MNI EUROPEAN MARKETS ANALYSIS: US Tsy Futures Uptrend Continues, More Fedspeak Coming Up

US TSYS: Treasury Futures Edge Higher As Volumes Surge, Weekly Claims Later

• US treasury futures volume has surged today, initially volumes picked up after what looked to be stopped being triggered, ~160k TY contracts have traded as we head into the Asia break over double the recent volume for this time of day, the contract trades near intraday highs at 109-30+ up (+ 07+), TU briefly traded above overnight highs, tapping 101.29.75 but has been met with sellers and now trade back at 101-29 up ( +01.125)
• The treasury curve has flattened today with yields 1-3bps lower, the 2Y yield -1.3bps at 4.711%, 10Y -2.1bps to 4.319%, while the 2y10y -0.866 at -39.447
• Looking across local rates markets: NZGBs yields are 8-10bps lower, ACGBs yields are 11-12bps lower, JGBs are 0.5bp - 4bps lower, while in the EM space INDON yields are 8-15bps lower and PHILIP yields are 5-12bps lower
• Short end rate cut pricing now projects two 25bp rate cuts by year end (Sep & Dec)
• Looking Ahead: Weekly Claims, Build Permits and more Fed Speak

GLOBAL: Geopolitics Driving Swings In Key Global Costs

Some input costs are being directly impacted by developments in the Middle East and Russia/Ukraine and we have seen the subsequent swings in these factors recently, especially in energy and shipping. This situation currently appears likely to continue indefinitely and so the key is if costs rise, are they being passed on as they are persistent.

• Oil prices rose each month between January and April adding to headline price pressures but they are lower in May to date due to the unwinding of the geopolitical risk premium and demand concerns. The crude outlook is highly uncertain given geopolitical volatility and an unclear supply/demand position and so could continue to swing.

Source: MNI - Market News/Refinitiv

• Shipping costs are also currently dependent on geopolitical developments. They are up in May for both bulk and containers after falling in April. Companies are saying rerouting away from the Red Sea is likely to continue until at least year end.
• Supply chain bottlenecks were a key reason for the rise in inflation but according to the NY Fed index continue to provide disinflationary pressures. The index fell to -0.85 in April from -0.3%.

Source: MNI - Market News/Refinitiv

• Apart from rice and sugar, food prices have generally been disinflationary. The FAO index though rose in both March and April due to meat and oils. Rice prices declined over February-April but are up again so far this month.
• Metals and iron ore have shown broad based strength over Q2 with LME prices 4.4% m/m higher in May to be up 15.6% y/y. Sanctions on Russian exports and increased China infrastructure investment have boosted some metal prices. Wool prices remain weak as they are tied closely to consumer demand.

GLOBAL: Return To Target Likely To Be Gradual

Global inflation has been sticky in 2024 as a number of cost factors that brought inflation down have turned or stabilised but demand pressures also persist. OECD core inflation was steady at 6.4% y/y in March while G20 headline remained at 6.9% above December’s 6.5%. While supply chains look to be continuing to put downward pressure on inflation, factors impacted by geopolitics are swinging from inflationary to disinflationary month to month.

• April CPI data are still being released but the US saw moderation to 3.4% from 3.5% and core to 3.6% from 3.8%. The euro area CPI held steady at 2.4%.
• Non-Japan Asia ex China April core CPI continued trending lower to 1.9% from 2.0% but headline was steady at 3.6% in April. While China’s inflation remains very low, headline and core picked up in April to 0.3% y/y and 0.7% respectively.
• April saw added price pressures from oil, food, metals & ores but downward ones from supply-chains, shipping costs and wool. But there will be lags from these price developments that will feed into products over coming months. The mixed picture is going to add to concerns that bringing inflation down the last part towards targets will be difficult.

Source: MNI - Market News/Refinitiv/IMF

JGBS: Futures Test Week To Date Highs, BoJ Bond Buying Ops On Tap Tomorrow

JGB futures sit just below session highs. JBM4 was last at 144.27, +.36. Post the lunch time break we got to highs of 144.35, after a solid 20yr auction result.

