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MNI EUROPEAN MARKETS ANALYSIS: NZ Yield Surge Continues Ahead Of Next Week's RBNZ, Aiding NZD FX

  • The NZGB 2-year benchmark yield sits 28bp higher in post-Budget trading with the 10-year yield 16bp higher. RBNZ dated OIS has firmed 9-29bp post-Budget across meetings with early ’24 leading. 37bp of tightening is priced for next week’s RBNZ meeting. Terminal Rate expectations lift to a new cycle high of 5.92%. This has aided NZD outperformance over the past week, the Kiwi the best performer in the G10 space.
  • In Japan, apart from the April CPI, which was in line with expectations and showed the highest annual core rate since the early 1980s, there have been few significant domestic factors worth noting. The presence of strong inflationary data may lead to speculation about potential upward revisions to the BOJ's price projections. Still, bond and swap markets have remained well behaved, with the 10yr government bond yield comfortably below the YCC ceiling. JPY has risen a touch today but is still tracking nearly 2% lower for the week.
  • USD/CNH hit fresh highs of 7.0750 post the CNH fix, but is back sub 7.0600 now. Hong Kong tech equities are underperforming today, which has tempered regional risk appetite.
  • Looking ahead, in Europe today German PPI is the highlight of an otherwise thin docket. Fedpseak from Fed Chair Powell, NY Fed President Williams and Gov. Bowman will cross.



MARKETS

US TSYS: Marginally Richer In Muted Asian Session

TYM3 deals at 114-00, +0-02+, with a 0-03+ range observed on volume of ~73k.

  • Cash tsys sit ~1bp richer across the major benchmarks.
  • Tsys have observed narrow ranges with little follow through in a muted Asian session. Little meaningful macro news flow crossed.
  • FOMC dated OIS price ~8bps of hikes in June with a terminal rate of 5.16%, there are ~50bps of cuts priced for 2023.
  • In Europe today German PPI is the highlight of an otherwise thin docket. Fedpseak from Fed Chair Powell, NY Fed President Williams and Gov. Bowman will cross.

JGBS: Futures Holding Weaker, Narrow Range, Tokyo CPI The Data Highlight Next Week

JGB futures are sitting weaker, trading in a relatively narrow range in afternoon Tokyo trade, -20 versus settlement levels.

  • Apart from the April CPI, which was in line with expectations and showed the highest annual core rate since the early 1980s, there have been few significant domestic factors worth noting. The presence of strong inflationary data may lead to speculation about potential upward revisions to the BOJ's price projections. This, in turn, could redirect attention to the possibility of a monetary policy adjustment that could have implications for the bond market.
  • Cash JGBs are cheaper across the curve in afternoon trade, apart from the 2-year zone which is 0.3bp richer. Yields beyond the 2-year zone are flat to 2.0bp higher with the 7-year zone leading. The benchmark 10-year yield is 1.7bp higher at 0.399%, with the 40-year yield 1.7bp higher at 1.442% ahead of next week’s auction (May 25).
  • Swap rates are higher with the curve steeper and swap spreads narrower except for the 3-5-year zone.
  • The economic data calendar highlight will be the release of Tokyo CPI on Friday. Ahead of that will be the release of Machine Orders (mar), Jibun Bank PMIs (May P) and weekly Investment Security flow data (May 19).
  • The MoF plans to sell 10-year index-linked JGBs on Tuesday and 40-year JGBs on Thursday.
  • BoJ Rinban operations covering 1-25-year JGBs is slated for Wednesday.

AUSSIE BONDS: Cheaper, Post-Jobs Data Reversal Continues

ACGBs sit near session lows (YM -10.0 & XM -10.0) as the post-employment data sell-off continues unabated. At the time of writing, futures are around 18bp lower than the post-data high, sitting at their lowest levels since March 13. Without economic data today, local participants have likely been on US tsy watch. US tsys have seen higher yield for five consecutive days.

  • Cash ACGBs are 10bp higher with the 10-year yield differential +4bp at -5bp.
  • Swap rates are 9-10bp higher with the 3s10s curve flatter.
  • The bills strip is steeper with pricing -4 to -13.
  • RBA dated OIS is 3-10bp firmer for meetings beyond June with early '24 leading. There is an 20% chance of a 25bp hike at the June meeting priced. The expected terminal rate is at 4.01%, the highest level since March 9.
  • The AOFM plans to sell A$150mn of the 1.25% 21 August 2040 Indexed bond on Tuesday May 23 and A$800mn of the 3.50% 21 December 2034 bond on Wednesday May 24.

NZGBS: Post-Budget Sell-Off Continues

NZGBs closed weaker, but above the session’s worst levels, with 2- and 10-year benchmark yields 15bp and 10bp higher respectively.

