MNI EUROPEAN MARKETS ANALYSIS: JGBs Steepen On Soft Auction Reception, Further Asia FX Intervention Noted

US TSYS: Modest Cheapening Bias Overnight, Aided By Move In JGBs

A modest cheapening bias was observed in Asia hours, aided by the previously outlined post-auction weakness and steepening on the JGB curve. The move in Tsys has been much more limited, with cash benchmarks running 2bp cheaper across the curve. TYZ2 operates in a fairly limited 0-08 range, last -0-05+ at 114-25+, just off lows on subdued volume of ~40K.

• One market contact noted some regional real-money account interest in selling 30s.
• Regional risk events failed to provide a tangible catalyst for the space.
• Thursday’s U.S. docket sees the release of retail sales, Empire & Philly Fed surveys, industrial production, weekly jobless claims and terms of trade data.
• Focus is squarely on the 75/100bp hike debate re: next week’s FOMC (J.P.Morgan played down the odds of a 100bp move on Wednesday after Nomura called for such a hike post-CPI). ~83bp of tightening is currently priced for next week’s meeting.
• A block sale of SFRU3 (-3.5K) and block flattener in SFRH3/H4 (-9K) headlined on the flow side in Asia.
• The Shanghai Cooperation Organisation gathering gets underway on Thursday, with Chinese President Xi set to meet with Russian President Putin in the afternoon (Uzbekistan time). The Kremlin has already noted that the summit will provide an "alternative" to the Western world.

JGBS: Bear Steepening On Weak 20-Year JGB Auction

JGB futures are -15 ticks last, while the curve has bear steepened in the wake of a soft 20-Year JGB auction which saw a much lower than expected low price and the lowest cover ratio observed at a 20-Year auction in a decade.

• The auction was hindered by the apparent return of international investors for a renewed challenge of the BoJ’s YCC settings (based on weekly international security flow data from the Japanese MoF), which likely limited broader demand alongside a lack of relative value appeal.
• The major cash JGB benchmarks run 0.5-7.0bp cheaper ahead of the bell.
• Futures recovered from Tokyo lows lodged post-auction after failing to test their overnight base, likely as 10-Year JGB yields continue to hover close to the upper limit of the BoJ’s permitted trading band.
• There are no domestic data releases of note scheduled for Friday.

JAPAN: International Investors Start To Test BoJ

The latest round of weekly international security flow data saw limited flows on the part of Japanese participants, with the real eye catcher coming in the form of the sales of Japanese bonds on the part of international investors (via the largest round of weekly net sales seen since the record level lodged in June), which suggests that offshore participants are willing to test the BoJ’s resolve when it comes to defending its existing YCC settings.

• The re-widening of longer dated LCH/JSCC swap spreads was a sign that international investors had started to speculate via such positions, albeit with reduced appetite vs. what was seen in June, given outright super-long spread and LCH/JSCC spread levels.
• A reminder that the Japanese authorities seemingly upped their verbal intervention to rate checking via the BoJ on Wednesday, with Japan’s energy importer status and then relative monetary policy differences weighing on the JPY through ’22.
• The government’s apparent want to limit further JPY weakness remains troubled by the BoJ’s clear reluctance to deviate from its on-hold stance, giving international investors a focal point to target. 10-Year JGB yields operate around the BoJ’s 0.25% limit at typing.

Source: MNI - Market News/Bloomberg/Japanese Ministry Of Finance

AUSSIE BONDS: Cheaper On Core Global FI Moves; Gov. Lowe To Testify On Friday

ACGBs sit a little off session cheaps at typing, with a continued downtick in U.S. Tsys & JGBs helping to unwind the twist flattening observed in futures overnight, which spilled over into early Sydney trade.