• These moves put us back to earlier highs for the week and above levels that prevailed prior to the BoJ curbing its bond buying ops (for the 5-10yr tenors).
• The 20yr auction saw a pick up in the bid to cover ratio to 3.65, the highest since February, while the tail also shortened compared to the prior auction, suggesting firm underlying demand.
• Positive impetus for JGB futures has also been from higher US TSy futures, which pushed through Wednesday highs in earlier dealings.
• On the data front, we had weaker than expected Q1 GDP and downward revisions to Q4 growth. Still, government officials are hopeful Q2 momentum will be better as some one-off headwinds fade, while consumption could be aided by higher wages.
• For cash JGBs yields, losses are concentrated in the 7-10yr tenors where we are off 3-4bps. The 10yr yield sits back near 0.92%. The 30yr yield is down around 2bps. The 10yr swap rate has continued to track lower last under 0.98%.
• Tomorrow the data calendar is empty but we do have BoJ bond buying ops, as well as a 3mth bill auction.

JAPAN DATA: Q1 GDP Falls More Than Expected, But Q2 May Show Better Trends

Japan's Q1 GDP was weaker than expected. We fell 0.5% in q/q terms against an expected -0.3% dip. Note as well Q4 growth was revised back to flat, against a 0.1% gain originally reported. In annualized terms growth was -2.0% q/q against a -1.2% forecast and flat Q4.

• Relative to expectations, private consumption was weaker at -0.7% q/q (-0.2% projected). Q4 consumption was also revised to a -0.4% dip. Business spending also came in weaker than forecast at -0.8%q/q (-0.5% was forecast). Exports were down -5.0% q/q after a 2.8% rise in Q4 last year.
• Positives were in terms of net inventories adding 0.2% to growth, while public demand rose 0.8% q/q, led by investment.
• Nominal GDP figures were mostly positive in q/q terms. Up 0.1% q/q, slightly below the +0.2% projected. The GDP deflator was +3.6% y/y, above market expectations.
• The figure below plots Japan private demand in y/y terms (the white line) and aggregate GDP.
• The trends don't look favorable but our policy teams notes the outlook may improve for Q2. "The Japanese economy and private consumption will likely recover in or after the second quarter as temporary factors weighed them down over Q1, a senior official at the Cabinet Office said on Thursday, pointing to the suspension of automobile production and shipments in addition to the Hokuriku region earthquake." See this link for more details.
• Higher wage outcomes are also expected to aid the consumption recovery. See here as well.

Fig 1: Japan Private Demand Y/Y & GDP Y/Y (Real Original Terms)

AUSTRALIAN DATA: Economy Struggles To Make Enough Jobs For Increased Labour Force

April employment printed higher than expected at 38.5k, close to the previous 3-month average, after an upwardly-revised 5.9k drop. The details were a bit weaker with the unemployment rate rising to 4.1% from 3.9% and new jobs concentrated in part-time but the data remains volatile. The pickup in unemployment was impacted by people taking time off before starting a new job. Through the volatility, the labour market remains tight but continues to ease gradually, consistent with the RBA’s May view.

• The March unemployment rate was revised up to 3.9% but this was from 3.84% to 3.87%, so not as significant to 2-decimal places. April was 4.054% and so a low 4.1% but still 0.2pp higher than March. Note February fell to 3.7% from a holiday-impacted 4.1%.
• The number of unemployed rose 30.3k to be up 13.7% y/y and the ABS notes that it included those looking for work as well as “more people than usual” waiting to start a job. This effect should be cleared in the May data due on June 13.
• Employment remains strong with the 3-month average in job gains rising to 50.3k from 41.3k and growth rising to 2.8% y/y from 2.4%. But demand couldn’t keep up with supply as the labour force rose 68.8k in April with working age population rising another 57k in the month. The employment-to-population ratio was steady at 64% implying that the labour market remains tight.

