MNI EUROPEAN MARKETS ANALYSIS: RBA Market Pricing Close To 50% For A 25bps Hike Tomorrow

US TSYS: Weaker, Sitting Just Above Session Cheaps, Looming Supply Surge Weighs

TYU3 is sitting near Asia-Pac cheaps at 113-19+, -7+ from NY closing levels, after reaching a low of 113-17+.

• Cash tsys are 0.9-3.6bp cheaper across benchmarks in Asia-Pac trade, but 1.0 to 1.5bp richer than session cheaps.
• With the Asian calendar light, local participants have likely been on headlines watch as they digest the sharp post-payrolls sell-off on Friday.
• US Treasury yields seem to be under pressure due to the imminent risk of increased debt issuance following months of disruption, as President Biden signed legislation to suspend the federal debt ceiling. (link)

JGBS: Futures Heavy, Pressured By US Tsys, 30-Year Supply Tomorrow

JGB futures are trading on a low note, currently standing at 148.54, -28 compared to the settlement levels.

• There hasn’t been much in the way of domestic drivers to flag, outside of the previously outlined Jibun Bank Services and Composite PMIs.
• Accordingly, local participants are likely to have been on headlines and US tsys watch as they digest the sharp post-payroll sell-off on Friday. Cash tsys are 1.5-4.1bp cheaper with tsy futures at 113-19, -8 versus NY closing levels.
• US Treasury yields seem to be under pressure due to the imminent risk of increased debt issuance following months of disruption, as President Biden signed legislation to suspend the federal debt ceiling. (link)
• The strength of May price rises will lead the BOJ and Governor Kazuo Ueda to make a tough call on yield curve control. (link)
• Cash JGBs are cheaper with yields higher beyond the 2-year zone. Yields are 0.3-2.6bp higher across benchmarks with the futures linked 7-year zone leading. The benchmark 10-year yield is 1.7bp higher at 0.431%. The 30-year JGB yield is 0.7bp higher at 1.281% ahead of tomorrow’s supply.
• The swaps curve bear steepens with rates 0.3bp to 2.6bp higher and swap spreads wider.
• The local calendar tomorrow sees April’s Labour Cash Earnings and Household Spending along with 30-year supply.

AUSSIE BONDS: Cheaper, RBA Policy Decision Tomorrow, Uncertain Outcome

ACGBs are weaker (YM -12.0 & XM -12.0), sitting at Sydney session cheaps as US tsys extend Friday’s post-Payroll sell-off in Asia-Pac trading.

• The RBA Policy Decision is scheduled for tomorrow. While the BBG consensus anticipates no change, it is important to note that this view is not unanimous. The meeting holds significance as the case for a further rate increase is likely to be seriously discussed, following the upside surprise in the April Monthly CPI Indicator.
• RBA dated OIS pricing is 2-10bp firmer for meetings beyond August with Apr’24 leading. The market currently is currently attaching a 52% chance of a 25bp hike at tomorrow’s meeting. The expected terminal rate sits at 4.17%, just shy of today’s intraday high of 4.20%. Nonetheless, the current level is the highest level since March 3. Year-end easing expectations continue to be unwound with only 4bp priced.
• Cash ACGBs are 11-12bp cheaper with the AU-US 10-year yield differential at +4bp.
• Swap rates are 11bp higher with EFPs 1bp tighter.
• The bills strip twist steepens with pricing +3 to -13.
• Ahead of the RBA decision tomorrow, the local calendar is scheduled to release Q1 Current Account and Net Exports data.

Australia STIR: RBA Dated OIS Firmer Ahead Of The RBA Decision Tomorrow

RBA dated OIS pricing is 2-10bp firmer for meetings beyond August with Apr’24 leading.