• Cash ACGBs run 1.5-6.5bp cheaper across the curve, bear flattening. YM is -6.8 and XM is -2.6, with both contracts keeping within their overnight boundaries. Bills run 4 to 8 ticks richer through the reds.
• Aussie bonds saw little by way of a meaningful, lasting reaction to the release of domestic labour market data, with the modest miss in headline employment gains and uptick in unemployment not expected to move the needle re: the RBA’s policy decision in Oct, at least in isolation.
• STIR markets now price in ~39bp of tightening for the RBA’s Oct ‘22 meeting, little changed from levels observed prior to today’s labour market data, consolidating the recent move higher which came on the U.S. CPI print and the subsequent repricing of market expectations re: Fed tightening.
• Friday will see RBA Governor Lowe appear in Parliament for his semi-annual testimony. Following that, A$800mn of ACGB May-32 will be on offer at auction, with the AOFM’s weekly issuance slate due as well.

AUSTRALIA DATA: Labour Market: Unlikely To Shift RBA Views In Either Direction

Employment rose 33.5k in August, which was close to expectations. The unemployment rate unexpectedly rose 0.1pp to 3.5%, as the number of unemployed increased 14k and the participation rate recovered to 66.6%. But underemployment fell 0.1pp, as people work more hours.

• While the data was close to expectations, it shows strength in the jobs market continues unabated. There is nothing here to shift RBA views in either direction for the October meeting.
• Hours worked increased by 0.8% m/m and 7.3%y/y, recovering from an illness- and holiday-impacted July. This is the highest annual growth rate since 1989 (ex Covid period), showing that firms are increasing existing employees’ hours in the face of a shortage of suitable job candidates. Consistent with the fall in the underemployment rate.
• In another sign that the labour market remains tight, full-time employment rose 58.8k (highest since May) while part-time fell 25.3k. Total employment growth is now 4.4% y/y (highest since 1989, apart from Covid-impacted 2021) and full-time jobs +5.8% y/y.

FOREX: Antipodean Data Dominate As G10 FX Hold Ranges

Antipodean data took the limelight in the Asia-Pac session, with New Zealand's Q2 GDP beating expectations and Australian Aug labour force figures lacked any major surprises. The Aussie and Kiwi dollars outperform in the G10 FX basket, albeit by very thin margins as overall volatility in the space remained subdued.

• The kiwi dollar turned bid as New Zealand's Q2 GDP growth printed at +1.7% Q/Q after an unrevised 0.2% contraction recorded in Q1. The sequential outturn exceeded the median estimate of +1.0% but falling slightly short of the RBNZ's +1.8% projection. Initial market reaction has been largely unwound as the session progressed. RBNZ pricing is little changed but ASB lifted their terminal OCR level forecast by 25bp to 4.25%.
• The Aussie ticked higher as the latest batch of Australian jobs data lacked any major surprises. Employment growth was marginally softer than forecast (+33.5k vs +35.0k expected), while the unemployment rate nudged up to 3.5% versus 3.4% expected amid slightly wider participation. The report is unlikely to shift RBA views ahead of their October meeting.
• AUD/NZD slipped on the release of NZ GDP data, moving in tandem with Australia/New Zealand 2-Year swap spread. The pair returned to positive territory as participants digested Australian jobs figures, with the swap spread returning to its previous levels. Spot AUD/NZD last operates ~10 pips higher on the day.
• Spot USD/JPY advanced as the yen slipped to the bottom of the G10 pile. Renewed yen weakness could be linked to a RTRS report flagging comments from Japan's ruling party official Katayama, who said that "conducting solo FX intervention likely won't be that effective in stemming sharp yen falls" The record trade deficit reported by Japan may have increased yen vulnerability.
• Focus turns to to U.S. advance retail sales, industrial output, Empire M'fing Survey, Philly Fed Business Outlook & initial jobless claims. ECB's de Guindos and Centeno will speak at conference events.

AUDNZD: AUD/NZD Just Off Cyclical Highs, Despite Relative Data Outcomes

The AUD/NZD cross sits just below fresh cyclical highs, last at 1.1245/50. The pair has had a number of attempts to break above 1.1255/60 in recent weeks but hasn't been able to do so. Dips sub 1.1200 have been supported this week, with underlying flow momentum still seemingly skewed in AUD's favour.

