, while also stating that he hopes interest rates are cut soon to boost the economy. The government is doing all it can to boost the economy. This was from a BBG interview on Wednesday.

INDONESIA: Political Uncertainty Pressuring Rupiah

Indonesia’s government is looking fragile ahead of the February 14 election. President Jokowi is apparently working to keep his cabinet together as a number of ministers are considering resignation to protest the President’s support for Prabowo in the upcoming vote, who is not his party’s candidate. The age restriction requirement was waved for Jokowi’s son Gibran to run as Prabowo’s VP.

• USDIDR is up 0.5% today to 15775 after a high of 15795. Bank Indonesia intervened in the FX market today to stabilise the currency and said “rupiah weakening is still under control”.
• Senior members of the cabinet considering resignation include the finance, foreign and public works ministers, according to anonymous Bloomberg sources. Decisions have not yet been made and things could easily change but they apparently don’t approve of the President not supporting the PDI-P’s own candidate Ganjar. The sources have said that any resignations may not be announced straight away given the impact on the IDR, which has already reacted to the headlines.
• The President has said that he is “allowed to campaign, allowed to take sides” as that is democracy but he can’t use “state facilities”.
• Jokowi’s term does not finish until October and so resignations could disrupt policy continuity.
• Prabowo is well ahead in opinion polls to replace Jokowi but it is uncertain whether he can pass the 50% hurdle in February to avoid a runoff in June.

SOUTH KOREAN DATA: Q4 Growth Close To Expected, Exports/Capex Offset Construction Weakness

Q4 GDP (advanced estimates) was reasonably close to estimates. Q/Q growth was +0.6% (in line with), with prior at 0.6% as well. Y/Y growth printed at 2.2%, slightly above the 2.1% consensus and a pick up on Q3's 1.4% pace. Full year 2023 growth was 1.4%.

• On the industry side, the main drag came from construction which fell by 3.6% q/q. Manufacturing rose 1.1% q/q, while services increased by 0.6% q/q. in y/y terms manufacturing rose 6.5%, construction was -2.2% and services +1.1%.
• This aligns with the GDP expenditure side. Exports (+2.6%q/q) and capital investment (+3.0%q/q) were the main positive, while construction investment fell -4.2% q/q. Private consumption growth was a more modest 0.2% as well.
• These trends align with the BoK narrative around the drivers of growth. Domestic growth may only turn firmer once BoK shifts to easier policy settings.