Source: MNI - Market News/ABS

• Full-time employment (FT) fell 6.1k while part-time (PT) rose 44.6k and this trend was also reflected in hours worked with FT falling 0.2% m/m and 2.1% y/y but PT rising 0.9% m/m and 6% y/y. Businesses are giving additional hours worked to part-timers signalling a more cautious environment. Total hours were flat in April but down 0.8% y/y.

RBA: April Data In Line With Gradual Labour Market Easing

At the May RBA press conference Governor Bullock said that the central bank looks at a variety of labour market indicators including vacancies, part-time/full-time breakdown, youth unemployment, underutilisation and hours worked. She said in aggregate they were showing a gradual easing in the labour market and the April data are consistent with this view.

• The youth unemployment rate is seen as a leading indicator and it rose 0.1pp in April to 9.7% and is now 2.5pp above the July 2022 trough but the 3-month average is in line with Q4.

Source: MNI - Market News/ABS

• The underemployment rate is 0.4pp higher on a year ago at 6.6% but the 3-month average has been around this rate through 2024. Underutilisation is 0.8pp higher than a year ago at 10.7% but the 3-month average is around 10.4%, where it was in December. While these measures are off their lows, they have not deteriorated over 2024 on average.

Source: MNI - Market News/ABS

• There is a growing gap between growth in PT and FT employment with the former up 6.8% y/y compared with 1.1% for the latter. This is also reflected in hours worked at +6% y/y versus -0.8%. Businesses appear to have a more cautious approach to labour demand (see MNI Economy Struggles To Make Enough Jobs For Increased Labour Force).
• Internet vacancies-to-unemployed continued to ease falling 3.5pp to 39.6% in April but still above the long-run average. With labour force growth running at 3.2% y/y and vacancies down around 18% y/y, it is not surprising that SEEK applicants per job is at its highest since Covid-impacted June 2020. Q1 NAB labour shortages fell to its lowest since Q3 2021.

AUSSIE BONDS: ACGBs Richer, Curve Flatter, Employment Data Mixed

ACGBs (XM +13.0 (+4.00 post Emply) YM +13.5 (+4.00 post Emply)) are richer today, with the curve slightly flatter. Initial yields opened lower, in line with US treasuries after Retail Sales missed estimates with CPI was still hot but broadly as expected, yields then made another move lower after mixed employment data.

• Cross-asset moves: Equities have followed US markets higher, US equities futures up about 0.15% today. In FX the yen is the top performing G10 currency up 0.63%, while the AUD is the worst performer down 0.10%, while Iron Ore is 1.60% higher.
• Earlier, Employment change was 38.5k vs 23.7k, with the make up being 44.6k part-time and -6.1k full time roles, the unemployment rate was 4.1% vs 3.9% est while March was revised higher to 3.9% from 3.8%.
• US Tsys curve has bull-flattened with the 2y10y -1.474 at -40.055, yields are 0.5bp to 2.5bps lower
• The ACGB is slightly flatter today with the 5-10yr tenors seeing the strongest demand, yields are 12-14bps lower, while the AU-US 10-year yield differential 2bps lower at -13.5bps• Swap rates are 6-7bps lower• The bills strip is 2-12bps higher, curve steeper.
• RBA-dated OIS implied rate is 3-11bps lower out past the august meetings and is now pricing 18bps of easing into the year-end to a terminal rate of 4.17%
• Looking ahead, calendar is empty on Friday, with WBC Consumer Confidence on Tuesday

NZGBS: Richer, Close Near Session Best

NZGBs are 8-10bps richer today and trading near best for the session, over the past month we have seen 25-32bps of tighten across the curve with the 15-20yr the best supported. US Tsys futures have seen an increase in volumes today, after breaking above the overnight highs.

