MNI EUROPEAN OPEN: Fallout From BoJ Still Under Microscope

SNAPSHOT: Fallout From BoJ Still Under Microscope

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

• Nikkei 225 up 135.43 points at 26523.07
• ASX 200 up 37.409 points at 7152.5
• Shanghai Comp. up 7.61 points at 3076.017
• JGB 10-Yr future up 59 ticks at 146.35, yield down 7.6bp at 0.404%
• Aussie 10-Yr future down 8.5 ticks at 96.170, yield up 8.0bp at 3.806%
• U.S. 10-Yr future up 0-04+ at 113-22+, yield down 0.93bp at 3.6527%
• WTI crude up $0.42 at $78.71, Gold up $5.97 at $1820.36
• USD/JPY down 71 pips at Y131.75
• ECB’S CENTENO: DATA INDICATE INFLATION IS REACHING PEAK IN Q4 (BBG)
• UK FELL DEEPER INTO RECESSION IN FOURTH QUARTER, CBI SURVEY SAYS (BBG)
• BIDEN TELLS ZELENSKIY US TO BACK UKRAINE ‘AS LONG AS IT TAKES’ (BBG)
• WEAK YEN CONCERNS BEHIND BOJ'S SHOCK YIELD SHIFT (MNI)
• NIPPON LIFE WEIGHS MORE JAPAN BOND PURCHASES AS BOJ LIFTS YIELDS (BBG)
• PBOC RATE CUTS NEEDED AS LEVERAGE SET TO RISE (MNI)

US TSYS: A Touch Firmer Overnight On Broader Inputs

A bid in JGBs and a block buy in TY futures (+1,896) supported Tsys overnight, although some cheapening in ACGBs and a pullback from best levels in the JGB space probably capped the bid.

• That leaves cash Tsys ~1-2bp richer across the major benchmarks, with intermediates outperforming at the margin after lagging during Wednesday’s relatively modest (at least based on net daily change) rally. TYH3 is +0-06 at 113-24, 0-00+ off the peak of its 0-05 range, on volume of ~64K.
• There was a lack of meaningful macro headline flow overnight, outside of U.S. President Biden pledging to back Ukraine for “as long as it takes” re: the conflict with Russia. This left the aforementioned cross-market direction and block flow at the fore. We also believe that U.S. Tsys may have benefitted from spread based demand vs. ACGBs (as we have covered elsewhere).
• Looking ahead, weekly jobless claims data, revised Q3 GDP readings and the Kansas City Fed m’fing index are due in NY hours. We will also get 5-Year TIPS supply.

JGBS: Firmer, But Off Best Levels At The Bell

JGB futures extended on their overnight session gains during the Tokyo morning, with short covering perhaps playing a part.

• The contract has since eased back from best levels after gapping higher at the afternoon open, closing +49. Note that bulls failed to challenge the contract’s post-BoJ high of 146.74, with the vol. continuing.
• An early bull flattening impetus gave way to outperformance in 10s, with the major cash JGB benchmarks running flat to 8bp richer into the close.
• Low offer to cover ratios in the details of the latest round of BoJ Rinban purchases (after the Bank stuck with its focus on the 3- to 10-Year zone, as it looks to facilitate the functioning of its new YCC settings) helped underpin intermediates, resulting in the post-lunch break richening. Reports pointing to a downtick in JGB issuance in the next FY also helped that bid, before the aforementioned fade from best levels., which lacked a clear catalyst.
• Twist steepening on the swap curve may have also been a limiting factor, resulting in mixed swap spread performance (tighter to little changed in the front end of the curve, with a widening theme then extending the further out the curve you look).
• Tomorrow’s local docket is headlined by national CPI data and the outdated minutes from the BoJ’s Oct meeting.

AUSSIE BONDS: Bucking The Trend, Likely Weighed By Cross Market Flows

Thursday’s weakness in ACGBs was somewhat peculiar, given the general core FI richening theme and a lack of idiosyncratic news flow.

• This (once again) leads us to conclude that cross-market flows were at the fore, with the AU/U.S. 10-Year yield spread resuming its recent widening, hitting the widest level seen since October, perhaps aided by some exits from crowded compression trade positioning in that spread. AU/NZ cross-market flows may also have been at work, given the relative resilience in NZGBs and movement in AUD/NZD.
• That left YM -6.0 and XM -7.0 at the close, while the wider cash ACGB benchmarks were 4.5-8.0bp cheaper, with bear steepening in play.
• Swap flow seemed to aid the general trajectory, with EFPs a little wider on the day. This came as the Bill curve ran steeper, finishing 1-11bp cheaper through the reds. Meanwhile terminal cash rate pricing in the RBA dated OIS strip nudged higher, finishing a little shy of 3.80%, aiding the cheapening & swap paying dynamics.

NZGBS: Early, Light Richening Holds

NZGBs held on to their early richening, even as their Antipodean counterparts faltered on the back of what seems like cross-market flow-driven moves (which perhaps underpinned NZGBs further).

• That left the major NZGB benchmarks running flat 2.5-4.0bp richer across the curve at the close, with some light bull steepening seen after NZGBs looked to Wednesday’s bid in U.S. Tsys for early support.
• Swap rates are essentially unchanged across the curve.
• The front end of the RBNZ dated OIS strip was flat, with ~71bp of tightening priced for the Feb ’23 gathering and a terminal OCR of ~5.55% currently baked in.
• Broader inputs will shape the NZGB space on Friday, although activity is likely to be limited, unless we get major macro headline flow, with the local docket empty and participants eying the exits ahead of the Christmas holiday.

