MNI EUROPEAN MARKETS ANALYSIS: Dovish Lowe Sends ACGB Yields Lower

ECB: MNI ECB Preview - September 2022: Hiking By Less Than 75bp Could Be Risky For The ECB

Hiking By Less Than 75bp Could Be Risky For The ECB

• It is a close call, but we expect the ECB to hike by 75bp at the September meeting.
• With inflation getting closer to double digits and the ECB already well behind it peers, hiking by ‘only’ 50bp could risk undermining the perceived commitment to restoring price stability.

Despite dropping forward guidance given the current heightened degree of uncertainty, the ECB’s position on the policy rate path is relatively clear. There has been a notably hawkish shift since the July meeting, hiking in 25bp increments is no longer being discussed and the terminal rate is likely to be in the 1-2% range. So, we know that the ECB is in tightening mode and we have a reasonable idea of where the GC would like to get to (in the first instance). The two substantial unknowns are the pace of tightening and whether or not the ECB would continue hiking into a recession.

As others have commented, the September decision is finely balanced, but we come down on the side of a 75bp move. Inflation continues surprising higher, European gas prices have soared, the Fed has set a precedent by recently hiking in 75bp increments, and the window of opportunity to frontload rates in the euro area is narrowing.

For the full publication please see:

ECB Preview September 2022.pdf

US TSYS: Extending Wednesday’s Rally; Fedspeak Eyed Ahead Of Pre-FOMC Blackout

U.S. Tsys are just shy of session highs, having richened throughout the Asia-Pac session, building on the bull flattening observed in Wednesday’s session.

• Tsys caught a bid in tandem with core FI markets on remarks from RBA Governor Lowe signalling a possible end to larger rate hikes, with Tsy yields across the curve dipping to session lows.
• TYZ2 is +0-07+ at 116-13, a little below best levels, extending a move off of Wednesday’s 12-week lows for the contract at writing. Cash Tsys run 1.0-4.0bp richer across the curve, with the belly leading the bid.
• The recent bid in cash Tsys has unwound much of the bear flattening observed after U.S. markets returned from the long weekend on Tuesday, with nominal 10-Year Tsy yields returning to ranges observed prior to the Labour Day holiday.
• Looking ahead, final wholesale inventories, consumer credit, and weekly jobless claims are due in the NY session.
• Scheduled Fedspeak is headlined by Chairman Powell, Chicago Fed Pres Evans (‘23 voter), and Minneapolis Fed Pres Kashkari (‘23 voter), although the latter is slated to deliver introductory remarks, potentially limiting the scope for comments on monetary policy.
• A reminder that this week’s Fedspeak comes ahead of the pre-FOMC blackout period (Sept. 10-22).

JGBS: Futures Extend Overnight Bid

JGB futures have tracked the wider movements in core FI markets since Wednesday’s Tokyo close, with the contract rallying after the Tokyo lunch break (as RBA Gov. Lowe was speaking), extending their move away from their overnight lows. JBU2 last trades at 149.50, 24 ticks firmer.

• Cash JGBs run flat to 2.0bp richer across the curve, bull flattening.
• The release of a range of Japanese data (Q2 final GDP, BoP, bank lending, and weekly international security flow figures) provoked little by way of a meaningful reaction in JGBs,
• The liquidity enhancement auction for off-the-run 5- to 15.5-Year JGBs went very well as spreads firmed from the previous auction, the spread tail width remained narrow, and the cover ratio improved to 4.90x (from 3.63x prev.). Cash JGBs were little moved post-auction.
• Friday will see Japanese money supply for Aug headline the domestic data docket.

AUSSIE BONDS: Off Best Levels But Comfortably Richer; Lowe Boosts Bonds

ACGBs are off best levels but sit comfortably richer at writing, with comments from the RBA’s Governor Lowe accelerating a pre-speech move higher (derived from the overnight bid in Aussie bond futures).

• To elaborate, Gov. Lowe signalled a possible end to large rate hikes, stating that the case for slower rate hikes would grow as the cash rate rises, with a dip in the AUD and rally in core global FI markets observed after.
• Cash ACGBs run 13.0-17.5bp richer across the curve, with the belly leading the bid. 3s sit 16.5bp richer at typing, after printing as much as 23bp richer earlier.
• YM is +18.0 and XM is +15.0, with both contracts off their respective session highs but consolidating higher post-Lowe. EFPs are mixed, with 3-Year EFP narrowing and 10-Year EFP little changed, while Bills run 1 tick cheaper to 17 ticks richer through the reds.
• Looking ahead, no domestic data releases of note are scheduled for Friday, with the AOFM’s weekly issuance slate due.

JAPAN: Foreign Investors Resume Purchases Of Japanese Bonds; Accelerate Sale Of Japanese Equities

Japanese investors were small net buyers of foreign bonds last week, according to weekly international security flow data, halting a two-week run of relatively limited net selling.

