MNI EUROPEAN MARKETS ANALYSIS: Yen Crosses Lose Some Altitude

US TSYS: Little Changed, Narrow Range, Awaits BoE Decision & Chair Powell 2.0

TYU3 is currently trading at 113-08+, -1+ versus NY closing levels, after trading in a narrow range in Asia-Pac trade.

• Cash US tsys are little changed across major benchmarks.
• With the Asian calendar light, local participants are likely on headlines watch ahead of the BoE policy decision and Fed Chair Powell’s reappearance at Senate Banking Committee later today.
• According to Bloomberg Economics, A string of hotter-than-expected pay and inflation data has raised the chances that the BoE delivers a 50bp hike at its June meeting. The baseline view is that the central bank will err on the side of gradualism, given the ground covered to date, and opt for a smaller move with a hawkish message in the minutes of the meeting. (See link)

JGBS: Richer After Smooth Digestion Of 5-Year Supply, CPI Tomorrow

JGB futures are trading on a high note in Tokyo afternoon trading, +11 compared to settlement levels, after 5-year supply goes well with the auction low price aligning with dealer expectations, the tail decreasing and the cover ratio improving to 3.850x compared to 3.703x in the previous month's auction.

• There hasn’t been much in the way of domestic drivers to flag, outside of the previously outlined weekly investment flow data and speech by BoJ Board Member Asahi Noguchi. (See link, ICYMI)
• With the local calendar thin today, local participants have likely been on headlines and US tsys watch.
• Cash US tsys are flat to 1bp cheaper across benchmarks in Asia-Pac trade with TYU3 dealing at 113-07+, -2+ versus NY closing levels.
• Cash JGBs are richer in afternoon trading with a twist flattening of the curve, pivoting at the 2-year zone. The benchmark 10-year yield is 0.8bp lower at 0.374%, below the BoJ's YCC limit of 0.50%.
• The 5-year JGB remains unchanged after the auction, hovering near the lower end of the morning's range at 0.072%, a decrease of 0.3bp for the day.
• Swap spreads are generally wider beyond the 1-year zone.
• The local calendar tomorrow sees the release of May CPI along with the Jibun Bank PMI data.
• Tomorrow will also see BoJ Rinban operations covering 1- to 25-Year JGBs.

AUSSIE BONDS: Twist Flattening, Off Bests, Focus On BoE & Chair Powell’s Testimony

ACGB futures curve has twist flattened (YM -3.0 & XM +2.0) with pricing notably below the highs observed earlier in Sydney trading. Given the relatively light local calendar, it appears that the trading activity has been influenced by the weakening observed in US tsys during the Asia-Pac trading session.

• Cash ACGBs are 2bp cheaper to 2bp richer with the 3/10 curve flatter and the AU-US 10-year yield differential 1bp wider at +23bp.
• The 3s10s swap curve twist flattens with EFPs little changed.
• The bills strip bear flattens with pricing -6 to -1.
• RBA-dated OIS pricing is 4-6bp firmer for meetings beyond September. Terminal cash rate expectations sit at 4.57%.
• The local calendar is light tomorrow with Judo Bank PMI Preliminary data as the highlight. The next major data is the release of the CPI Monthly for May next Wednesday.
• Ahead of that, market participants are likely to be watching global bond yields as they navigate the BoE policy decision and Fed Chair Powell’s reappearance at Senate Banking Committee later today.
• The US is also slated to release weekly Jobless Claims, May Chicago Fed Activity Index and June Kansas City Fed Index.

NZGBS: Weaker But Off Cheaps After Solid Digestion Of Weekly Supply

NZGBs closed 4-5bp cheaper but off session cheaps after today’s weekly auction covering the May-30, Apr-33 and Apr-37 NZGB lines shows solid demand with the respective cover ratios printing 4.10x, 4.93x and 3.98x. In post-auction trading, these cash lines closed 2-3bp lower in yield.

• Nonetheless, NZGBs have underperformed the $-bloc with NZ/US and NZ/AU 10-year yield differentials both 5bp wider.
• Swap rates are 2-4bp higher with implied swap spreads tighter.
• RBNZ dated OIS pricing is flat to 4bp firmer across meetings with Feb’24 leading.
• The May trade surplus narrowed to NZ$46mn from a downwardly revised NZ$236mn. This left the YTD deficit slightly wider at NZ$17.12bn from NZ$17.02bn. Good exports rose 2.8% y/y and imports +4.4% y/y.
• The RBNZ released research on the importance of inflation expectations when forecasting the CPI. It finds that its headline inflation projections are more accurate when expectations are included and that the 1-year mean household inflation expectations have the best forecasting power. (See link)
• The local calendar is light tomorrow.
• Later today sees the BoE policy decision, with a 25bp hike expected, ahead of Fed Chair Powell’s reappearance at Senate Banking Committee.

