MNI EUROPEAN MARKETS ANALYSIS: RBNZ & AU CPI In Focus Tomorrow

US TSYS: Tick Away From NY Highs In Narrow Ranges

TYZ3 deals at 108-28, -0-04, a 0-05 range has been observed on volume of 63k.

• Cash tsys sit 1-2bps cheaper across the major benchmarks, light bear flattening is apparent.
• Tsys ticked away from NY session highs through the Asian session, participants perhaps used Monday's richening as an opportunity to exit long positions/add fresh shorts.
• Narrow ranges were observed for the most part as the move lower was limited.
• The data docket is thin in Europe today. Further out we have US Conference Board consumer confidence, Richmond Fed Mfg and Business Conditions and Dallas Fed Services. The latest 7-Year supply is due, as is Fedspeak from Fed Governor Waller and Chicago Fed President Goolsbee.

JGBS: Morning Strength Pared After A Poor 40Y Auction

JGB futures are only slightly richer, +9 compared to the settlement levels, after paring the morning’s gains following a poor 40-year auction.

• The issuance of 40-year bonds today encountered a tepid reception, with the actual high yield surpassing dealer expectations. The cover ratio witnessed a decline, dropping to the lowest level at a 40-year auction since March 2022. As the first 40-year supply following the BOJ’s shift to a 1% YCC reference rate, today’s result holds significance particularly given it was in stark contrast to the robust demand metrics witnessed at the 20- and 30-year JGB auctions in November.
• There hasn’t been much else in the way of domestic drivers to flag.
• Cash US tsys are 1-2bps cheaper in today's Asia-Pac session.
• The cash JGB curve is mixed with the belly outperforming. Yields are 1.8bps lower (5-year) to 2.0bps higher (40-year). The benchmark 10-year yield is 1.3bp lower at 0.765% versus the cycle high of 0.97% set in late October and the BOJ's 1% YCC reference rate. The 40-year JGB is around 3bp cheaper in post-auction dealings.
• The swaps curve has twist-steepened, pivoting at the 4s, with rates 0.8bp lower to 1.4bps higher. Swap spreads are mixed.
• Tomorrow, the local calendar is empty, apart from BOJ Rinban operations covering 3- to 25-year JGBs.

AUSSIE BONDS: Richer But Well Off Session’s Best Levels, CPI Monthly Due Tomorrow

ACGBs (YM +6.0 & XM +6.0) sit richer but well off the Sydney session’s best levels. The move away from the session’s best levels likely reflected both domestic and offshore influences.

• On the domestic front, RBA Governor Bullock participated in a panel at the HKMA-BIS conference today. She reiterated her view that stronger-than-expected demand and inflation may mean further tightening. She also said that the main challenge for the RBA going forward will be to reduce domestic inflationary pressures.
• There was also likely spillover from a poor 40-year JGB auction. The actual high yield surpassed dealer expectations and the cover ratio declined to the lowest level at a 40-year auction since March 2022. The 40-year JGB is around 3bp cheaper in post-auction dealings.
• Cash ACGBs are 6bps richer, with the AU-US 10-year yield differential 4bps wider at +10bps.
• Swap rates are 6-7bps lower, with EFPs little changed.
• The bills strip has twist-flattened, with pricing -1 to +6.
• RBA-dated OIS pricing is flat to 5bps softer on the day across meetings, with Feb’25 leading.
• Tomorrow, the local calendar sees the CPI Monthly for October along with Q3 Construction Work Done and the Private Capital Expenditure Survey for 2023-24.
• Tomorrow, the AOFM plans to sell A$800mn of the 2.75% 21 June 2035 bond.

AUSTRALIAN DATA: Retail Spending Stagnating, Strong November Likely

October retail sales were weaker than expected falling 0.2% m/m after +0.9%. The ABS noted that consumers held back on spending during the month as they were waiting for late November’s Black Friday sales. With the growth in this event, there has been a shift in the timing of festive spending which is impacting the data despite its seasonally adjustment. The message from this data is consistent with the view that consumer retail demand has softened but it isn’t contracting yet.

• Retail spending is now only 1.2% higher than a year ago, the slowest annual growth rate since the Covid-impacted August 2021. Levels are only 1.5% higher compared to Q4 last year, suggesting that spending has stagnated over the year but hasn’t shrunk.
• Sales were weak in all major categories except food. Clothing & footwear fell 1% m/m, department stores -0.6% and household goods -0.6%.
• Restaurants, which had been quite resilient, saw sales decline 0.4% - the second consecutive drop. The ABS notes that people are dining out less due to higher food prices and cost-of-living pressures. Sales are still 4.6% higher than a year ago but well off the 2022 peak as pent-up demand for going out following the pandemic has been worked through.

