MNI EUROPEAN OPEN: JGBs Bear Steepening On BoJ Exit Plays

US TSYS: Tsy Yields Marginally Lower, Ignoring JGB Yield Spike On Potential BoJ Exit

TYH4 is trading at 111-11+, + 04+ from NY closing levels.

• JGB yields rose sharply as traders brought forward bets on BoJ hikes. There was little spill over to UST yields though. US Tsys yields were lower today with the 2Y 1.1bps lower while the 10y is 1.6bps lower, reflecting a slight flattening in the curve.
• It was quiet in terms of dedicated US news flow today, other than Trump winning New Hampshire Rep Primary, while Nikki Haley has confirmed she will not be dropping out of the race.
• Later tonight, flash US PMIs, the BoC decision and 5Y supply

JGBS: Bear-Steepening, Market Looks To An Early Exit To NIRP

JGB futures are holding sharply lower but above the session’s worst level, -82 compared to the settlement levels, after traders judged comments from the BoJ on Tuesday to be hawkish.

• While the BoJ left all policy levers unchanged yesterday, the central bank expressed increased confidence in achieving its 2% sustained inflation goal, although without specifying the expected timeline. In the press conference, Governor Ueda struck a balance between the dovish tone of the statement and a reference to policy normalisation. Overall, the recent developments did little to alter expectations that the BoJ is poised to increase policy rates at the April meeting. (See MNI’s BoJ Review here)
• There hasn’t been much in the way of domestic data drivers to flag, outside of the previously outlined Trade Balance and Preliminary Jibun Bank PMIs.
• The cash JGB curve has sharply bear-steepened, with yields 1-10bps higher. The benchmark 10-year yield is 5.3bps higher at 0.724% versus the Nov-Dec rally low of 0.555%. The 20-year is the underperformer, with the 40-year yield 5.3bps higher at 2.078% ahead of tomorrow’s supply.
• The swaps curve has also bear-steepened, with rates 2-5bps higher. Swap spreads are tighter beyond the 5-year.
• Tomorrow, the local calendar sees Weekly International Investment Flows, Tokyo Condominiums for Sale, Dept Store Sales and Machine Tool Orders data.

AUSSIE BONDS: Cheaper But Well Above Worst Levels, NZ CPI Eyed

ACGBs (YM -2.0 & XM -5.5) are weaker but well above Sydney session cheaps after rebounding from a mid-session slump. In the absence of market-moving data, the local market largely swung with offshore developments. That said, a relatively poor demand showing (cover ratio below 3.0x) at today’s Nov-33 ACGB auction did appear to add to lunch-time weakness.

• Offshore, there has been an extension of overnight weakness in US tsys in today’s Asia-Pac session, although there has been little follow-through on early selling. US tsys are flat to 1bp cheaper across benchmarks.
• There was also some spillover selling from NZGBs following the release of Q4 CPI data. NZGB benchmarks were as much as 4bps cheaper in post-CPI dealings, but that was pared to around 2bps following the release of the RBNZ’s core CPI measures.
• Cash ACGBs are 1-4bps cheaper, with the AU-US 10-year yield differential 2bps wider at +12bps.
• Swap rates are 1-3bps higher, with the 3s10s curve steeper.
• The bills strip is cheaper, with pricing -1 to -3.
• RBA-dated OIS pricing is 1-3bps softer for meetings beyond May. A cumulative 38bps of easing is priced by year-end.
• ICYMI, QTC launched a new 4.75% 2 February 2034 A$ fixed rate green bond. Transaction expected to price tomorrow.
• Tomorrow, the local calendar is empty.

NZGBS: Cheapen Further After Q4 CPI Details Keep Market Cautious

NZGBs closed 5bps cheaper across benchmarks, with the 10-year underperforming its US counterparts. At the local close, the NZ-US 10-year yield differential closed 3bps wider at +55bps.

• The underperformance came despite Q4 CPI data printing in line with consensus and below the RBNZ’s forecast. It was the details that had the market thinking the RBNZ would likely remain cautious given persistent domestically driven inflation. While the pace of increase in the domestically determined non-tradeables CPI eased to 1.1% q/q from 1.7% in Q3 and 1.5% in Q4 2022 (data is non-seasonally adjusted), annualised it is still at 4.3%. The annual rate moderated to 5.9% from 6.3%, which remains too high for the RBNZ to feel that the inflation fight has been won.
• On a more positive note, the RBNZ’s sector factor model later in the day showed core CPI inflation easing to 4.5% y/y in Q4 from 5.2% in Q3 and the peak of 5.7% in the previous three quarters. It was the lowest rate since Q4 2021.
• Swap rates closed 5-7bps higher, with the 2s10s curve steeper.
• RBNZ dated OIS pricing closed 3-6bps firmer across meetings beyond February.
• Tomorrow, the local calendar sees the Government’s 5-month Financial Statements.
• Tomorrow, the NZ Treasury plans to sell NZ$250mn of the Apr-27 bond, NZ$175mn of the May-34 bond and NZ$75mn of the Apr-37 bond.

