MNI EUROPEAN MARKETS ANALYSIS: Market Looks To Fed

US TSYS: Muted Asian Session

TYZ3 deals at 109-05, +0-01, a 0-03 range has been observed on volume of ~40k.

• Cash tsys sit little changed across the major benchmarks.
• Tsys have observed narrow ranges with little follow on moves today in Asia. The proximity to today's FOMC rate decision and press conference may be limiting activity.
• TY was mildly pressured in early trade however Tuesday's lows remained intact.
• Little meaningful macro news flow crossed in Asia.
• The highlight of today's docket is the aforementioned FOMC rate decision, the MNI preview is here.

JGBs: Futures Remain In Negative Territory, Pressured By Rinban Operations

JGB futures are sitting in negative territory, -5 compared to the settlement levels, after hitting a new session low (145.39) in early Tokyo afternoon dealing.

• The pressure on JGBs during the initial stages of the Tokyo afternoon session aligned with the insights gleaned from this morning's BoJ Rinban operations. These operations saw positive spreads, with the exception of the 1-3-year maturity range and witnessed increased offer cover ratios across all maturity buckets.
• There hasn’t been much in the way of domestic drivers to flag, outside of the previously outlined trade balance data.
• The cash JGB curve has twist-flattened, pivoting at the 5s, with yields 0.5bp lower to 1.8bp higher. The benchmark 10-year yield is 1.1bp higher at 0.729%, a new post-YCC tweak high.
• Swaps are also dealing mixed, with rates 0.2bp lower to 1.3bps higher. Swap spreads are generally tighter across the curve.
• The swap curve has also twist-flattened, with swap spreads tighter across the curve.
• Tomorrow the local calendar is empty ahead of National CPI for August and the BoJ policy decision on Friday. The MoF will also conduct a liquidity enhancement liquidity auction for OTR 5-15.5-year JGBs tomorrow.

AUSSIE BONDS: Cheaper, Narrow Ranges Ahead Of FOMC Decision

ACGBs (YM -7.0 & XM -6.0) are weaker after dealing in a relatively narrow range in the Sydney session. The local calendar has been light today, with Westpac leading index (-0.4% m/m) as the only release. Accordingly, local participants have likely been on headlines and US tsys watch ahead of the FOMC decision later today.

• Traders expect the Fed to keep rates on hold with a tightening bias. The median of analysts’ expectations for the Fed’s September Dot Plot rates suggests that the central expectation is for no changes from June’s projections: 5.6% for 2023, 4.6% for 2024, 3.4% for 2025, with the new entry for 2026 at 2.6%, and the Longer-Run rate at 2.5%.
• Narrow ranges have persisted in US tsy dealing in the Asia-Pac session, with no meaningful macro newsflow crossing. Cash US tsys sit little changed across the major benchmarks.
• Cash ACGBs are 5-6bps cheaper, with the AU-US 10-year yield differential at -14bps.
• Swap rates are 5bps higher, with EFPs little changed.
• Bills strip pricing is -6 to -7 for contracts beyond Dec-23.
• RBA-dated OIS pricing is 3-7bps firmer across meetings beyond Dec’23.
• Tomorrow the local calendar is empty, ahead of Judo Bank PMIs on Friday.

NZGBS: Sharply Cheaper Despite An Improvement In BoP, Q2 GDP Tomorrow

NZGBs closed near the session’s worst levels, with benchmark yields 5-7bps higher. Local participants looked past the positive news embedded in the narrower-than-expected current account deficit. The release of an 8.2% of GDP Q1 current account deficit in mid-March, which caught the attention of S&P bond ratings and led to consequential comments from them, triggered a sharp sell-off in NZGBs.

• NZ-US and NZ-AU 10-year yield differentials are flat and 1bp wider respectively.
• Swap rates are 4-7bps higher.
• RBNZ dated OIS pricing is flat to 8bps firmer, with Aug’24 leading.
• The Q2 NZ current account deficit narrowed more than expected to NZ$4.2bn from a downwardly revised NZ$4.7bn. Seasonally adjusted it narrowed NZ$1bn to NZ$6.6bn, due to a better trade deficit. This resulted in the ratio to GDP falling to 7.5% from 8.2% in Q1. This brings it on track to meet the RBNZ’s revised forecast of 6.8% for Q1 2024. Q4 2022 looks to have been the peak at 8.8% of GDP, one of the worst in the OECD.
• Tomorrow the local calendar sees Q2 GDP.
• Tomorrow the NZ Treasury plans to sell NZ$200mn of the 0.25% May-28 bond, NZ$225mn of the 2.0% May-32 bond and NZ$75mn of the 2.75% May-51 bond.

GOLD: Early Gains Reversed On Tuesday As USD & US Yields Moved Higher

Gold is little changed in the Asia-Pac session, after closing -0.1% at $1931.36 on Tuesday. The precious metal initially saw gains but retreated as the USD index regained momentum during the latter part of the New York session, coinciding with the ongoing upward trend in US Treasury yields.