• US treasury futures volumes has surged today, initially volumes picked up after what looked to be stopped being triggered, ~160k TY contracts have traded as we head into the Asia break over double the recent volume for this time of day, the contract trades near intraday highs at 109-30+ up (+ 07+), TU briefly traded above overnight highs, tapping 101.29.75 but has been met with sellers and now trade back at 101-29 up ( +01.125)
• The NZGB curve is little changed, yields are 8-10bps lower with the 2Y -8.7bps at 4.636, 10Y is -8.4bps at 4.558%
• Swap rates are 1-4bps lower, curve flatter.
• RBNZ dated OIS has firmed today with 1-2bps more of cuts into year-end, with a cumulative 48bps of easing now.
• Earlier, Govt Bonds held by foreigners fall to 62.2% from 62.9% in March.
• Looking Ahead: PPI Input/Output On Friday

FOREX: BBDXY USD Index Testing 100-day MA Support, A$ Lags On Higher U/E Rate

The early trend for the USD was very much to the downside, as dollar weakness extended from Wednesday's US session. The BBDXY got to fresh lows of 1241.31, levels last seen on April 10, before sentiment stabilized somewhat. We last tracked near 1242.5, around 0.15% weaker for the session.

• Note for the BBDXY the simple 100-day MA is nearby to current levels (1242.31). We haven't been below this support point since March of this year.
• Yen gains drove USD weakness, as US Tsy 10yr futures climbed above Wednesday highs. Markets are refocused on Fed easing risks in light of the in line CPI print but weaker retail sales outcome.
• USD/JPY got to lows of 153.60, but we sit back near 153.90 in recent dealings, still around 0.65% stronger in yen terms. The Q1 Japan GDP miss saw USD/JPY push higher but it didn't have a lasting impact on sentiment (officials hope Q2 growth momentum will be better as higher wages benefit consumption).
• AUD/USD has struggled post the higher than expected unemployment rate for April (4.1% versus 3.9% expected). The detail wasn't as bad as the headlines suggested, however, it still indicates some softening in labour market conditions. The currency fell to 0.6677, but we sit higher now around 0.6690, as firmer equity market sentiment, led by China property gains, has provided some offset.
• NZD/USD is around 0.6125, slightly up for the session. The AUD/NZD cross got to lows of 1.0915 before stabilising somewhat.
• Looking ahead, the Fed’s Barr, Barkin, Harker, Mester, Bostic and BoE’s Greene speak. There are also US jobless claims, April housing, IP, trade prices and May Philly Fed index.

JAPAN DATA: Offshore Investors Continue Equity Purchases, Bond Inflows Rebound

Offshore investors continued purchases of local equities last week. Just under ¥661bn in net inflows were seen. This was the third week of inflows into this segment and the largest weekly inflow since mid-April. Offshore investors were also net buyers of bonds for the first time in 4 weeks. Just under ¥1700bn in inflows were seen, the largest since mid March. It will be interesting to see if this trend continues this week given the general upside bias in yields seen over this period.

• In terms of Japan outbound flows, we saw net selling across both foreign bonds and stocks last week.
• The trend around offshore bonds has been for local investors to sell in recent months. For offshore equities this was the first net weekly sale in 3 weeks.

Table 1: Japan Weekly Investment Flows

Source: MNI - Market News/Bloomberg

ASIA EQUITY FLOWS: Taiwan Continues To See Inflows On Strong Tech Demand, Asia Mixed

• South Korean equity markets were closed on Wednesday. Looking back over the past week, flows have been relatively subdued when compared to Taiwan both markets largely follow each other when global tech stocks are preforming well, but Taiwan has seen $1.6b in foreign investors inflows compared to just $275m for South Korea. Looking ahead, tomorrow we have unemployment rate which is expected to be unchanged at 2.8%.
• Taiwan equities were again higher on Monday, with the Taiex closing at all-time-highs, tech and semiconductor names continue to lead the way. Calendar has been empty all week, US announced tariffs on Chinese semiconductor imports which has been positive for the non-Chinese semiconductor names. Foreign investors have been buyers of Taiwanese equities recently with the past five-day seeing an inflow of about $1.6b. The 5-day average is now $333m well above the 20-day average of -$39m and the 100-day average at $82m.
• Thailand equities edged lower on Wednesday after briefly trading above the 50-day EMA on Tuesday, we now sit just under both the 20 & 50-day EMAs. Equity flow has been mixed over the past week with a net outflow of $30m over the past 5 sessions. The 5-day average now at -$6m, the 20-day average -$16.5m, while the 100-day average is -$18m.
• Indonesian equities continue to see foreign investors selling stocks, we are now at 26 of the past 28 days of selling for a net outflow of $1.85b. The JCI finished the Wednesday session up 1.36% and was able to close back above the 20, 100 & 200-day EMAs, while the 14-day RSI ticked back above 50 and the MACD indictor is now showing increasing green bars. We have seen a slowing down in outflows the past two session with the 5-day average now -$59m in slightly above the 20-day average at -$67m while the 100-day average is still positive at $4.5m
• Indian equities have seen foreign investors sell stocks for the 9th straight session with a net outflow of $3.25b over that same period. We did however see the Nifty 50 bounce right off the 100-day EMA. The 5-day average now -$483m, the 20-day average is -$235m while the 100-day average is still positive but declining quickly and sits at $28m.

