MNI EUROPEAN MARKETS ANALYSIS: USD Down On Intervention Risks, Aust Productivity Growth Remains Weak

US TSYS: Narrow Ranges In Asia

TYZ3 deals at 110-03+, +0-05, a 0-05+ range has been observed on volume of ~60k.

• Cash tsys sit 2bps richer to flat across the major benchmarks, light bull steepening is apparent.
• Tsys were pressured in early dealing, the move came alongside the USD extending recent gains despite the lack of an overt headline driver.
• TY was supported ahead of 109-28+, the low from Aug 29.
• The move didn't follow through and tsys ticked higher through the session.
• On the wires today we have Trade Balance and ISM Services Index, the Fed's Beige Book is also released and the latest monetary policy decision from the Bank of Canada is due. Fedspeak from Boston Fed President Collins and Dallas Fed President Logan crosses.

JGBS: Futures Are Stronger And At Session Highs, 30Y Supply Tomorrow

JGB futures are close to session highs, +5 compared to settlement levels, after spending most of the morning session in slightly negative territory.

• With the local data calendar empty today, local participants were likely focused on a speech by BoJ Board Member Takata. In the speech, he said that large-scale monetary easing must be kept in place amid extremely high uncertainties. Adding that it’s also necessary to take action nimbly to prepare for uncertainties by considering inflation and economic conditions. (See linkICYMI)
• Outside the speech, local participants have likely been guided by US tsys. US tsys are dealing at Asia-Pac session bests, 1-2bp richer.
• Cash JGBs are mixed across the curve, with yields 0.5bp higher (1-year) to 1.6bp lower (40-year). The benchmark 10-year yield is 0.1bp lower at 0.657%, above BoJ's YCC old limit of 0.50% but below its new hard limit of 1.0%.
• The swaps curve has bull flattened, with rates 0.1bp to 1.5bp lower. Swap spreads are tighter, out to the 30-year.
• Tomorrow the local calendar sees International Investment Flows, along with a speech from BoJ Board Member Nakagawa.
• Tomorrow the MoF plans to sell Y900mn of 30-year JGBs.

AUSSIE BONDS: Little Changed, At Session Bests, RBA Gov. Lowe’s Final Speech Tomorrow

ACGBs (YM -1.0 & XM -1.0) sit at or near session highs, although the ranges have been narrow today.

• Q2 GDP printed in line with expectations at +0.4% q/q after an upwardly revised +0.4% in Q1. Due to revisions, Q2 grew at a faster-than-expected +2.1% y/y. This is above trend and well above the RBA’s forecast of +1.6% y/y. To achieve its year-end projection of +0.9%, H2 needs to average 0.1% q/q.
• Q2 saw another very weak productivity reading driven by a strong pick-up in hours worked, which rose 2.5% q/q. Productivity fell 2% q/q, the third straight quarterly drop, to be down 3.5% y/y after -4.6% y/y in Q1. As a result, unit labour costs remained elevated rising to 7.5% y/y, which is likely to continue concerning the RBA.
• Cash ACGBs are flat to 1bp cheaper, with the AU-US 10-year yield differential at -10bp.
• Swap rates are flat, with EFPs tighter.
• The bills strip is mixed, with pricing flat to +1.
• RBA-dated OIS pricing is flat to 3bp firmer for meetings beyond Mar'24.
• Tomorrow the local calendar sees the release of July trade balance data, along with a speech from outgoing RBA Governor Phil Lowe.

AU-US SWAP RATES: Year-Ahead Expectations For AU-US 3M Differential Have Narrowed Sharply Since Mid-July

In mid-April, the AU-US 3-month swap rate 1-year forward (1y3m) moved into positive territory for the first time this year on expectations that the RBA would play catch-up to rate hikes already delivered by the US Fed.

• Year-ahead expectations for the AU-US 3m swap differential reached their highest point at +40 basis points in mid-June. This occurred following a policy pause by the RBA. This peak was revisited in mid-July after the RBA, for the second consecutive meeting, opted to maintain the cash rate at 4.10%.
• Since then, the 1y3m swap rate in Australia has collapsed some 70bp. With the US 1y3m rate little changed over the same period, the AU-US 1y3m swap differential has pushed well truly back into negative territory.
• Nonetheless, the AU-US 3M swap differential is expected to narrow by around 120bp over the next year as the US Fed cuts rates.

Figure 1: AU & US 1y3m Rates (%)

Source: MNI – Market News / Bloomberg

AUSTRALIAN DATA: Solid GDP Print Weighed Down By Destocking

Q2 GDP printed in line with expectations at 0.4% q/q after an upwardly-revised 0.4% in Q1. Revisions pushed the annual rate higher to 2.4% in Q1 and so Q2 grew 2.1% y/y, stronger than expected, still above trend and slightly higher than growth in 2019. The 1.1pp stock drawdown weighed on the headline number as net exports were strong and domestic demand posted another robust quarter. Q2 growth was well above the RBA’s forecast of 1.6% y/y and to achieve its year-end projection of 0.9% H2 needs to average 0.1% q/q.