• The market currently is currently attaching a 52% chance of a 25bp hike at tomorrow’s meeting.
• The expected terminal rate sits at 4.17%, just shy of today’s intraday high of 4.20%. Nonetheless, the current level is the highest level since March 3.
• Year end easing expectations continue to be unwound with only 4bp priced. The day after the RBA surprised the market with a 25bp hike at the May meeting, year-end easing expectations stood at 26bp.

Figure 1: RBA-Dated OIS – Terminal Rate Expectations

Source: MNI – Market News / Bloomberg

AUSTRALIAN DATA: Easing In MI Inflation Gauge But Inflation Still “Too High”

The Melbourne Institute inflation gauge in May eased to 5.9% from 6.1%. The peak appears to have been in January at 6.4%. It remains elevated and is moderating at a gentle pace. The MI trimmed mean was lower at 5.2% from 5.5% in April but in line with March. After rising in April due to base effects, monthly CPI inflation may ease again in May. But both series are indicating that inflation remains “too high”.

Australia CPI y/y% vs MI inflation gauge y/y%

Source: MNI - Market News/ABS/Refinitiv

AUSTRALIAN DATA: Higher Inventories, Slower Profit Growth, Wages Solid

Gross operating profits rose a lower-than-expected 0.5% in Q1 to be up 7.1% y/y after an upwardly revised 12.7% q/q and 16% y/y in Q4. Mining profits fell 2.2% q/q. But inventories rose solidly and while companies’ wages bills grew at a slower pace, they remain high. Watch unit labour costs in Wednesday’s Q1 national accounts.

• Wages & salaries grew 1.8% q/q to be up 11.4% y/y. While still strong reflecting continued employment, hours and wages growth, the series slowed from Q4’s +2.7% q/q and 11.5% y/y.
• Inventories rose 1.2% q/q, which was more than expected, and Q4 was revised up to +0.3%. Thus they look set to make a positive quarterly contribution to Wednesday’s Q1 GDP. After revisions this was the sixth consecutive quarter of stock build. They stand 4.1% above year ago levels, which is down from the Q3 2022 peak of 7.6% y/y, but may be signalling some involuntary inventory build in the face of slowing demand following the resolution of pandemic-related restocking. Retail inventories rose 0.9% q/q.

Source: MNI - Market News/ABS

FOREX: USD Supported By Firmer Yield Backdrop

The USD has mostly been supported today, albeit within recent ranges. US yields have tracked higher, with higher oil and debt issuance fears (post the debt ceiling agreement) appearing as supports. However, we are off session highs at this stage, with the 2yr back at 4.53%, after getting close to 4.55% in early trade.

• This has likely helped curb USD gains to a degree, with the BBDXY last around 1242.70/75, versus 1243.30 highs for the session. USD/JPY got to fresh highs of 140.25/30 but we now sit back at 140.05/10. Positive PMI revisions for May did little to boost yen sentiment.
• AUD/USD dips sub 0.6600 have been supported but we still sit lower versus NY closing levels from the end of last week. AU data has been mixed today, but not shifting the RBA expectations needle much ahead of tomorrow's outcome, with market pricing close to 50% priced for a 25bps move at this stage.
• The China Caixin services PMI printed better than expected, dragging the A$ from its lows, but follow through has been limited.
• NZD/USD is softer but within recent ranges, last 0.6060. NZ onshore markets have been closed today.
• EUR/USD was last just under 1.0700, GBP/USD is -0.20% weaker, sitting at 1.2425/30 currently.
• Looking ahead, we have Swiss CPI, EU and UK PMIs for the services sector. ECB's Lagarde also speaks. In The US, the ISM services PMI and factory orders are on tap.

EQUITIES: Fresh Highs For Japan Stocks, China Property Shares Give Back Some Of Friday's Gains

Regional equities are mostly higher, with Japan stocks leading the way. China stocks have given back some of Friday's gains in terms of the CSI 300, as property stocks ease. US futures are in the red. Eminis off around 0.10% at this stage to 4283 while Nasdaq futures have fallen 0.40%.