Table 1: EM Asia Equity Flows

ASIA STOCKS: Chinese Property Names Soar After Policy Support, HK GDP Tomorrow

Hong Kong & Chinese equities are higher today. Hong Kong returns from a day break for Buddha's birthday. Property names have been the focus today and have surged higher on the back of news released yesterday around the proposal for local government will be set to buy unsold Chinese homes from distressed builders, the China property stocks gauge is up over 13% at the moment.

• Hong Kong equities are mostly higher today, the property sector is surging with the Mainland Property Index up 5.74%, and is now up 37% from Apr lows, the HSTech Index opened lower on mixed corporate earnings, but has since erased those loses and trade up 1.05%, while the HSI is up 1.59%. In China markets, the CSI300 Real Estate Index is up 3.55%, well above the CSI300 Index which is trading up just 0.78%, elsewhere CSI1000 is up 0.54% while the ChiNext is up just 1.14%
• (MNI) China Press Digest May 16: LPR, Housing Stocks, CSRC - (See link)
• In the property space, as reported on Wednesday China is looking into a proposal which would allow local governments to purchase unsold homes from distressed property developers, authorities of the Lin’an district in China’s Hangzhou city has decided to buy apartment buildings and to use as public rental housing, as per BBG
• (BBG) - China Property Stocks Gauge Jumps on Proposal for Home Purchases - (See link)
• Looking ahead, Chinese Industrial Production & Retail Sales and Hong Kong GDP on Friday

ASIA PAC STOCKS: Regional Asia Equities Head Higher On US Rate Cut Expectations

Asian equity markets are mostly higher today, following US markets higher as the latest US inflation data reinforced bets for Federal Reserve interest-rate cuts. Locally, Japan posted GDP numbers that were lower than expected coming in annualized at -2.0% q/q and Australia reported mixed employment data.

• Japanese equities are mixed today, tech shares gained after a slowdown in US inflation supported the sector globally, while USD weakness has helped strengthen the yen and now trades back under 154.00 however this move has hurt export names. The Topix is down 0.08%, while the Nikkei 225 is up 0.95%
• South Korean equities have returned from their break and with the Kospi trading about 1.2% higher although off morning highs, the moves are largely on the back of higher global tech prices following lower yields and expected rate cuts.
• Taiwan equities continue their strong run of late, with the Taiex trading up 0.65%. There hasn't been any local data out or major headlines recently, with the moves largely tracking global peers. Equity flows into Taiwan, have been strong recently with $1.65b of net flows over the past 5 trading sessions.
• Australian equities are trading near days best with the ASX200 up 1.87%, earlier we had a mixed employment print with slightly higher jobs growth at 38.5k (+23.7k forecast) although full time jobs fell to -6.1k, partially unwinding some of the prior months rise, part time job rose 44.6k and the unemployment rate rose more than expected to 4.1% 3.9% est.
• Elsewhere in SEA, New Zealand equities are up 1.75%, Indonesian equities are up 0.90%, Philippines equities are up 0.45%, Malaysian equities are up 0.50% and Singapore equities are 0.80% higher.