• Today's data, at face value, was better from an NZD standpoint, following the comfortable Q2 GDP beat. Australian jobs data was more mixed, with a slight uptick in the unemployment rate.
• Still, several local banks have stated today's data is a hawkish read for the RBA outlook. This is reflected in higher short end yields. The 2yr bond is up close to 6bps for the session, last at 3.07%.
• This has pushed the AU-NZ 2yr spread marginally back in AUD's favor, see the chart below, although a wedge remains.
• Today's outcomes should bias relative data surprise indices lower. We wrote earlier in the week about the current cyclical backdrop being less favourable for the cross (see this link for more details).
• Tomorrow, RBA Governor Lowe appears at a parliamentary testimony, while in NZ the manufacturing PMI is out.

Fig 1: AUD/NZD Versus AU-NZ 2yr Swap Spread

Source: MNI - Market News/Bloomberg

FX OPTIONS: Expiries for Sep15 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0000(E1.1bln), $1.0015-20(E790mln), $1.0050(E1.1bln)
• GBP/USD: $1.2150(Gbp1.3bln)
• USD/JPY: Y142.00-20($710mln), Y144.00($576mln)
• EUR/GBP: Gbp0.8600(E1.6bln)
• USD/CAD: C$1.3035-50($540mln)
• USD/CNY: Cny7.00($3.5bln)

ASIA FX: Intervention Curbs USD/KRW Move Towards 1400

Once again USD/Asia pairs are mixed. The main focus has been on USD/KRW, which has fallen post intervention. USD/CNH has been range bound around 6.9750. Likewise for USD/TWD and USD/SGD. Elsewhere, IDR has outperformed, following a trade data beat. THB remains weak. Later, the focus is on the Xi-Putin meeting (see this link for more details), then tomorrow China August activity data is out (see this link). Also due is South Korea trade prices and Singapore export figures.

• USD/CNH has respected recent ranges, last at 6.9770. The CNY fixing once again much firmer than expected. The MLF rate was left unchanged as expected. The focus is on the upcoming Xi-Putin meeting, then tomorrow we get activity data for August.
• USD/KRW is off highs of close to 1398, following reports that the authorities have sold dollars to curb the won's rise. The pair has found some support ahead of 1390 (last 1392.50).
• USD/TWD (last just under 31.10) and USD/SGD (1.4060) have been rangebound.
• USD/IDR is back under 14900, last 14883. The trade surplus was firmer than expected at $5.76bn for August, versus $4bn expected. The parliamentary budget committee endorsed setting the average inflation target at +3.6% Y/Y and the rupiah target at IDR14,800 in Budget 2023. The targets are higher than those proposed by Pres Widodo last month (+3.3% and IDR14,750 respectively).
• USD/INR is rangebound, the pair edging back above 79.50. Onshore equities are around flat so far. Yesterday's wholesale prices came in slightly weaker than expected (+12.41% y/y, versus a 13.00% y/y estimate).
• USD/THB is pushing up towards 37.00 (last 36.75). Offshore investors sold a net $33.4mn in Thai equities Wednesday, the second consecutive day of outflows. Recovery in foreign demand for Thai stocks that began in Jun has seemingly run its course.

CHINA DATA: August Activity Data Unlikely To Change Weaker 2022 Narrative

Tomorrow delivers the August round of activity data, although it would take some big surprises to shift the weaker 2022 narrative. On tap is new home prices, IP, retail sales, fixed asset investment (FAI), property investment and the unemployment rate.

• House prices have declined m/m for the past year, but there is no consensus estimate for the August outcome.
• IP growth is expected to be unchanged at 3.8% y/y. Recall the manufacturing PMIs remained in contraction in August.
• FAI is expected to moderate further to 5.5% y/y (from 5.7% y/y), weighed by property investment (-7.0% y/y forecast, from -6.4%).
• Retail sales are expected to show improvement to 3.2% y/y, from 2.7%. Services PMIs surprised on the upside in August, albeit easing from July levels. Finally, the jobless rate is forecast to be unchanged at 5.4%.
• The broader consensus continues to revise down 2022 growth forecasts for China (now at 3.5%). Earlier this week we also had fresh stimulus measures announced after a State Council meeting
• The PBoC will provide 200bn yuan in special relending funds to banks to boost loans to companies, while SMEs will be able to defer tax payments for another 4 months.