EQUITIES: HSI Leads Regional Move Higher, As China Authorities Pledge More Policy Support

Asia Pac equities are higher across the board (except Indonesia/India). The HSI and China Enterprise Index lead gains, while US/EU futures are also higher (+0.30/+0.40%), providing further support to the regional backdrop.

• The HSI is +2.70%, with the underlying tech index +4.60%. The China Enterprise index is +3.15%. A measure of property developers surged in early trade, amid calls late yesterday from the PBoC Governor for more support for the sector. We are away from best levels though, last around +1.45% for the session.
• Mainland stocks are also higher, the CSI last at +0.76%. State TV reported that the authorities urged the implementation of policies to support the economy and utilize existing policies more effectively, after a state council meeting yesterday. The Shanghai Composite is up a more modest 0.34%.
• Japan stocks are higher, +0.50% for the Nikkei 225, the first gain for the index since last Wednesday. The Kospi (+0.80%) and Taiex (+1.30%) have risen more, supported by major tech index gains during the Wednesday US session.
• Indonesian stocks are down slightly, -0.18%, we do have the BI decision later, +25bps expected. Indian stocks have also opened up weaker, down 0.35% at this stage.

GOLD: Prices Higher As USD Softens

Gold prices are up about 0.3% to around $1819.75/oz after falling 0.2% on Wednesday. It is currently trading just under its intraday high of $1820.15. Bullion has found support from a weaker USD (DXY -0.3%). Fed expectations will shape the 2023 outlook for gold.

• Trend conditions for gold remain bullish and the bull trigger is at $1824.50, the December 13 high. Key short-term support is at $1765.90, the December 5 low, and a break of this would signal a deeper retracement. It’s currently in a pattern of higher highs and higher lows.
• Later today there are US jobless claims and the Chicago and Kansas Fed indices. The focus is on Friday’s personal consumption data which includes the Fed’s preferred measure of inflation for November, the core PCE – price index. There is also Michigan consumer confidence for December and November durable goods data on Friday.

OIL: Prices Continue To Rally But A Lot Of Uncertainty Going Into 2023

Oil prices are up around 0.5% on yesterday’s NY close, as US EIA data showed a drawdown in crude stocks, but have been trading in tight ranges. WTI is trading around $78.70/bbl and during today’s session reached its highest since early December. Brent is around $82.60 just below the intraday high of $82.71. DXY is down 0.3%.

• WTI conditions remain bearish but are in an upward corrective cycle and have traded today above the 20-day EMA of $76.80. The next level to watch on the upside is $79.79, the 50-day EMA. On the downside, the bear trigger is $70.31, the December 9 low. Brent has also broken through its 20-day EMA of $82.03.
• The US EIA reported a 5.89mn bbl drawdown in crude inventories after a 10.23mn build the previous week, which was the lowest at this time of year since 2014.
• There is a lot of uncertainty going into 2023, due to recession fears, the reopening of China, the effect of sanctions on Russian oil supplies and how OPEC will respond to these factors.
• Later today there are US jobless claims and the Chicago and Kansas Fed indices. The focus is on Friday’s personal consumption data which includes the Fed’s preferred measure of inflation for November, the core PCE – price index.

FOREX: USD Index Edging Closer To December Lows, A$ Surges On Cross-Asset Support

USD losses have continued, with the BBDXY now off by ~0.30%, last tracking under 1252. Through December the index has found support around the 1250 level, see the chart below. The set up for the DXY is a little less adverse but this index is also down by a similar amount for the session (last around 103.85/90).

• Similar drivers of USD weakness appear are still in play that were evident earlier (firmer equities/lower US cash Tsy yields). The bigger shift has come from gains seen for regional equities, particularly in Hong Kong.
• The A$ has jumped ahead of the yen to be the leader of G10 moves. AUD/USD is now +0.80% for the day, near 0.6760. Higher AU government bond yields are helping, +5/+7bps across the curve. Firmer commodity prices are as well (copper +0.80% CMX basis), although iron ore has moved down from recent highs, last around $111.50/tonne.
• NZD/USD has been dragged higher, back to 0.6320. The AUD/NZD cross is still rising though. The pair got to 1.0700, fresh highs back to the start of the month, before selling interest emerged. The above-mentioned yield momentum is also likely to be biasing AUD higher.
• USD/JPY hit a low of 131.65, but we are now back to 131.80/85. Still 0.50% higher for the yen so far. Yesterday's low in the pair came around the 131.50 region.
• GDP revisions for the UK and US dominate the data calendar later on, with US jobless claims also due.

Fig 1: BBDXY Approaching December Lows

FX OPTIONS: Expiries for Dec22 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0500(E614mln), $1.0550(E1.5bln), $1.0630(E575mln), $1.0675-80(E496mln)
• USD/JPY: Y130.00($1.9bln), Y132.50($1.9bln), Y134.30-50($750mln), Y137.00($560mln), Y137.50-60($1.0bln)
• AUD/USD: $0.6650-70(A$696mln), $0.6810(A$831mln)
• USD/CAD: C$1.3480-00($965mln), C$1.3660-75($903mln)
• USD/CNY: Cny6.9000($883mln), Cny6.9500($900mln), Cny7.0900($600mln), Cny7.2000($1.5bln), Cny7.2500($1.2bln)