• Higher US yields are weighing, with firmer oil prices (post the Saudi cut) and a potential US debt issuance dump (post the debt ceiling agreement), boosting yields. A headline also crossed from the WSJ, which stated US banks may face a 20% boost in capital requirements in the US, but this hasn't impacted broader equity sentiment at this stage.
• The CSI 300 is -0.45% lower at the break while the Shanghai Composite is not too far away from flat. Property related stocks have slipped, reversing some of the impressive gains from Friday, which were fueled by fresh stimulus reports. Reports indicate measures under consideration include lower down payments in parts of some cities, although fresh details didn't appear forthcoming over the weekend.
• The HSI is doing better, up 0.54% at the break, with the underlying tech index close to flat.
• Japan's Nikkei is +1.75%, hitting a fresh 33 high. Tech related plays have performed well, but momentum also appears to be a factor. Higher USD/JPY levels are also likely helping at the margin.
• The ASX 200 is up over 1%, while Indonesia markets have returned from a two-day break. We were higher in earlier trade but now sit back closer to flat for the JCI.

OIL: Crude Gives Up Most Of Early Gains Following Saudi Output Cut

Oil started Monday trading strongly higher following the surprise announcement that Saudi Arabia would reduce its output by an additional 1mbd from July in addition to the 1.6mbd announced by OPEC+ in April. The move should provide a floor to prices, unless economic data deteriorates more than expected. Brent reached an intraday high of $78.73/bbl earlier but has given up a lot of those gains and is now trading around $77.11, up 1.3% from Friday’s NY close. WTI is +1.4% to $72.75 after a high of $75.06. The USD index is 0.1% higher.

• China’s Caixin services PMI for May rose to 57.1, stronger than expected, from 56.4. Manufacturing also rose and the composite now stands at 55.6 up from 53.6, thus providing some optimism for China’s oil demand.
• The July voluntary cut by Saudi Arabia may be extended or deepened as the oil producer can remain flexible depending on market stabilisation. There was a long debate on quotas and the rest of the group, including Russia, didn’t follow but did confirm that they would extend the existing cuts through 2024. In contrast, UAE will increase production next year covered by unused quotas from African members.
• The Fed’s Mester (non-voting) gives welcome remarks later and ECB President Lagarde also speaks. Services PMIs/ISM for May are released.

GOLD: Down Again, Pressured By Higher Yields & A Firmer Dollar

Gold has experienced a slight weakening in the Asia-Pacific session, with prices at 1945.45 (-0.1%). This decline follows a 1.5% drop on Friday, which can be attributed to a shift in investor sentiment towards risk-on assets after the resolution of the US debt-default issue, dampening demand for bullion.

• Furthermore, the increase in US tsy yields on Friday likely contributed to the decline in gold, given it lacks yield-bearing characteristics.
• The move higher in yields came despite mixed employment data: strong May jobs gains and up-revisions for the prior two data sets, versus a higher unemployment level.
• Potentially pressuring US tsy yields has been the looming threat of net new debt issuance after months of disruption. (link)
• Additionally, the dollar spot index experienced an increase on Friday, further influencing the price dynamics of gold.

CHINA DATA: Caixin PMIs Outperform Official Prints, Questions Remain If June Will See A Repeat

The Caixin services PMI printed above expectations in a similar fashion to the manufacturing PMI. The 57.1 outcome was a touch below the Mar outcome of 57.80, but is quite elevated from an historical standpoint. The composite PMI now stands at 55.6, which is the highest print since Dec 2020.