• Domestic demand contributed 0.7pp to Q2 quarterly growth, the same as in Q1. The main contribution to strength came from public sector investment (+0.4pp), which was driven by health and transport infrastructure. Private consumption continued to slow but stayed positive and added 0.1pp to growth. It rose 0.1% q/q and slowed to 1.5% y/y from 3.6%, the lowest since Q4 2019, excluding Covid, but again above the 2019 average. Private GFCF and government spending also contributed 0.1pp.
• Q2 saw very strong export growth of 4.3% q/q and 9.8% y/y, due to strong travel services, whereas imports grew 0.7% q/q and 4.4% y/y and were weighed down by the inventory drawdown. As a result net exports contributed 0.8pp to GDP, as expected.
• Household spending was driven by spending on essential goods & services and the savings rate fell 0.4pp to 3.2%, the lowest since 2008’s financial crisis. The ABS noted that the down trend is being driven by higher mortgage payments and cost of living. Household income rose 1.8% q/q with compensation up 1.6% q/q, the lowest increase since Q3 2021.

Source: MNI - Market News/ABS

AUSTRALIAN DATA: Weak Q2 Productivity, ULC Remain Elevated

Q2 saw another very weak productivity reading driven by a strong pick up in hours worked, which rose 2.5% q/q. Productivity fell 2% q/q, the third straight quarterly drop, to be down 3.5% y/y after -0.4% q/q and -4.6% y/y in Q1. Base effects were always likely to result in an improvement in the annual rate. As a result unit labour costs (ULC) remained elevated rising 1.6% q/q to 7.5% y/y, which is likely to continue concerning the RBA.

• If hours worked are unchanged by the end of 2023, then the RBA’s desired 1% y/y productivity growth can be achieved by mid-2024 but if they stay stronger for longer then it won’t be until the end of the year. Both scenarios have ULC growth above 5% y/y until Q2 2024. These scenarios use the RBA’s WPI and GDP forecasts.
• Real unit labour costs rose 3.2% q/q and 5.9% y/y, signalling a sharp deterioration in competitiveness. Excluding Covid, this was the highest quarterly increase since the series began in 1985.

Source: MNI - Market News/ABS/RBA

Australia unit labour costs y/y%

Source: MNI - Market News/ABS

RBA: MNI RBA Review - September 2023: On Hold, Time To Assess

• At Governor Lowe’s final meeting, the RBA left rates at 4.1% for the third consecutive time. The meeting statement was little changed from August and the tightening bias was retained. There remain considerable uncertainties around the inflation and growth outlook, but while the economy evolves as expected the Board is unlikely to raise rates.
• One addition to the statement signalled that at this juncture the Board is more confident that it is successfully navigating the “narrow path”.
• Another hike can’t be ruled out and imminent easing is highly unlikely, and so at this stage, rates higher for longer is the more likely scenario. Rates are likely to be on hold again in October but with Q3 CPI on October 25 and updated RBA forecasts there is more uncertainty around the November meeting.
• See full review here.

NZGBS: Cheaper, Narrow Range, PM Wants Trade Diversification

NZGBs closed 1-3bp cheaper in the middle of the local session range. Construction work done fell in Q2 by 0.1% q/q versus the consensus estimate of +0.2%. Nevertheless, the data had minimal impact on the market, with the session’s range relatively narrow.

• 10-year NZGB underperformed its $-bloc counterparts, with the NZ-US and NZ-AU yield differentials respectively 1bp and 3bp wider at respectively +77bp and +88bp.
• Swap rates are -1bp lower to 2bp higher, with the 2s10s curve steeper.
• RBNZ dated OIS pricing is flat to 1bp firmer across meetings out to Jul’24.
• NZ’s government plans to focus on trade diversification to help insulate its economy from the slowdown in key trading partner China, Prime Minister Chris Hipkins said. “The slower-than-expected recovery in the Chinese economy has had an impact on New Zealand,” Hipkins told Bloomberg Television in Auckland Wednesday. “That is one of the reasons our government has been very focused on trade diversification.” (See link)
• Tomorrow the local data calendar is empty.
• Tomorrow the NZ Treasury plans to sell NZ$225mn of the 4.50% May-30 bond, NZ$175mn of the 2.00% May-32 bond and NZ$100mn of the 2.75% Apr-37 bond.