• Japanese investors were also small net buyers of foreign equities, adding to last week’s marginal round of net buying.
• Foreign investors were marginal net buyers of Japanese bonds, resuming their run of net buying prior to last week’s negative print.
• Elsewhere, foreign investors accelerated their net selling of Japanese equities, likely reflecting some worry re: domestic stocks amidst the recent uptick in expectations for rate hikes globally.

RBA: Lowe More Dovish, Wage Outcomes Key

There were several take aways from the Q&A session following RBA Governor Lowe's speech.

• When Lowe was pressed as to why Australia wouldn't follow the path of other global central banks in terms of further aggressive hikes, he stated that the RBA would set monetary policy based on Australian-specific conditions.
• He added the strong differences in wage outcomes in Australia compared to the US. Given the institutional settings in wage outcomes in Australia we may not enter into a wage/inflation spiral.
• This will be key in determining how much higher rates go and at what pace, but that Australia may be able to avoid offshore experiences of higher wages/inflation and therefore much higher interest rates.
• In any case, this comment fits in with Lowe's earlier comment around slowing the pace of rate hikes (while remaining data dependent).
• The RBA also has no plans to embark on quantitative tightening (QT). The bonds on the balance sheet are expected to be held until maturity.
• All in all, the Q&A didn't reverse any of the context of the speech given earlier, with the overall tone from RBA Governor Lowe still coming across as dovish.

AUSTRALIA DATA: Trade Balance Narrows On Weaker Details

The July trade balance narrowed more than expected to A$8733 after A$17131 in June. The softer outcome was due to not only a sharper-than-expected fall in exports of 9.9% but also a significantly larger rise in imports of 5.2% on the month.

• Imports posted their third consecutive rise and now stand 40.8% higher than a year ago (June +34.3%). Despite the July rise being driven by overseas travel, goods imports rose 4.8% m/m and across the three major categories, suggesting that domestic demand growth has remained robust and that there could also be some inventory build in Q3 after the run down in Q2.

• Weakness in coal and metal exports was behind the fall in the total. This is a nominal series and coking coal and metals prices were down on average in July. Exports of travel services rose 8.2% m/m. Export growth to China also weakened for the fifth consecutive month falling by 24% y/y, suggesting that reduced demand there is impacting the Australian economy.

Source: MNI - Market News, ABS, Refinitiv Eikon Datastream

FOREX: EUR Near Parity Ahead Of ECB, Dovish Lowe Weighs On AUD

EUR/USD has not gotten much beyond a 20pip range today, holding between 0.9980/1.0000 for much of the session. All eyes shift to the ECB decision due later today, where a 75bps hike is expected. This is not a uniform expectation though, nor fully priced by the market, so if delivered could aid EUR/USD sentiment, particularly as the currency looks a little low relative to yield spreads.

• More action was evident in EUR/JPY. The pair got to fresh highs around 144.35, but we now sit back at 143.80, mainly due to some JPY stability.
• USD/JPY didn't see much headway beyond 144.50 earlier. Lower UST yields (10yr off to 3.23%), has likely helped. Dips sub 144.00 still appear to be supported.
• AUD/USD is down the most within the G10 space for the session, dipping to 0.6715, now back at 0.6730. The trade surplus was much lower than expected for July, as exports to China suffered.
• Then RBA Governor Lowe gave a dovish speech, stating the case can be made for slowing the pace of rate hikes. The governor stated Australia's lower wages backdrop may mean the RBA doesn't have to follow the experience of some offshore central banks in hiking rates aggressively.
• NZD (0.6045/50) has largely followed AUD's path. The AUD/NZD cross slightly lower at 1.1130.
• Dips sub 1.1500 in GBP have been supported, with UK fiscal plans the likely focus point today.
• ECB will then take centre stage. Scheduled Fedspeak is headlined by Chairman Powell, Chicago Fed Pres Evans (‘23 voter), and Minneapolis Fed Pres Kashkari (‘23 voter).

FX OPTIONS: Expiries for Sep08 NY cut 1000ET (Source DTCC)

• EUR/USD: $0.9800(E1.6bln), $0.9850-65(E1.2bln), $0.9900(E889mln), $1.0000(E2.2bln)
• USD/JPY: Y140.00($1.7bln)
• GBP/USD: $1.1400(Gbp593mln)
• USD/CAD: C$1.3200($540mln)
• USD/CNY: Cny6.8000($1.3bln)

ASIA FX: BNM Still To Come, China Inflation In Focus Tomorrow

Today has seen range bound backdrop for USD/Asia pairs, ahead of key offshore event risk (ECB later this evening).