Source: MNI - Market News/ABS

RBA: Challenge To Reduce Domestic Inflation, Demand Resilience Surprised

RBA Governor Bullock participated in a panel at the HKMA-BIS conference today which included BoT Governor Sethaput, BoE Deputy Governor Ramsden and Bank of Spain Governor de Cos. There were some common themes – commitment to reduce inflation and while policy is restrictive, rates will likely need to remain “higher for longer”, demand has been more resilient to monetary tightening than expected and thus inflation, especially services, has been stickier, but significant uncertainties persist around the outlook.

• RBA’s Bullock reiterated many of her previous comments from this month and so she didn’t alter the view that stronger-than-expected demand and inflation may mean further tightening depending on the outlook. She said that the main challenge for the RBA going forward will be to reduce domestic inflationary pressures.
• Bullock said that more resilient demand had led to second round effects from increased costs related to supply shocks on domestic inflation. Robust demand has enabled businesses to maintain their profit margins and thus pass on higher costs. She noted that while wages haven’t got “completely out of control” yet, the lack of productivity has resulted in strong unit labour cost inflation.
• She said that employment remains the key as jobs enable people to pay higher mortgages and costs. So, the RBA now needs to be “a little bit careful” when setting policy.
• Private and public sector balance sheets in Australia are in a good position. Mortgage arrears remain very low and refis onto higher rates have generally been managed, savings buffers are mainly still intact, government budget is in surplus but it will face higher borrowing costs going forward.

NZGBS: Closed On A Strong Note Ahead Of Tomorrow’s RBNZ Policy Decision

NZGBs closed richer, at or near the session’s best levels, with yields 6-8bps lower. With the domestic calendar empty today ahead of the RBNZ policy decision tomorrow, local participants appear to have been guided by US tsys’s strong resumption to trading yesterday after the Thanksgiving long weekend. That said, those gains have been slightly pared in today’s Asia-Pac session, with cash US tsys flat to 2bps cheaper.

• Swap rates are 11-12bps lower, with the 2s10s curve slightly flatter.
• RBNZ dated OIS pricing is flat to 8bps softer across meetings, with Oct’24 leading. Notably, the market assigns a 15% probability to a 25bp hike at tomorrow's policy meeting.
• We expect the RBNZ to leave rates at 5.5%, where they have been since May. Bloomberg consensus is unanimous at 5.5%. As a result, the focus will be on the accompanying updated forecasts, statement and press conference. (See MNI’s preview here)
• Terminal OCR expectations remain steady at 5.54%. It is noteworthy that the recent peak in the expected terminal rate, recorded at 5.72%, occurred in the lead-up to the Q3 CPI release in mid-October. Subsequently, expectations have undergone a gradual softening, amounting to nearly 20bps. Looking ahead, the market fully prices in a 25bp rate cut by August 2024.

RBNZ: MNI RBNZ Preview - November 2023: Economy Developing Broadly As Expected

• We expect the RBNZ to leave rates at 5.5%, where they have been since May, at its final meeting for 2023. Bloomberg consensus is unanimous at 5.5%. As a result, the focus will be on the accompanying updated forecasts, statement and press conference.
• In terms of projections, there are likely to be some near-term revisions with the medium-term little changed, which is the time horizon that the MPC focuses on. As the economy is evolving broadly as the RBNZ expected, the OCR forecast is likely to be little changed and headline CPI inflation still return to target in Q3 2024.
• The MPC will still want to send a strong message that policy needs to remain restrictive to bring inflation back to target. It won’t want easing brought forward and risk a reduction in mortgage rates. Its neutral stance should be maintained and the “high for longer” message is likely to be unchanged.
• See full review here.

FOREX: Fresh MTD Low For BBDXY

The greenback has ticked marginally lower today, BBDXY printed a fresh November low. An offer in USD/JPY has spillover into moderate USD pressure. Bloomberg noted that month end rebalancing is providing support for the Yen. The cross asset space is relatively muted; US Tsy Yields are a touch higher and US Equity Futures are marginally lower.

• USD/JPY is down ~0.3%, the pair briefly tested ¥148 before marginally paring losses. We sit at ¥148.20/25. Support is at ¥147.15 low from Nov 21. Resistance comes in at ¥149.94, the 20-Day EMA.
• AUD/USD has breached Monday's highs and now sits at touch off its highest level since early August. We sit a touch above $0.6616 the high from Aug 10, the next target for bulls is $0.6656, 61.8% retracement of Jul-Oct bear leg.
• Kiwi has observed narrow ranges for the most part, NZD/USD is see-sawing around $0.61 handle and is little changed from opening levels.
• Elsewhere in G-10 there hasn't been any moves of note.
• The docket is thin in Europe today.