EQUITIES: Further Property Stimulus Hopes Aid China Developers, But Not Aggregate Indices

Regional equities have been mixed, despite a modestly negative lead from US/EU markets in Tuesday trade. HK and China stocks are down in terms of aggregate indices, despite hopes of more property stimulus. Japan shares have bucked the weaker trend at this stage. US equity futures are down a touch. Eminis last near 4498, off 0.10%, Nasdaq futures were just under 15504, down -0.20%.

• China property developers have surged. The Hang Seng Mainland Properties Index has rebounded 3%, while the CSI 300 real estate sub index is actually down slightly, off by 0.31%. Earlier onshore media reported that policies restricting house purchases should be scrapped. Easier restrictions should not just be for the tier-one cities. (See this link for more details).
• Still, these moves couldn't drag the HSI aggregate index higher. This index sits down 0.82% at the break. Softness in terms of the earnings backdrop was a factor citied as weighing on overall HSI trends.
• In China, the headline CSI 300 is off by 0.65% at the break, the index back sub the 3800 level.
• Japan's Topix is +0.70% higher, with Toyota gains helping to drive broader sentiment. A slightly stronger yen, fueled by increased intervention threats from the authorities, hasn't impacted sentiment.
• The ASX 200 sits lower, last down 0.80%. Weakness in materials and financials have offset gains in energy stocks.
• in SEA, market trends are fairly muted. Thailand and Malaysia stocks are tracking modestly higher at this stage, but the Philippines are weaker.

FOREX: USD Erases Early Gains

The greenback has pared early gains in the Asian session to sit little changed from opening levels, BBDXY registered its highest level since mid-March in early trade marginally extending Tuesday's gains.

• Kiwi sits little changed from opening levels, NZD/USD was down as much as ~0.4% before finding support at Tuesday's lows and paring losses. The pair sits at $0.5880/85.
• AUD/USD was down ~0.3% before paring losses through the session. Q2 GDP was in line with estimates at 0.4% Q/Q, the Y/Y measure was firmer than expected at 2.1%. Technically the trend condition remains bearish; support comes in at yesterday's low ($0.6358) and 2.00 projection of the Jun 16-Jun 29-Jul 13 price swing ($0.6287). Resistance is at $0.6465, yesterday's high.
• Yen is marginally firmer, USD/JPY prints at ¥147.50/60, the pair was as low as ¥137.37 in early trade as Japanese Currency Chief Kanda noted that he wouldn't rule out any options if FX moves continue. Narrow ranges were observed for the remainder of the Asian session.
• Elsewhere in G-10 EUR and GBP are a touch higher.
• Cross asset wise; BBDXY pared a 0.1% gain to sit a touch lower and US Tsy Yields are little changed.
• German Factory Orders and UK Construction PMI provide the highlight in Europe before the Bank of Canada's rate decision crosses.

OIL: Crude Range Trading But Remains Elevated

Oil prices have held onto Tuesday’s gains and have been in a narrow range during APAC trading. WTI is unchanged at $86.70/bbl. It found round-number resistance at $87 where it reached the intraday high. Brent is also steady at $90.06 and has traded above $90 during the session with the low at $90.02. It made a high of $90.34 earlier. The USD index is off its intraday high but close to Tuesday’s close.

• On Tuesday Saudi Arabia and Russia announced their output cuts of 1mbd and 300kbd respectively would be extended to the end of the year whereas the market expected only until October. Prices rose sharply on the news. The WTI prompt spread is at its widest since mid-last year.
• OPEC+ output cuts plus stronger oil demand have resulted in prices rising around 20% in Q3 to date. The IEA estimates that consumption is at a record. Prices are likely to remain supported as these trends are expected to continue over the rest of 2023. Goldman Sachs sees upside risks to its crude forecasts, according to Bloomberg.
• Also on the supply side, the US has seen large crude inventory drawdowns and later today the API will release its latest stock data, which is likely to be monitored closely given last week’s huge 11.5mn drawdown.
• Later the Fed’s Collins speaks on the economy and policy making and Logan takes part in a listening session. The Beige Book is also published. In terms of data, the US July trade balance and August services PMI/ISM are out as well as euro area July retail sales. The Bank of Canada also meets.

GOLD: Steady After Largest Drop In A Month On Tuesday

Gold is unchanged in the Asia-Pac session, after closing 0.9% lower on Tuesday. A strong USD appreciation on higher US Treasury yields weighed heavily.

• Stronger-than-expected factory orders, heavy corporate issuance and higher oil prices were the key drivers for US Treasuries.
• Tuesday’s move in gold aligns with the observation that the USD Index looks to have resumed the primary uptrend off the mid-July low, potentially exerting downward pressure on precious metals.
• Bullion touched a low of $1925.41 but appears to have found some support at the 20-day EMA of $1926.1. A break of this level could see a more concerted push lower to potentially $1903.9 (Aug 25 low), according to MNI's technicals team.