NZ DATA: Inflation Expectations Increase Price Forecast Accuracy

The RBNZ has released research on the importance of inflation expectations when forecasting the CPI. It finds that its headline inflation projections are more accurate when expectations are included and that the 1-year mean household inflation expectations have the best forecasting power. But the difference between it and other measures is small, as the charts below show.

• Consumer inflation expectations have been stuck above 7% since Q2 2022 and ticked up again to 7.4% in Q2 2023, close to the 7.5% recent peak. This is likely to concern the RBNZ given the predictive power for inflation and will be monitored closely.
• Simple correlations show that while 1-year business and consumer inflation expectations are very similar with headline inflation, consumer has a better fit with underlying inflation.
• See analysis here.

Source: MNI - Market News/Refinitiv

NZ core CPI y/y% vs inflation expectations

Source: MNI - Market News/Refinitiv

FOREX: USD Index Back To Session Highs, AUD/JPY Dips

The BBDXY sits a touch above NY closing levels from Wednesday, last at 1222.80, with dips today under 1222 supported. Commodity was firmer in early trade, but has given up gains, particularly on crosses like AUD/JPY. Cross asset signals have been muted, with US yields little changed, while US equity futures are down a touch. Regional equities are mixed in holiday impacted markets, with China and Hong Kong both out today.

• AUD/USD couldn't sustain earlier gains above 0.6800. The pair last tracks 0.6770/75, around 0.35% weaker versus NY closing levels from Wednesday. Local equities are underperformers (the ASX 200 off 1.6%), although we have seen iron ore firm by around 1%. AUD/JPY is down around 0.50%, last back under 96.00, after earlier highs above 96.50.
• NZD/USD couldn't get above 0.6220 and now sits back at 0.6200, slightly down for the session. Earlier May trade figures showed a small surplus as exports to China continued to recover.
• USD/JPY is tracking slightly lower, last around session lows at 141.65/70. Slight risk off in the commodity FX space likely helping at the margins. BoJ board member Noguchi struck a familiar tone in a speech today, saying the bank is showing a strong commitment to easing and that 2% inflation expectations are not anchored yet.
• EUR/USD is steady around 1.0990, while GBP/USD is down a touch to 1.2760.
• Later, the BoE, Norgesbank and SNB decisions are announced. All three are expected to hike rates by 25bp. Also Fed Chair Powell appears before the Senate Banking Committee and the Fed’s Waller, Bowman, Mester and Barkin speak. There is US Chicago & Kansas indices, jobless claims and existing home sales.

EQUITIES: Mixed Trends In Holiday Impacted Markets

Regional equity markets are mixed today. China and Hong Kong markets are out, which has no doubt reduced liquidity and broader regional participation. Japan shares are mixed, although Goldman's upgraded its Topix target. US futures are a touch lower, with Eminis back closer to 4407, while EU futures are tracking lower.

• Goldman's raised the Topix target to potentially reach 2500 in the next 12 months. That compares with current levels around 2307. The bank cited expectations of corporate reforms and better fundamentals to offshore markets. IT services and electrical machinery are the preferred sub-index overweights.
• The Topix is a little over +0.60% firmer at this stage, while the Nikkei 225 is -0.50%.
• The Kospi is tracking higher in South Korea, last +0.50% higher, despite negative tech leads in US trade on Wednesday.
• The ASX 200 is down sharply, off 1.56%, as material stocks underperform. Bank stocks are also weaker.
• Most bourses in SEA are weaker, with PSEi down 0.55% and 10% off Jan highs. The Philippines has been weighed by planned tax changes to the food and beverages sector.
• Indian shares are a touch higher in early trade, looking to continue he recent run of outperformance, as Modi's visit to the US spurs hope of fresh investment flows.

OIL: Crude Down Slightly Ahead Of More Fed Speakers

Oil prices are down slightly during APAC trading after rising around 1.5% on Wednesday. WTI is 0.3% lower at $72.30/bbl, close to the intraday low of $72.26. Brent is also down 0.3% to $76.88 after a low of $76.83. The USD index has moved sideways.

• Official EIA data is published later today. Bloomberg is reporting API measured US crude stocks fell 1.2mn barrels in the latest week according to sources familiar with the data. Gasoline rose 2.9mn but distillate fell 0.3mn. Prices eased slightly following the data.
• The market remains nervous about the demand outlook but has become tentatively more optimistic following some Chinese stimulus and the June Fed pause. FOMC chair Powell noted that some tightening will probably be needed but other members sounded more dovish.
• Later the BoE, Norgesbank and SNB decisions are announced. All three are expected to hike rates by 25bp. Also Fed Chair Powell appears before the Senate Banking Committee and the Fed’s Waller, Bowman, Mester and Barkin speak. There is US Chicago & Kansas indices, jobless claims and existing home sales.