FOREX: USD Sold Heavily Per CFTC Update

In the week to 21 of Nov (last Tuesday) we saw a decent shift against the USD according to CFTC positioning data released on Monday during US trade.

• Net EUR longs rose +20.7k to 126.6k. This is back to early Sep levels from a positioning standpoint. It was also the biggest weekly change since mid-July in terms of net longs.
• GBP was also bought, +1.6k, along with CHF (+1.2k). Yen shorts were also cut back, +24.8k to -105k.
• Interestingly, AUD shorts were added to -7k, taking net positioning to -78k. CAD shorts were reduced though by nearly 5k.
• In the EM space, MXN longs were added to +15.5k.

Fig 1: EUR/USD Versus Net EUR CFTC Positioning (Non-Commercial)

Source: MNI - Market News/CFTC/Bloomberg

FX VOL: Implied Volatility Ticks Lower, Remains Stable

1-Month Implied volatility in FX markets, measured using the JP Morgan G-10 Volatility Index, sits well within recent ranges and has been ticking lower in recent dealing.

• The index sits at 7.19%, well within the range observed since April, we did print as high as 7.64% last week.
• Implied volatility across G-10 FX remains relatively stable, looking ahead we have RBNZ monetary policy decision, Australia Oct CPI tomorrow, German Regional and National CPI and US GDP all cross tomorrow.

Fig 1: JPMorgan 1-Month G10 FX Volatility

Source: JP Morgan/MNI/Bloomberg

EQUITIES: Hong Kong & Japan Weaken, Firm Gains For South Korean & Taiwan

Equity sentiment is mixed in Asia Pac markets in Tuesday trade to date. Japan and Hong Kong markets are weaker. Most other major markets are higher. US equity futures have been range bound and currently sit a touch weaker. Eminis were last near 4561 (flat), Nasdaq futures are at 15995 (off 0.10%).

• Hong Kong markets sit lower at the break, off 0.60%. Familiar headwinds in terms of earnings concerns and property headwinds are weighing. SCMP noted that the Beijing small cap (BSE 50) index slumped as the authorities looked to curb sharp recent gains. The Beijing Stock Exchange also stated it was untrue that the exchange asked major shareholders not to reduce holdings (BBG).
• PBoC Governor Pan spoke HK, he played down the risks from real estate, stating spill over to the financial system was limited. The economy should achieve its growth target in 2023 as well, while risks from local government debt levels were also contained at an aggregate level.
• The CSI 300 is around flat at the lunch time break.
• The Kospi (+0.7%) is doing better led by Samsung gains. Taiwan's Taiex is also up firmly, over 1% led by the semi conductor sector.
• Japan's markets are lagging, with the Topix off 0.50%, the Nikkei -0.35%. A further rally in the yen (+0.35%) is likely weighing.
• In SEA trends are mixed, Singapore and Malaysia stocks off modestly, but mostly positive gains elsewhere.

OIL: Steady Trends As Market Awaits OPEC Meeting

Oil has tracked a fairly tight range through the first part of Tuesday trade. Brent was last in the $80.15/20 region, a touch above Monday closing levels. We have clawed back 0.25% of Monday's 0.74% loss at this stage. For WTI we are close to the $75/bbl level, following a similar trajectory to Brent.

• Brent drifted higher in early trade, but highs near $80.50/bbl remained well within Monday's ranges. Recent dips sub $80/bbl have been supported and some distance from testing support at $76.60 (Nov 16 low).
• Focus remains on Thursday's OPEC+ meeting. There have been reports that the group remains divided over whether to cut output further with many reluctant to do so and the Nigeria/Angola quota increase has not yet been agreed. CME Group estimates a 67.8% probability that there will be no change in the output level and 24.8% that it will be increased, according to Dow Jones.
• The market is speculating that if OPEC+ can’t agree on quotas that Saudi Arabia will end its voluntary cuts and “flood the market” pushing prices down for all members.

GOLD: Steady Near Highest Level Since May

Gold is slightly higher in the Asia-Pac session, after closing 0.7% higher at $2014.13 on Monday.

• The yellow metal currently sits near the highest level since May, supported by lower US Treasury yields and a weaker USD index.
• US yields and the USD have declined in November as investors made wagers on a dovish pivot from the US Federal Reserve next year, with weak economic data bolstering expectations that the central bank is done with rate hikes.
• Bullion reached a high of $2018.21 on Monday, piercing resistance at $2009.4 (Nov 7 high). According to MNI’s technicals team, a clear break of this hurdle would confirm a resumption of the uptrend and open $2022.2, the May 15 high.