MALAYSIA: MNI BNM Preview - September 2023: Lower Growth & Inflation = On Hold

• Tomorrow’s BNM policy meeting outcome looks a fairly straight forward on hold decision at this stage. This is our firm bias and also the sell-side consensus. All 21 economists surveyed by Bloomberg look for the policy rate to hold steady at 3.00%.
• Local data outcomes continue to argue for steady policy. On the inflation front, we continue to see a loss of momentum in terms of both headline and core. The authorities are likely to be wary of a rebound in food prices. However, this is likely to be a watch point, rather than something that turns the BNM more hawkish. In the July CPI print, 11 out of the 12 sub-categories recorded softer or the same y/y momentum compared with June.
• On the growth front, Q2 GDP was 1.5% q/q, but eased back to 2.9% y/y, versus 5.6% prior. Private spending momentum slowed further, and the export drag rose, while government spending and investment were positive offsets. Growth momentum is well below 2022 highs. The weaker MYR FX may be a source of renewed concern, but the MYR NEER is comfortably above 2023 lows.
• See our full preview here:

ASIA FX: USD/Asia Pairs Off Highs Amid Intervention Risks

USD/Asia pairs are off earlier highs. Intervention risks are more heightened amid the firmer dollar backdrop. Such flows are likely to have helped curb USD/CNH upside. 1 month USD/KRW is also down sharply from intra-day highs. THB and SGD are modestly firmer against the USD. Still to come is Taiwan CPI for August. Tomorrow, China August trade data is on tap. The BNM decision is also out in Malaysia, no changes are expected.

• USD/CNH is off earlier highs. We got to 7.3278 before retracing back towards 7.3100, we sit near 7.3130 in latest dealings. Headlines cross that state owned banks were selling USDs onshore and reducing liquidity in CNH (to make the currency more expensive to short). Spot USD/CNY sits back near 7.3100, after making fresh YTD highs earlier at 7.3217. Onshore equities are weaker despite more optimism around property stimulus.
• 1 month USD/KRW spiked in early trade. We got to 1335.40, before retracing sharply. We now sit back near 1328, close to session lows and under the NY close on Tuesday. Lower USD/JPY levels (amid intervention threats) and USD/CNH dipping have aided the won. Lower equities are weaker, down 0.65%, with offshore investors selling -$88.2mn of local shares so far today.
• The SGD NEER (per Goldman Sachs estimates) is little changed on Wednesday as the measure nudged away from late August's cycle highs yesterday. We now sit ~0.6% below the top of the band. USD/SGD printed its highest level since early December 2022 this morning before paring gains as the USD ticked away from session highs. The pair sits ~3.5% above July lows as broader USD trends dominate flows. In August S&P Global PMI ticked higher to 53.6 from 51.3 prior, this is the sixth consecutive month of expansion for the index.
• USD/MYR has extended recent gains rising ~0.2% today and printed its highest level since late June before paring gains. The pair sits at 4.6725/50, as broader USD trends dominated flows this morning. An early session high of 4.6783 was seen before gains were pared. Tomorrow's BNM policy meeting headlines the remainder of the week's docket, there is no change expected to the Overnight Policy Rate which sits at 3.00%.
• Higher Oil prices and broader USD flows weighed on the Rupee yesterday, USD/INR firmed above the 83 to sit at its highest level since 22 August. In early dealing on Wednesday the pair is little changed, last printing at 83.0650/0750. India’s central bank will remain vigilant for the second round effects of inflation, Governor Shaktikanta Das said Tuesday. The domestic data docket is empty for the remainder of the week.
• USD/IDR is holding above 15300, +0.25% firmer for the session, although we sit below session highs near 15320. The mid August surge in USD/IDR towards 15360 peaked out, so this could be levels to watch on the top side. The BI continues to view the currency on the cheap side, so intervention risks are likely to remain elevated. On the downside, the 20-day EMA sits back near 15244. Local equities are close to multi-month highs, the JCI last around 7000, with offshore inflows +$73.7mn so far this month. Firmer global commodity prices should be a positive for local equities, all else equal. Some offset is coming from bond outflows, with $-115.5mn in outflows month to date, and relatively light foreign participation at yesterday's debt auction.
• USD/THB sits off earlier highs, last in the 35.40/45 region. This is little changed on yesterday's closing levels. Not long after the open we gaped higher towards 35.60 but this move proved short lived. Like elsewhere in the region, the Thailand authorities may be on guard against a sharp rally in USD/THB through previous highs. The Federation of Thai Capital Market Organizations (FETCO) stated investor confidence surged in August to 141.27 from 83.45 prior. FETCO noted the new government has raised optimism around stimulus and the growth outlook.
• USD/PHP has tracked higher but hasn't breached the 57.00 spot level yet. The pair last near 56.96. 57.00 is the top end of the authorities assumed FX range (54-57), so intervention risks are likely to be elevated in the near term.