• USD/CNH sits around 6.9700 currently, after a rough range of 6.9585-6.9775 so far today. The CNY fixing was again stronger than expected today. China's domestic covid situation remains a headwind, while onshore equities have underperformed broader gains in the region today. Tomorrow August CPI is on tap, with CPI expected at 2.8% y/y (2.7% prior), while the PPI is expected to moderate further (3.2% y/y forecast versus 4.2% last month).
• USD/KRW has oscillated around the 1380 level. The BoK Deputy Governor repeated recent warnings around one-sided FX moves, while USD/TWD is slightly lower (30.915). Both currencies have supported by higher onshore equities at the margin.
• USD/MYR is back at 4.5000, with the BNM still ahead. The market consensus rests with a 25bps hike (see our preview for more details).
• USD/THB is lower, back under 36.505, likely aided by lower oil prices. There still appears firm resistance ahead of 37.00. The Thai court will meet on September 14 for the PM's term limit case.
• Lower oil is also benefiting INR. USD/INR is back to 79.75, onshore equities higher by +0.7% so far, while the 10yr bond yield is back under 7.10%, fresh multi month lows.
• USD/PHP is holding close to recent highs, last 57.20. A dip in the unemployment rate (to 5.2% from 6%) not aiding onshore sentiment.

CNH: CNY Fixing Still On The Strong Side

The USD/CNY fixing came in at 6.9148, versus a Bloomberg consensus of 6.9543. Note the Reuters estimate was much lower at 6.9204, but the actual fixing was still lower than this.

• Relative to the Bloomberg estimate, the fixing was -395pips in USD/CNY terms, so still leaning heavily against depreciation pressures. Note yesterday's outcome was -454pips.
• The 5-day sum of the error term is -1375pips, while for the past 10 sessions it is -2176pips. We are at historic wides on both metrics.
• The USD/CNH reaction has been fairly muted to the fix, the pair continues to track broad USD sentiment during. We were last back under in the low 6.9600 region, down from early highs above 6.9700.

EQUITIES: Mostly Higher In Asia On Lead from Wall St., ASX200 Receives Boost From Lowe

Most major Asia-Pac equity indices are in the green, seeing the MSCI AC Asia Pacific deal >1.0% firmer at typing, with sentiment in high-beta equities across the region lifted by the tech-led rally in Wall St. on Wednesday, benefitting from a continued easing in crude prices as well.

• The Nikkei 225 sits 2.0% firmer, outperforming regional peers, with nearly all of the index’s constituents in the green at writing (218 of 225). Large caps such as Fast Retailing (+1.5%) and Tokyo Electron (+2.4%) contributed the most to gains, adding to broad outperformance in exporters and healthcare names.
• The ASX200 trades 1.6% higher at typing, extending an earlier bid amidst a speech (and Q&A) from RBA Governor Lowe suggesting a case for a slower pace of rate hikes, keeping in mind prevailing uncertainty re: the degree of tightening to be deployed by the RBA in this cycle. Tech equities lead gains, with the S&P/ASX200 All Tech Index hitting fresh one-week highs after adding 2.7%.
• The Hang Seng Index deals 0.4% worse off at writing, off worst levels, but operating just above Wednesday’s six-month lows. The utilities and finance sub-indices lead the way lower, worsening a poor showing from large-cap Tencent Holdings (-2.2%) after the latter offered to double its stake in video game company Ubisoft.
• E-minis sit flat to 0.1% better off at writing, holding on to the bulk of their respective rallies (between 1.3-2.0%) observed on Wednesday.

GOLD: $1,720 Proving Hard To Break Amidst Still-High Yields, Dollar

Gold sits just shy of Wednesday’s best levels, dealing $2/oz weaker to print $1,716/oz at typing as the USD and nominal U.S Tsy yields have largely stemmed their slides.

• To recap, the precious metal closed $16 firmer on Wednesday, rising by the most in over a month amidst a pullback in the USD (DXY) and U.S. real yields from their recent, respective highs.
• A BBG report has pointed to a sharp rise in gold’s inverse correlation coefficient with the USD, suggesting more “pain” ahead for bullion in the case of continued Dollar strength.
• From a technical perspective, gold remains in a clear downtrend after its recent breach of support at $1,727.8 (Aug 22 low) reinforced bearish conditions. Initial support is seen at $1,681.0 (Jul 21 low and bear trigger), with resistance located at $1,726.7 (6 Sep high).

OIL: Consolidating Above Wednesday’s Eight-Month Lows; EIA Inventory Data Due

WTI and Brent are ~$0.60 firmer apiece, paring a little of Wednesday’s losses at writing, with both benchmarks having shed ~$5 apiece in that session amidst elevated worry re: Chinese crude demand and tighter central bank monetary policy.

• Crude has drawn some support from comments by Russian Pres Putin re: the cessation of energy exports to countries adopting a price cap, that came ahead of an announcement from the European Commission on plans to propose a price cap on Russian gas.
• The recent decline in crude also comes ahead of the ECB’s policy decision later today, with a 50bp vs 75bp hike still in the balance, leaving open some uncertainty re: expectations for economic growth amidst higher rates.
• Elsewhere, the latest round of U.S. API inventory estimates saw reports point to a surprise, significantly large build in crude stockpiles, adding to the surprise build reported last week as well. Distillate stocks increased, unwinding last week’s decline, while gasoline and Cushing hub stocks decreased for another week.
• Looking ahead, U.S. EIA inventory data is due later today, with BBG median estimates calling for a modest drawdown in crude stockpiles.