EQUITIES: Cautiously Higher In Asia; Chinese Developers Outperform On Growing Policy Support

Most major Asia-Pac equity indices sit modestly higher on a positive lead from Wall St., with Chinese and South Korean benchmarks bucked the broader trend of gains.

• The CSI300 deals 0.7% softer at writing, with limited gains in the heavyweight consumer staples sub-index (+0.5%) unable to counter weakness in industrials and consumer discretionary equities.
• China-based property developer shares outperformed on the Hong Kong and Chinese bourses, with the Hang Seng Mainland Properties Index (+4.7%) and the CSI300 Real Estate Index (+2.6%) surging amidst signs of strengthening policy support for the sector, with the latter hitting 6-week highs earlier in the session.
• The ASX200 is 0.2% firmer, with the energy (+3.4%) and financials (+1.0%) sub-gauges offsetting weakness in high-beta healthcare (-0.9%) and tech equities (S&P/ASX All Tech Index: -0.4%)
• The Hang Seng deals 0.5% firmer at writing, with the properties (+2.0%) sub-gauge contributing the most to gains.
• E-minis deal 0.1% firmer apiece at writing, having stuck to the top of their respective ranges established on Wednesday.

GOLD: Steadying Below $1,700/oz As Dollar Holds Post-CPI Gains

Gold deals ~$3/oz weaker to print $1,695/oz, operating a little above Wednesday’s one-week lows at writing, having left the $1,700/oz mark unchallenged throughout Asia-Pac dealing so far.

• To recap, gold closed $5 lower on Wednesday, ending below $1,700 for the first time in two weeks, with the higher than expected U.S. core PPI reading (+7.3% Y/Y vs. BBG median +7.0%) doing little to lift gloom in the space re: worry over Fed rate hikes amidst persistent, elevated inflation.
• Gold trade around its lowest levels for Sep as the USD has held on to the bulk of its post-CPI rally from Tuesday, with the DXY operating just shy of the 110.00 mark at writing.
• Zooming out, the precious metal sits ~$15 above its lowest levels for ‘22 ($1,681.0, Jul 21 low), with the move lower facilitated by a simultaneous rally in the Dollar and U.S. real yields.
• From a technical perspective, gold remains in a clear downtrend. Initial support is seen at $1,681.0 (21 Jul low and bear trigger), while resistance is located at ~$1,735.1 (Sep 12 high).

OIL: Little Changed In Asia; U.S. Rail Strike Eyed

WTI and Brent are little changed at writing, having traded on either side of neutral levels across Asia-Pac dealing, consolidating around the upper end of their respective ranges established on Wednesday.

• To recap, WTI and Brent briefly rose to their best levels in over a week on Wed after EIA data showed an above-expectations increase in crude inventories, nonetheless rising at a slower pace than last week’s ~8.8mn bbl build. Distillate stockpiles saw a surprise increase, while gasoline and hub stocks fell.
• Both benchmarks operate just shy of best levels for Sep, rallying from eight-month lows observed last Thursday on gains in four of the past five trading sessions.
• A partial easing of COVID curbs in the Chinese city of Chengdu (pop. ~21mn) aided sentiment, coming as China has reported <1K COVID cases daily for a fourth day.
• Elsewhere, the IEA forecast oil consumption from gas-to-oil switching across Oct ‘22 to Mar ‘23 to double from a year prior (to 700K bpd) on increased demand for heating.
• Looking ahead, participants will be keeping an eye on ongoing negotiations to avert rail strikes in the U.S., with the API having previously described a disruption to the rail network as “catastrophic”.