MNI EUROPEAN OPEN: All Eyes On U.S. CPI

SNAPSHOT: All Eyes On U.S. CPI

Below gives key levels of markets in the second half of the Asia-Pac session:

• Nikkei 225 down 207.76 points at 27792.15
• ASX 200 down 19.132 points at 7010.70
• Shanghai Comp. down 12.054 points at 3235.378
• JGB 10-Yr future down 20 ticks at 150.45, yield up 1.1bp at 0.180%
• Aussie 10-Yr future down 3.5 ticks at 96.76, yield up 3.7bp at 3.221%
• U.S. 10-Yr future +0-01 at 119-16+, yield up 1.1bp at 2.788%
• WTI crude down $0.35 at $90.15, Gold down $4.16 at $1790.17
• USD/JPY down 8 pips at Y134.97
• FED'S BULLARD: RATES COULD BE 'HIGHER FOR LONGER' (MNI)
• CHINA RELEASES WHITE PAPER ON TAIWAN QUESTION, REUNIFICATION IN NEW ERA (XINHUA)

US TSYS: CPI Keeps Asia Sidelined

TYU2 operated within the confines of a narrow 0-05 range overnight, last +0-01+ at 119-17, on sub-standard volume of ~40K, with the proximity to the impending CPI print keeping most sidelined. Cash Tsys run 1.0bp richer to 1.5bp cheaper across the curve, pivoting around 3s.

• A Chinese white paper reiterating the country’s stance on Taiwan, which also failed to take the prospect of military action against the island off the table, provided the major point of interest in Asia.
• A downtick for the Hang Seng, which trades ~2% weaker at typing, may have provided incremental support.
• A $190K DV01 block buy in TU futures (+5K) has also helped underpin the front of the curve.
• Note that we published a podcast interview with St. Louis Fed President Bullard late on Tuesday, with Bullard stressing that the Fed will be prepared to hold interest rates "higher for longer" should inflation continue to surprise to the upside, and market pricing will need to adjust accordingly. He also noted that when it comes to terminal rates “I think the destination is a little bit higher than what I would have thought even a couple months ago because inflation has continued to broaden out and doesn't look like it's turning the corner at least based on the evidence we have today.”
• When questioned on the prospect of an inter-meeting rate hike Bullard told us that Jackson Hole falls in the current inter-meeting period, "the Chair could use that if he thinks it's appropriate to signal changes in monetary policy."
• CPI data presents the focal point on Wednesday, with the German and Eurozone (final) readings due before the U.S. equivalent (see our full preview of that data release here: https://marketnews.com/mni-us-cpi-preview-buckle-up). Elsewhere, real average earnings data & 10-Year Tsy supply are due in NY hours, while Fedspeak will come from Evans & Kashkari.

JGBS: Curve Twist Flattens

Wednesday saw another day of firm demand for super-long JGBs, although the 1- to 10-Year zone cheapened in the afternoon, with little in the way of a definitive catalyst observed. Note that the aforementioned bid in the longer end seems to be driven by interest in JGBs, with super-long swap spreads a little wider on the session, albeit back from session wides ahead of the bell.

• That leaves the major cash JGB benchmarks running little 2.0bp cheaper to 2.5bp richer as the curve bull flattens.
• Futures pulled lower in the Tokyo afternoon after paring modest overnight losses in the morning, last dealing -26.
• The breakdown of the latest BoJ Rinban operations revealed the following offer/cover ratios:
• 1- to 3-Year: 1.80x (prev. 2.66x)
• 3- to 5-Year: 3.13x (prev. 3.22x)
• 5- to 10-Year: 2.97x (prev. 2.04x)
• We wouldn’t suggest that the uptick in the offer/cover for the 5- to 10-Year bucket was meaningful enough to drive the sell off observed in JGBs out to 10s during the Tokyo afternoon, at least not in isolation.
• A reminder that Japan will observe a national holiday on Thursday, which will mean that JGBs are closed. Any downside momentum in futures/JGBs out to 10s in the wake of the uptick in the offer to cover in the 5- to 10-Year Rinban operations may have been exacerbated by traders closing out longs as they don’t want to carry excess risk over the period when U.S. CPI data will be released, given the holiday closure of JGB markets.
• A slightly firmer than expected PPI print has headlined when it comes to domestic news flow, although there was still a moderation in the rate observed in the headline Y/Y reading (to +8.6% from +9.4%).
• Elsewhere, Japanese Finance Minister Suzuki noted that protecting the fiscal health of the nation is his most important task, while highlighting the severe fiscal issues facing the country.