OIL: Crude Continues Climb Higher On Better Supply & US Inflation News

After rising around a percent on Wednesday, crude is up again during the APAC session after a lower-than-expected US CPI print, and the US’ EIA reported a drawdown in crude and product inventories. Fires are threatening Canada’s oil sands region with two close to Fort McMurray. A softer USD is also providing support with the BBDXY index down 0.1%.

• Brent has found support around $83.00 and is currently up 0.4% to $83.09 after a low of $83.01 and high of $83.25. WTI is hovering around $79 to be up 0.5% today.
• EIA reported a crude drawdown of 2.51mn barrels last week after -1.36mn bringing them to the lowest level in almost a month. Gasoline stocks fell 235k and distillate -45k. Gasoline demand rose 78kbd. Refinery utilisation rose 1.9pp to 90.4%.
• The oil sands are well outside Fort McMurray but employees live in the town and so the fire threat may disrupt crude production through staff shortages. Operators have said that while they have reduced staff levels, operations haven’t yet been impacted.
• The next major scheduled events for oil will be US April core PCE inflation on May 31 and the OPEC meeting on June 1 to decide the way forward for its output cuts.
• Later the Fed’s Barr, Barkin, Harker, Mester, Bostic and BoE’s Greene speak. There are also US jobless claims, April housing, IP, trade prices and May Philly Fed index.

GOLD: Can't Break Above $2400, But Technical Uptrend Intact

Gold stopped short of a test above the $2400 level. Earlier highs in bullion were at $2397.35. We last tracked at $2388, marginally above end NY levels from the Wednesday session.

• The earlier move up in gold coincided with a further round of USD weakness, led by the yen. However, as broader USD sentiment stabilized we have moved off session best levels for bullion.
• Still, the broader technical backdrop looks supportive for gold, underpinned by a weaker USD/lower yield backdrop as Fed cuts get priced back in the wake of recent data (softer retail sales/broadly in line CPI).
• This backdrop could refocus attention on $2,431.50, the Apr 12 high. On the downside, the 50-day EMA, at $2,273.83, represents a key support.

ASIA FX: KRW & THB Rally Strongly, CNH Lags Softer Dollar Backdrop

Asian FX has spent most of Thursday trade to date on the front foot, albeit to varying degrees. CNH has lagged, while KRW and THB have outperformed. A softer USD against most the of majors, particularly the yen, is helping sentiment, while US yields have also ticked lower as Fed easing gets priced back in. Equity sentiment is positive for the region as well. Still to come is the BSP decision, although no change is expected. Tomorrow focus will be China house price figures and April activity data.

• USD/CNH got to fresh lows of 7.2042 earlier, but we now sit back around 7.2140, only slightly firmer in yuan terms for the session. The USD/CNY fixing was only set marginally lower and remained above 7.1000. In the equity space, focus remains on strong real estate index gains, which have surged today around 13% today. This follows yesterday's new around the proposal for local governments buy unsold Chinese homes from distressed builders Overall, the yuan remains a low beta play to broader USD shifts.
• 1 month USD/KRW is tracking at fresh lows for May, last near 1343/44. This is +0.60% stronger in won terms for the session so far. Onshore markets have returned today, with equity markets rising, the Kospi last +0.85%, which is off earlier gains.
• 1 month USD/TWD is under 32.00 in the first part of trade, fresh lows back to the first half of April. The equity backdrop is positive (Taiex +0.7%), while offshore inflows continue. Spot TWD is back to 32.10.
• 1 month USD/IDR got under 15900 in early dealings, but we last racked around 15950, so slightly up on end NY levels from Wednesday's session (near 15930).
• USD/THB is around 36.05/10, +1.25% firmer in baht terms. We sit very close to session lows. This is back to late March levels for the pair. Local focus today will rest with the meeting between the finance minister and BoT Governor to discuss economic issues.
• Spot USD/PHP tracks lower at 57.25/30. The 1 month NDF is back to 57.30, so only slightly firmer in PHP terms for the session so far. The BSP meeting later is expected to deliver no change in the policy rate.