• These results are in contrast to the official PMI prints, which surprised on the downside for both manufacturing and services at the end of May. The official composite PMI was 52.9 (from 54.4 prior).
• The detail of the Caixin services PMI print showed that activity was boosted by the May day holiday period, which aided the hotels, restaurants and travel agency segments.
• This aided jobs growth, albeit at a slower pace, while pricing power rose at the fastest pace since Feb 2022.
• Optimism around the outlook eased though (back to Dec 2022 levels). Coupled, with reduced impetus following the May day holiday raises question marks around how the June figures will look.
• "In general, it remains a prominent feature of the Chinese economy that the services sector is stronger than manufacturing," said Wang Zhe, senior economist at Caixin Insight Group. "This divergence highlights that economic growth is lacking internal drive and market entities lack sufficient confidence, underscoring the importance of expanding and restoring demand," he said.

ASIA DATA: Weaker Foreign Demand Weighing On Output/Confidence, Price Pressures Ease

The S&P Global ASEAN manufacturing PMI eased to 51.1 in May from 52.7, still signalling positive activity in the sector but at a slower rate. Order and output growth slowed but overseas demand continued to fall. All countries saw a decline except the Philippines but Indonesia, Thailand, Myanmar and the Philippines all remained above 50 in expansion territory. Businesses were generally positive regarding the outlook over the next year but confidence was at its weakest in almost 3 years as caution grows.

• Price pressures eased with input costs and output prices rising at their slowest rates in 30 and 28 months respectively, which is good news for the region’s central banks.
• The Indonesian manufacturing PMI fell to 50.3 in May from 52.7, barely in growth territory due to contracting new orders, which weighed on employment growth and business confidence. Foreign orders fell for the 12^th consecutive month. Input costs rose at their lowest since November 2020 and this along with softer demand meant that selling prices rose only marginally and well below average. Like in other countries, some businesses are discounting to attract customers. BI has been on hold since February.
• See Manufacturing PMIs Mixed Across ASEAN, Price Pressures Muted for details on countries released last week.

Source: MNI - Market News/S&P Global

ASIA FX: USD/Asia Pairs Higher, But Rupiah Strengthens As Local Markets Return

With the exception of USD/IDR, all other USD/Asia pairs are higher today. There was a brief period of USD weakness post the better than expected Caixin China PMI, but this didn't last. Tomorrow, the main data points in focus will be inflation prints in Thailand, the Philippines and Taiwan.

• USD/CNH dips have been supported. The pair to 7.1030 post the PMI beat, but we have steadily recovered since, the pair back near 7.1200 at the time of typing. Recall Friday's lows were sub 7.0700. Weaker onshore equities have weighed at the margins, with not much positive follow through from Friday's bounce. A firmer US yield backdrop also weighed.
• 1 month USD/KRW has outperformed at the margins, last near 1305. Earlier highs in the pair came in at 1308/09 but this region found selling interest. The Kospi continues to push higher, now above 2610, +0.45% firmer for the session.
• Spot USD/IDR has returned from a two day break (Thur/Fri) last week to gap lower in the first part of trade. The pair is back to the 14880 level, after closing last Wed just under 15000. Part of this is catch up with lower USD levels more broadly since the last spot close. Higher oil prices will be helping IDR at the margins, with palm oil prices recovering some ground in the second half of last week. Indonesian CPI inflation was lower than expected in May and down on April. Headline CPI rose 4% y/y down from 4.3% the previous month, the top of the target band, and core was 2.7% down from 2.8%.
• USD/PHP has spiked back above 56.00, last in the 56.10/15 region, around 0.40% above closing levels from the end of last week. The simple 200-day MA is nearby at 56.12, but we have seen stronger selling resistance on moves into the 56.30/56.40 region in recent months. Higher oil prices are likely weighing at the margin, given the Philippines already less than favorable external trade dynamics. Still, prices for Brent crude are down on earlier session highs (last around $77/bbl), which has likely tempered bearish sentiment to a degree.
• USD/INR is pushing higher, last near 82.55, versus lows from last Friday sub 82.30. Higher oil prices will be a headwind, while the services PMI printed at 61.2 for May, down from the 62.0 Apr print, but still suggestive of a supportive growth back drop.