AUSSIE BONDS: Bear Flattening

Aussie bonds are at cheapest levels of the day as we move towards the Sydney close, with the move in futures extending through overnight lows in recent dealing. Cash ACGBs run 4.5-6.5bp cheaper across the curve, bear flattening, while YM and XM are -5.0, respectively. Bills run 1 to 9 ticks cheaper through the reds, bear steepening.

• There has been a lack of relevant macro headlines and the tight trade in U.S. Tsys (noting the proximity to U.S. CPI due later today), providing little in the way of lasting direction for the space through Sydney dealing.
• The latest round of ACGB Nov-31 supply went well on the pricing side, with the weighted average yield printing 0.97bp through prevailing mids (per Yieldbroker estimates), although the cover ratio slipped further to 2.28x (from 2.67x previously), well below the six-auction average at 3.55x. Uncertainty surrounding the RBA may have kept overseas investors sidelined, limiting demand at the auction. Meanwhile, the relative value of the line against 3s was noted to have been limited due to the flatness of the curve, while the 10-Year zone of the curve was seen to have been operating towards the richer end of the YtD range on the 5-/10-/15-Year butterfly, with both observations being negatives for demand for the line.
• Elsewhere, little by way of a meaningful market reaction was observed in ACGBs on the release of lower-than-expected Chinese inflation data, with CPI noted to have come in at two-year highs.
• Thursday will see consumer inflation expectations for August headline the domestic data docket, with little else on offer.

AUSSIE BONDS: AOFM sells A$800mn of the 1.00% 21 November 2031 Bond, issue #TB163:

The Australian Office of Financial Management (AOFM) sells A$800mn of the 1.00% 21 November 2031 Bond, issue #TB163:

• Average Yield: 3.1801% (prev. 2.7542%)
• High Yield: 3.1825% (prev. 2.7575%)
• Bid/Cover: 2.2812x (prev. 2.6700x)
• Amount allotted at highest accepted yield as percentage of amount bid at that yield: 60.9% (prev. 17.1%)
• Bidders 44 (prev. 35), successful 19 (prev. 14), allocated in full 12 (prev. 9)

EQUITIES: Lower In Asia; Tech Sentiment Softens After Micron Warning

Virtually all Asia-Pac equity indices are softer at typing amidst underperformance in tech-related names, tracking the tech-led decline on Wall St. after Micron Technology’s warning re: the weakened demand outlook for chips (adding to prior, similar warnings from the likes of Nvidia and Intel).

• Chinese and Hong Kong stocks fell to session lows in the wake of Chinese inflation data that had missed expectations but showed CPI hitting two-year highs, driving down expectations from some quarters re: PBOC monetary easing going forward.
• The Hang Seng deals 2.1% weaker, hitting fresh one-week lows with nearly every constituent in the red at writing. China-based tech struggled (HSTECH: -3.1%), adding to heavy losses observed in the Hang Seng’s finance (-1.3%) and property (-1.6%) sub-indices amidst persistent sector-wide gloom after Hong Kong regulators clarified earlier on Tuesday that there are no plans for the relaxation of stamp duties on home purchases.
• The CSI300 trades 0.9% lower, led by losses in richly-valued consumer staples and healthcare equities. The ChiNext index deals 1.0% weaker at writing, reflecting underperformance in chipmakers in the wake of Micron’s announcement,
• The ASX200 sits 0.2% worse off at writing, with heavy losses in tech (S&P/ASX All Tech Index: -2.4%) countering gains in commodity-related and financial equities.
• The Taiex sits 0.6% weaker at typing, with index heavyweight TSMC (-1.6%) contributing the most to losses.
• E-minis are flat to 0.1% worse off at typing, holding on to the bulk of their losses observed on Tuesday.

OIL: Little Changed In Asia; EIA Inventories Eyed

WTI and Brent are ~-$0.30 apiece, with the former holding just above the $90.0 mark at typing. Both benchmarks sit a little above multi-month lows made last Friday as demand worry (particularly in U.S. gasoline) has taken focus for the space, countering prior concerns re: tightness in crude supplies.