GOLD: Fed Chair Powell's Testimony Weighs On Bullion

Gold is little changed in the Asia-Pac session. In the previous session, it experienced a slight decline of 0.2% and closed at 1932.55 following Fed Chairman Powell's semi-annual testimony to Congress.

• During his testimony, Powell reiterated the key points discussed in last week's hawkish hold. He emphasised that the decision to maintain interest rates at their current level, which marked the first time since March 2022, was a reflection of the significant progress made in a relatively short period. Powell further stated that future decisions regarding interest rates will be approached on a meeting-by-meeting basis.
• Gold has been negatively affected by the expectation of further monetary tightening from both the US Federal Reserve and the ECB, following their recent meetings.
• Additionally, the recent strengthening of the US dollar has dampened demand for gold, further impacting its performance.

ASIA FX: USD/Asia Dips Supported, BI & BSP Decisions Coming Up

Asia markets have seen lighter interest today, with China and Hong Kong markets closed for holidays. Lower USD/Asia levels in the first part of trading has seen dollar support emerge, which is consistent with some weakness in commodity FX in the G10 space. Tomorrow, Hong Kong markets return, but China's remain closed until Monday. On the data front tomorrow is Singapore and Malaysian CPI prints. Still to come today is the BI and BSP decisions, both are expected to remain on hold.

• USD/CNH liquidity/interest has been impacted by the holidays outlined above, as such we have followed broader USD trends. Moves sub the 7.1700 level were supported and we last tracked above 7.1800.
• It has been a similar backdrop for USD/KRW, with the 1 month NDF sitting back in the 1291/92 region, against opening lows near 1285. Onshore equities are firmer, although off session highs. Offshore investor flows are slightly negative (-$20.3mn at this stage).
• USD/IDR is up from earlier session lows. We got sub 14900 in the first part of dealing back now sit back closer to 14935, in line with a stronger USD tone. Later we get the BI decision, which is expected to remain on hold. There is unlikely to be an easing signal in the June meeting statement while the economy is still “solid” and it is unclear how much the Fed still has to do.
• USD/PHP also sits a touch above earlier session lows, last near 55.60. Again, no changes are expected from the BSP. BofA noted that PHP could weaken to 57.50 in Q3 if the BSP doesn't follow the Fed with higher rates. The bank sees the currency vulnerable from a low real rates and twin deficits stand point. Elsewhere, local equities are weaker, down 0.70% with the PCOMP sub 6400 and we aren't too far off intra-day YTD lows. The index is also 10% down from its Jan highs. A plan to tax food and beverage companies is being cited as a source of weakness.
• USD/INR holds under 81.95 for now, slightly opened opening lows near 81.90. PM Modi's trip to US is generating optimism from an investment flow standpoint. Equity inflows remain strong, nearly $2.5bn month to date. For USD/INR the pair is still close to its 200-day MA. However, on a NEER basis we are close to YTD highs. CNH/INR continues to trend lower, last around 11.41, close to YTD lows.

INDONESIA: Highlights From Local News Wires

Below is a collection of news wires reports from English versions of Indonesian Newspapers and some other major news outlets.

BI: “An extended rate pause in the cards for Indonesia, Philippines” – Bloomberg (see link)

Economy: “Need to optimize policy on forex from exports for growth: ministry” – Antara News (see link)

• Ministry of Economic Affairs has said that they will implement an export task force, change the law on FX from commodity exports (to keep FX in domestic financial markets) and advance local currency settlement to mitigate risks from a global slowdown.

Economy: “Forex from exports could help Indonesia become developed: ministry” – Antara News (see link)

Economy: “Prices of staple goods still stable nearing Eid al-Adha: President” – Antara News (see link)

Markets: “IDX announces 3 days off for next week” – Jakarta Globe (see link)

Geopolitics: “Indonesia must take real actions to end Myanmar violence: UN expert” – Antara News (see link)

Geopolitics: “UN expert expresses concern over junta presence in ASEAN meetings” – Antara News (see link)

Trade: “Hartato, European Parliament delegates discuss IEU-CEPA” – Antara News (see link)

Energy: “Indonesia, S Korea build synergy in use of NRE in manufacturing” – Antara News (see link) (NRE = new, renewable energy)

Health: “Indonesia says goodbye to Covid-19 pandemic” – Jakarta Globe (see link)