• US Treasury yields pushed to their highest levels since 2007 ahead of the FOMC decision later today. The 2-year yield hit 5.109%, while the 10-year saw 4.3647%. Hotter-than-anticipated inflation data in Canada for the second straight month and rising oil prices added to global concerns about resurgent price pressures. Canadian yields surged, with the 10-year yield rising 12bps to 3.86%.
• Traders expect the Fed to keep rates on hold with a tightening bias. The median of analysts’ expectations for the Fed’s September Dot Plot rates suggests that the central expectation is for no changes from June’s projections: 5.6% for 2023, 4.6% for 2024, 3.4% for 2025, with the new entry for 2026 at 2.6%, and the Longer-Run rate at 2.5%.
• According to MNI’s technicals team, Tuesday’s high of $1937.44 came close to resistance at $1939.0 (Sep 5 high).

OIL: Crude Off Highs, US Stocks Down Again

Oil prices are off their intraday highs to be up only 0.1% on Tuesday. Crude corrected in line with the risk off tone and when the dollar rose following strong US building permit data. Brent broke through $95 and spent much of trading above this level on Saudi comments that it aims to stabilise the market but it couldn’t hold the move in the end. Recent strength is driving increased expectations that oil will reach $100/bbl but indicators suggest it is overbought and thus vulnerable.

• Brent finished up 0.1% to $94.53/bbl but it reached an intraday high of $95.96 before correcting to a low of $94.16. Resistance is at $96.95, 14 November 2022 high.
• WTI is also 0.1% higher and closed at $90.70 but has started today slightly lower at $90.65. It reached a high of $92.43 but then fell to $90.31. Resistance is at $94.66.
• Bloomberg is reporting that US crude inventories fell 5.25mn barrels last week, according to people familiar with the API data. Gasoline stocks rose 732k but distillate fell 258k, as shortages continue globally heading into the northern hemisphere winter. Falling inventories are adding to supply concerns.

FOREX: Muted Asian Session With FOMC In View

There has been a muted Asian session across G-10 FX, there was little follow through on moves and ranges have been narrow.

• Kiwi has pared gains of as much as ~0.3% to sit little changed from opening levels. NZD/USD is holding onto recent gains and is consolidating above the 20-Day EMA.
• AUD/USD is flat however a ~20pip range has persisted for the most part. Technically the trend in AUD/USD remains bearish. Support comes in at $0.6357, low from Sep 6 and bear trigger. Resistance is at $0.6481, high from Sep 4.
• Yen is little changed from opening levels, August Trade Balance was wider than expected however there hasnt been much reaction in FX. Technically the trend needle points north. Immediate focus for bulls is the Sep 15 high (¥147.95), the next resistance level comes in at ¥148.40 (high from 4 Nov 2022). Support is at ¥145.91, low from Sep 11.
• Elsewhere in G-10 NOK is mildly pressured however liquidity is generally poor in Asia.
• The highlight of todays session is the FOMC rate decision and press conference.

EQUITIES: Equity Markets Down On Expectations Of Hawkish Fed Hold

Markets are cautious ahead of the Fed decision announced later today and are following US indices lower. MSCI APEX is down 0.8% today to be down 2.7% this week and Nasdaq futures 0.2% and S&P -0.1%. The USD index is slightly higher.

• China’s markets are down with CSI 300 and Shanghai comp -0.3%. The Hang Seng is 0.75% lower. Finance stocks are lower after the PBoC left prime lending rates unchanged today.
• In north Asia, Japan’s Nikkei is down 0.5%, Korea’s KOSPI is doing better down only 0.2% due to weakness in the electronics & electrical sectors, and Taiwan’s TAIEX -0.5%.
• The ASX is down 0.6%, driven by energy and mining stocks, to be 1.8% lower this week. NZX 50 is outperforming the ASX down only 0.1%.
• Jakarta is the outperforming in the region rising 0.7% but the rest of ASEAN is lower with Singapore down 0.2%, Thailand -0.6%, Malaysia -0.3% and Philippines -0.1%.
• India’s Nifty 50 is also lower down 0.8%.
• Later the focus is on the Fed decision. It is widely expected to leave rates steady (see MNI Fed Preview). There will also be a forecast update and press conference. An expected hawkish tone is already weighing on equity markets. On the data front UK CPI for August is released. The Bank of England meets tomorrow.

NEW ZEALAND: Current Account Deficit Narrowing Following Concerning Levels

The Q2 NZ current account deficit narrowed more than expected to $4.2bn from a downwardly revised $4.7bn. Seasonally adjusted it narrowed $1bn to $6.6bn, due to a better trade deficit. This resulted in the ratio to GDP falling to 7.5% from 8.2% in Q1. This brings it on track to meet the RBNZ’s revised forecast of 6.8% for Q1 2024. Q4 2022 looks to have been the peak at 8.8% of GDP, one of the worst in the OECD.

• Q2 saw a 4.5% q/q rise in exports of goods & services bringing the annual rate to +10.5% y/y, whereas imports fell 3.1% q/q to be up only 0.9% y/y. Both goods and services exports rose over 4% on the quarter driven by dairy products and tourism, which should be a positive for Q2 GDP released on Thursday.
• The primary income deficit widened by $1.3bn to $11.6bn due to higher interest rates, according to Stats NZ

NZ current account deficit % GDP

Source: MNI - Market News/Refinitiv