• Average U.S. gasoline prices collated by Gasbuddy dipped below $4 per gallon for the first time since March (after peaking at ~$5.03 in mid-June), potentially reflecting the easing of supply tightness in that space.
• Keeping within the U.S., the latest round of API inventory estimates saw reports point to a large, surprise build in crude stockpiles, with an increase in distillate and Cushing hub stocks, and a drawdown in gasoline inventories observed. The result comes ahead of EIA data later today, with BBG estimates calling for a relatively small build in crude inventories (potentially adding to the significant upside surprise observed at last week’s release).
• Elsewhere, an S&P Platts survey has pointed to OPEC+ raising output in July by the most in five months, but remaining short of planned output increases (Jul output +490K bpd vs. +648K bpd expected). While the group as a whole has pumped the most crude since March, the gap between production and quotas continues to widen, sitting at >2.8mn bpd.
• Brent’s prompt spread has continued to drift lower, printing ~$1.42 at typing (vs. ~$1.75 earlier this week), reflecting moderating worry re: tightness in near-term supplies of crude.

GOLD: A Little Below Six-Week Highs; $1,800/oz Eyed Ahead Of U.S. CPI

Gold sits little changed to print $1,794/oz at typing, maintaining a tight ~$4/oz range throughout Asia-Pac dealing so far. The precious metal operates a little below six-week highs made on Tuesday, pausing a two-day streak of higher daily closes, with the U.S. CPI print later today taking focus for the space.

• To recap Tuesday’s price action, gold pared gains after briefly showing above $1,800/oz, ultimately closing ~$5/oz firmer, erasing all of its post-NFP losses in the process. The move higher takes gold to its highest daily close since July 5, aided by a drift lower in the USD (DXY) from its own cycle highs (above 109.00) since mid-July.
• Elsewhere, bullion continues to receive support from elevated Sino-U.S. tensions surrounding Taiwan, adding to prevailing, well-documented recession-related worry (particularly in Europe and the U.S.).
• Sep FOMC dated OIS now price in ~70bp of tightening for that meeting ahead of the U.S. CPI print later today, sitting around their highest levels since last Friday’s NFP print (was ~58bp pre-NFP).
• From a technical perspective, gold has assumed a firmer tone in recent sessions, and briefly broke through trendline resistance at $1,797.1/oz, potentially exposing further resistance at $1,825.1 (Jun 30 high). On the other hand, support is located at $1,759.5/oz (20-Day EMA).

FOREX: Calm Before U.S. CPI

The greenback turned bid in early Asia trade but its strength gradually fizzled away as the session progressed. The BBDXY index crept above yesterday's high, topped out at 1,273 and pared gains as the session progressed.

• The greenback staged its round tripped as U.S. Tsy yields wavered in Tokyo trade, with regional players awaiting the latest batch of U.S. CPI data. The report will be closely watched for any hints on the future direction of Fed tightening campaign.
• The USD gave back its initial gains despite a parallel upswing in USD/CNH as Chinese CPI (+2.7% Y/Y versus +2.9% median) and PPI (+4.2% Y/Y versus +4.9% median) missed expectations. Spot USD/CNH added ~50 pips before stabilising near its current levels.
• USD/JPY eased off highs into the Tokyo fix and ground further into negative territory as the yen took the lead in G10 FX space (even if only by very narrow margins). Risk reversals continued to creep higher, with 1-year tenor consolidating above par.
• The Aussie dollar remained on the back foot amid cautious mood music. Another round of combative rhetoric from China, which refused to rule out using force in resolving the Taiwan situation, did little to boost sentiment.
• Volatility across major currency pairs was subdued, with many participants on stand by ahead of the release of said CPI report out of the U.S.
• Today's economic docket remains dominated by CPI figures. Apart from U.S. data, we will get the latest prints out of the Germany (f), Italy (f) and Norway. Speeches are due from Fed's Evans & Kashkari as well as BoE's Pill.

FX OPTIONS: Expiries for Aug10 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0100(E874mln), $1.0168-75(E1.7bln), $1.0210(E1.2bln), $1.0215-20(E752mln), $1.0400(E1.4bln)
• USD/JPY: Y133.90-05($1.4bln)
• GBP/USD: $1.2040-50(Gbp528mln), $1.2400(Gbp690mln)
• AUD/USD: $0.6985-00(A$794mln)
• USD/CAD: C$1.2900($1.1bln)
• USD/CNY: Cny6.7500($732mln)