FOREX: Yen Outperforms On Higher JGB Yields, AS BoJ Outlook Assessed

Yen strength has been evident in the G10 FX space as the Wednesday session has progressed. The BBDXY sits a touch below NY closing levels but is still holding above 1238 at this stage.

• Slightly lower USD index levels are largely due to a firmer yen backdrop. USD/JPY is back sub 148.00, the pair around 0.40% stronger in yen terms (last near 147.80).
• A modest move and well above Tuesday lows (146.99), but JGB yields have risen strongly as traders assess the risks around a BoJ move in the first half of the year. The 10yr US-JP government bond yield differential is back sub +340bps, comfortably off recent highs (near +350bps). Outright 10yr JGB yields are back to 0.74%, fresh highs since mid Dec last year.
• AUD and NZD have lost some ground against the USD, with yen cross sales a potential factor. AUD/USD last near 0.6570, off close to 0.20%. NZD/USD is down 0.10%, so outperforming slightly, the pair last near 0.6095.
• Earlier we had stronger than expected non-tradables Q4 inflation, which has helped the Kiwi at the margins.
• Looking ahead, a host of European Flash PMIs preview the latest strength of regional economies. The Bank of Canada rate decision will also highlight.

EQUITIES: Equities Mixed As Traders Bet on BoJ Rate Hikes

Regional equities are mixed today with China and Japanese Equities lower. US Equity futures have again continued their trend higher, led by Nasdaq futures, up 0.35%, while Eminis were last +0.22% higher.

• Japan Equity indices are lower today as investors weighed comments late yesterday from BoJ Governor Ueda. A potentially earlier NIRP exit saw the 10Y yield move 10bps higher and 30Y yield moved 12.5bps higher. This led the move lower in equities with the Nikkei 225 down 0.902%, while the Topix is down 0.70% at this stage.
• Hong Kong extended gains from yesterday in part as a continuation from yesterday's announcement around a rescue package for to boast China equity markets, Hang Seng currently trading 0.45% higher today at the break. Share buybacks for Alibaba (from owner Jack Ma) have also aided sentiment.
• China regulators ask funds to restrict short selling of stock index futures (RTRS), still mainland equities all trading lower today with the CSI 300 down by 1.0% at this stage.
• In Australia, the ASX 200 is trading flat today, miners have performed as China steel demand grows. In SEA markets, Philippines are trading 0.70% higher and India is 0.80% higher continuing their winning streaks.

OIL: Crude Little Changed As Geopolitics Offset Fundamentals

Oil prices have traded in a tight range and are little changed during APAC trading today as continued geopolitical tensions offset soft supply fundamentals, a trend that has been in place through January. WTI is at $74.28/bbl, close to the low, and Brent hasn’t been able to break through $80 and is currently at $79.44 following a low of $79.43. The slightly lower US dollar hasn’t provided a boost to crude.

• Supply is expected to remain plentiful and with production beginning to come back on line in Libya following protests and in the US after a cold snap, markets are struggling to rally. But Brent’s bullish prompt spread’s backwardation structure has widened over January, signalling a tightening market.
• Bloomberg reported that US crude inventories fell 6.67mn barrels in the latest week, according to people familiar with the API data. Gasoline rose 7.18mn but distillate fell 245k. The data is likely impacted by recent very cold weather which reduced output and refining. The official EIA data is released today.
• Later preliminary January PMIs for US/Europe are released and the Bank of Canada’s decision is announced.

GOLD: January’s Narrow Range Continues To Hold

Gold is slightly weaker in the Asia-Pac session, after closing 0.4% higher at $2029.28 on Tuesday.

• Bullion has traded in a relatively narrow range this month as investors seek further clues on whether the Federal Reserve will start reducing interest rates as soon as March. Lower interest rates are typically positive for non-interest-bearing gold.
• The market is currently assigning less than a 50% chance to a 25bp rate cut in March. This compares to the near 70% chance seen a week ago.
• Fed speakers are in blackout ahead of next week’s FOMC meeting.
• US data scheduled for later in the week include the latest GDP figures and core PCE index, which is the central bank’s preferred gauge of underlying inflation and will likely drive sentiment for the precious metal in the short term.