SOUTH KOREA: Consumer Sentiment Eases Further, Inflation Expectations Steady

South Korean headline consumer sentiment continued to ease in November. We now sit at 97.2, still comfortably above mid 2022 lows, but down for the fourth straight month. The first chart below overlays headline sentiment against y/y GDP growth. The index isn't pointing to a sharp rise in y/y growth momentum.

• In terms of the detail, current living standards and the domestic economy both dipped from October levels. Consumer spending plans eased further, particularly in relation to recreational spending. Employment expectations eased, but were firmer in terms of the domestic economic outlook.

Fig 1: South Korea Headline Consumer Sentiment & GDP Growth Y/Y

Source: MNI - Market News/Bloomberg

• On the price side, the expected inflation level was unchanged at 3.4%. The chart below overlays these expectations against headline CPI y/y.
• Expected wages eased modestly, while house price expectations fell more noticeably (102 from 108 in Oct).

Fig 2: South Korean Consumer Inflation Expectations & Headline CPI Y/Y

Source: MNI - Market News/Bloomberg

ASIA FX: KRW & THB Rally, USD/CNH Steady, BoT Decision Due Tomorrow

USD/Asia Moves have mostly been skewed to the downside today. KRW and THB have been the strongest performers, while MYR has also gained. USD/CNH's beta to overall USD moves has become more muted in recent sessions. Still to come today is Taiwan Q3 GDP. Tomorrow, we have South Korea business sentiment early. Later on, focus will be on the BoT decision, although no change is expected.

• USD/CNH's beta to overall USD moves has been fairly muted. We had a lower USD/CNY fix, but dips in USD/CNH towards 7.1500 have been supported. We currently track near 7.1575 slightly firmer in CNH terms for the session. Onshore equities are around flat, while HK markets have been weaker in the first part of trade. PBoC Governor Pan spoke HK, he played down the risks from real estate, stating spill over to the financial system was limited. The economy should achieve its growth target in 2023 as well, while risks from local government debt levels were also contained at an aggregate level.
• 1 month USD/KRW has tracked lower in the first part of Tuesday trade. We were last near 1291, (+0.40% higher in won terms), with earlier lows at 1288.25. Won bulls will target a test of Nov 21 lows just under 1282. Positive spillover has been evident from a firmer yen backdrop, while broader USD index losses also continue (BBDXY down a further 0.12%). The firmer local equity backdrop has also helped, the Kospi rising 0.70% and putting the index back above 2500. We haven't been above to sustain gains above this level in recent weeks, so that will be a watch point.
• The Rupee has opened dealing little changed from Friday's closing levels in a muted start to Tuesday's session. Onshore participants are digesting the downtick in US Tsy Yields on Monday, which has moderated a touch in Asia today, and further pressure on Oil. A reminder that local markets were closed yesterday for the observance of a national holiday. The local docket is empty until Thursday when Q3 GDP crosses. A print of 6.9% Y/Y is expected, the prior read was 8.0%. Also due on Thursday is the October Fiscal Deficit. On Friday we have November S&P Global Mfg PMI.
• The SGD NEER (per Goldman Sachs estimates) is little changed this morning, we remain a touch off recent cycle highs. The measure sits ~0.3% below the top of the band. USD/SGD fell ~0.4% on Monday breaching the $1.34 handle as lower US Tsy Yields weighed on the pair. We sit a touch above the lows from 21 Nov when a 3 month low was printed. A reminder that the docket is light this week with just October Money Supply due on Thursday.
• The Ringgit has ticked higher as onshore participants digest yesterday's downtick in US Tsy Yields which has moderated a touch this morning. USD/MYR is ~0.3% lower today, last printing at 4.6660/90. A reminder that yesterday Malaysia’s lower house of Parliament voted in favour of the government’s 2024 spending plan, it will now be presented to the Senate.
• USD/THB sits at session lows, near 34.90, levels we haven't been at since the start of Sep. Baht has rallied nearly 0.60%, only bettered by KRW today. As we noted yesterday, firmer gold prices will be aiding sentiment at the margin, as this could lead to higher exports. Yesterday's surprise trade deficit hasn't had a lasting negative impact on sentiment. BoT Governor Sethaput spoke on a panel session in Hong Kong earlier. He didn't give much away on monetary policy given the proximity of tomorrow's policy meeting (no change is expected). One area of concern is that China tourists weren't coming back, with spending also down on prior outcomes the Governor noted. This is definitely something that is on the radar for the authorities, with steps being considered to boost inflows in 2024.
• Philippine markets have returned today. The early impetus has been for USD/PHP to gravitate higher, but we now sit close to unchanged from last Friday levels, last at 55.41. The Philippines Finance Secretary Diokno said over the weekend that the likely USD/PHP range was 53-57 over the medium term. Structural inflows and ample FX reserves support this backdrop (BBG).