  • Strong demand for the May-32 bond (cover at 5.13x) at the weekly round of NZ$400mn supply likely assisted the move away from session cheaps. The cover ratio for the May-26 bond was lower at 2.43x versus 3.46x at the last auction. The May-41 bond saw a similar cover at 2.66x.
  • Nonetheless, the NZGB 2-year benchmark yield sits 28bp higher in post-Budget trading with the 10-year yield 16bp higher.
  • The NZ/US 10-year yield differential is 3bp wider at +77bp, compared to around 60bp at the start of the week.
  • Swap rates are 10-19bp higher with the 2s10s curve 9bp flatter.
  • RBNZ dated OIS has firmed 9-29bp post-Budget across meetings with early ’24 leading. 37bp of tightening is priced for next week’s RBNZ meeting. Terminal Rate expectations lift to a new cycle high of 5.92%.
  • ASB now expects a 50bp hike at next week's RBNZ policy meeting.
  • The local calendar is light ahead of Wednesday’s release of Retail Sales Ex-Inflation ahead of the RBNZ policy decision on the same day.
  • With the global calendar light today, the markets will be on headlines watch, particularly regarding debt ceiling negotiations.

FOREX: Antipodeans, Yen Moderately Firmer In Asia

The Yen and the antipodeans are firmer in Asia on Friday, gains in AUD and NZD marginally extended as USD/CNH came off session highs. Elsewhere in G-10 ranges are narrow with little follow through on moves.

  • USD/JPY is ~0.2% lower, last printing at ¥138.30/40. The pair is paring some of yesterday's gains after printing a YTD high yesterday. Early in the session Japan's April Core-Core CPI rose at its fastest annual pace since Sept 1981, core CPI and headline CPI printing in line with estimates.
  • Kiwi is firmer this morning, widening rate differentials and a trade surplus in April have seen NZD/USD rise ~0.2%. The 200-Day EMA ($0.6258) presents as the first target for bulls, a break through here opens high from May 11 ($0.6385).
  • AUD/USD is ~0.2% higher and we sit a touch beneath session highs. Bulls look to break the 50-Day EMA ($0.6708).
  • EUR and GBP are little changed from opening levels and narrow ranges have been observed.
  • Cross asset wise; e-minis are ~0.2% higher and BBDXY is a touch softer. US Treasury Yields are ~1bp across the curve.
  • German PPI is the highlight of an otherwise thin calendar today.

EQUITIES: Weaker Hong Kong Tech Weighs On Risk-On Mood

Regional Asia Pac markets are mostly higher, albeit not to the same degree as implied by gains in US/EU bourses from Thursday's session. Hong Kong equities are down as well, which has likely weighed on sentiment to some degree in the region today. US equity futures have tracked mostly higher, with the tech space leading the way. Nasdaq futures last +0.22% to 13924. Eminis are ~0.14% higher, last around 4218.

  • The HSI is down around 1% at this stage, although we are above earlier session lows. Carry over from weaker Alibaba sentiment in US trade on Thursday has weighed (revenue growth from the company left investors disappointed). The HS TECH index is off 1.80% at this stage.
  • China shares were weaker at the open but have clawed back into positive territory, the CSI 300 last around +0.20%.
  • Japan shares remain on the front foot, albeit with gains slowing somewhat. The Topix +0.10% at this stage. The Nikkei 225 is faring better, last around 0.80% higher, back to early 1990s highs.
  • The Taiex (+0.40%) and Kospi (+0.80%) have both risen, on the back of better tech sentiment from Thursday's session in the US. Offshore investors have added a further $269mn to local Korean shares today.
  • In SEA, Thai shares remain under pressure, down a further 0.30%, but they may find some support ahead of the 1500 level.

OIL: Brent Tracking +3% Higher For The Week On Broader Risk Appetite Boost

Brent crude is higher, back in the $76.40-50/bbl region currently. This is +0.78% above NY closing levels from Thursday, although Brent remains within ranges for the past week or so. We are tracking around 3% higher at this stage versus end levels from last week. This would be the first gain since mid April for Brent. WTI was last near $72.40/bbl, and following a similar trajectory.

  • From a levels standpoint, Brent is wedged between support at $73.49 (May 15 low) and recent highs at $77.60 (May 10 high).
  • Broader risk appetite has improved in the equity space through the latter part of this week, as hopes of a debt deal rise. This has aided oil sentiment, helping to offset higher US real yields and weaker sentiment emanating out of China.
  • Bloomberg notes oil demand out of South Korea and Taiwan has picked up (link), which has also likely helped at the margins.
  • Elsewhere reports suggest wildfires in Alberta, Canada, is taking 240k barrels per day from supply.

GOLD: At Six Week Lows, USD & US Tsys Weigh

Gold is 0.3% higher at 1963.10 in Asia-Pac trade after the metal extended its decline into a third day to the lowest level in more than six weeks on Thursday as optimism for a US debt-ceiling deal and stronger-than-expected labour market data undercut the haven.

  • President Joe Biden expressed confidence that negotiators would reach an agreement to avoid a default, while House Speaker Kevin McCarthy said he remained hopeful of an accord.
  • US initial jobless claims fell more than forecast last week, underlining the robustness of the labour market despite higher interest rates.
  • Hawkish remarks from the Dallas Fed's Logan, who indicated support for another interest rate hike in June due to sustained high core inflation and wages, pressured US tsy yields.
  • The dollar and US tsy yields extended gains, weighing further on bullion, which dropped as much as 1.3% on Thursday.

ASIA FX: USD/CNH Makes Fresh Highs, KRW Continues To Outperform, IDR and THB Softer

Most USD/Asia pairs have traded with a firmer bias, led by USD/CNH, although KRW remains an outlier (along with TWD). In SEA, PHP is doing better, with yesterday's on hold BSP decision not seen as dovish as feared. IDR and THB have continued to weaken though. Looking ahead, China's 5yr and 1yr LPRs are due next Monday, no change is expected. Also out is the first 20-days of South Korean trade data for May.

  • USD/CNH has continued to March higher, getting to 7.0750 post the fixing outcome, which was slightly firmer than expected, but not enough to temper bearish expectations. Onshore equities have struggled to gain positive traction. Onshore spot got above 7.0600 in early trade, but now sits back at 7.0460/70. Reuters reported that onshore state owned banks were swapping yuan for dollars, in a potential sign of greater push back on recent depreciation pressures.
  • 1 month USD/KRW has traded with a negative bias today, albeit remaining within recent ranges. The pair last around 1329, around 0.35% stronger in won terms versus Thursday's closing levels. Onshore equities have continued to rally, the Kospi up a further 0.80%. Offshore investors have added a further $283.3mn to local shares today, brining week to date inflows to $904.3mn. Spot USD/TWD is also down a touch to 30.72/73.
  • USD/IDR is back above 14900, last near 14955, through highs from late April. Indonesian markets returned today after yesterday's holiday, with the pair playing some catch up with higher USD/Asia levels. A break above 14920 may see the market target 14970, highs from early April and beyond that is 15000, round figure resistance. Weaker palm oil prices will be weighing at the margin, while firmer US real yields is additional headwind. The real 10yr is back to +142bps, highs from the first half of March. Portfolio flows are also more modest compared to earlier in the year.
  • USD/PHP is holding close to session lows. The pair opened sharply lower hitting 55.665, before moving back into a 55.70/75 range, which is where we last tracked. This is around 1% off recent highs from Wednesday close to 56.25. Earlier May lows came in at 55.55 (May 11), while the simple 50-day MA sits further south at 55.21. The 200-day sits near 56.09, with moves above this resistance point proving unsustainable. Yesterday's BSP on-hold decision was expected, but the market may have taken some comfort from the fact that BSP Governor Medalla said the central bank will resume tightening if necessary (based on data), but the most likely outcome is on hold for the next 2-3 meetings. The market may have been fearful of a more dovish BSP outlook.
  • USD/MYR prints at 4.5500/5550, pair rose ~0.3% yesterday printing its highest level since 24 Nov. MYR was pressured yesterday as US Treasury Yields rose boosting the USD. Palm Oil futures fell a further ~1.3% on Thursday and are down ~5% this week although losses have been marginally pared this morning. The April Trade Balance was narrower than forecast, a surplus of MYR12.85bn was recorded vs an expected surplus of MYR21.20bn.
  • USD/THB has continued to track higher, last near 34.50, with onshore equities remaining on the back foot, down a further 0.40% towards recent lows near 1500.

UP TODAY (TIMES GMT/LOCAL)

DateGMT/LocalImpactFlagCountryEvent
19/05/20230600/0800**DEPPI
19/05/20231230/0830**CARetail Trade
19/05/20231245/0845
USNew York Fed's John Williams
19/05/20231300/0900
USFed Governor Michelle Bowman
19/05/20231400/1000*USServices Revenues
19/05/20231455/1655
EUECB Schnabel Speech at Conference on Financial Stability and Monetary Policy
19/05/20231500/1100
USFed Chair Jerome Powell
19/05/20231600/1800
EUECB Schnabel Panels Conference on Financial Stability and Monetary Policy
19/05/20231900/2100
EUECB Lagarde Video Presentation at Banco Central Brasil

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