MNI EUROPEAN OPEN: Spectre Of BoJ Shock Lingers

SNAPSHOT: Spectre Of BoJ Shock Lingers

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

• Nikkei 225 down 179.43 points at 26387.23
• ASX 200 up 90.833 points at 7115.1
• Shanghai Comp. down 0.781 points at 3072.985
• JGB 10-Yr future down 27 ticks at 145.87, yield up 6.2bp at 0.47%
• Aussie 10-Yr future unch. at 96.255, yield down 0.2bp at 3.725%
• U.S. 10-Yr future down 12.5 ticks at 113.40625, yield up 2.6bp at 3.7085%
• WTI crude down $0.01 at $76.22, Gold down $3.88 at $1814.04
• USD/JPY up 46 pips at Y132.19
• TC ENERGY DELAYS FULL KEYSTONE PIPELINE RESTART UNTIL NEXT WEEK (BBG)
• KURODA'S LEGACY LOOMS AS LEADERSHIP RACE NARROWS (MNI)
• CHINESE LOAN PRIME RATE CUT NEEDED NEXT YEAR (CSJ)

US TSYS: JGB Spill Over Weighs

The previously alluded to Tokyo morning weakness in broader JGBs (and continued pressure for JGBs out to 10s in late Tokyo trade) provided a cheapening impulse for U.S Tsys in a news light Asia-Pac session.

• The space heads into London a little off worst levels, with the wider cash Tsy benchmarks running 1.0-3.0bp cheaper across the curve, with 10s leading the weakness, while TYH3 is -0-05+ a 113-11+, 0-02 off the base of its 0-07+ range with volume sitting at ~63K.
• The early cheapening impulse ran out of steam as bears only failed to force an incremental and short-lived look below Tuesday’s base in TYH3. Some oscillation has been seen thereafter, albeit within contained ranges after 7+-Year paper bested Tuesday’s highs in yield terms.
• There wasn’t anything to note in the way of major market flow during Asia-Pac hours, given the proximity to the Christmas break and lack of meaningful headline drivers.
• Looking ahead, consumer confidence and existing home sales data headlines in NY hours, with 20-Year Tsy supply also due.

JGBS: Post-BoJ Pressure Continues, Market Moves Toward Test Of BoJ’s Resolve After YCC Reset

Tokyo faded the overnight uptick in JGB futures from the off, with the contract closing -38, at worst levels, with the post-BoJ impulse still being felt.

• A lack of unscheduled BoJ Rinban operations helped the space to cheapen beyond the initial bias lower during the morning session.
• The BoJ did step in with some paltry purchases in the 3- to 10-Year zone, but is more and more cognisant of market functioning issues, given that it now owns over 50% of outstanding JGBs and is set to upsize Rinban purchases in Q123. The limited size of the off-schedule operations meant that the relief rally in paper out to 10s was very shallow and short lived, with futures going on to make fresh session lows later in the day (albeit failing to test yesterday’s post-BoJ base).
• The cheapening wasn’t uniform, with the narrowing of the spreads at the latest liquidity enhancement auction covering off-the-run 15.5- to 39-Year JGBs supporting the long end.
• The broader cash JGB curve twist flattened as a result, with 5s & 7s leading the weakness, running ~8.5bp cheaper, while 20s through 40s firmed by ~1.5bp. 10-Year JGB yields moved towards the new YCC cap, last ~0.485%, as the kink in the curve and recent breaking of the BoJ’s will emboldened participants.
• There hasn’t been much in the way of domestic headline flow to note, outside of Economy Minister Goto trying to reaffirm the message provided by BoJ Governor Kuroda, in that yesterday’s YCC adjustment doesn’t represent a tweak, nor an exit from monetary easing.
• Weekly international security flow prints and lower tier data headline locally on Thursday, with the outdated minutes from the BoJ’s Oct meeting also slated.

JGBS AUCTION: Liquidity Enhancement Auction For OTR 15.5- to 39-Year Results

The Japanese Ministry of Finance (MOF) sells Y499.5bn of 15.5-39 Year JGBs in a liquidity enhancement auction:

• Average Spread: +0.022% (prev. +0.060%)
• High Spread: +0.027% (prev. +0.067%)
• % Allotted At High Spread: 75.2021% (prev. 19.8770%)
• Bid/Cover: 2.886x (prev. 2.897x)

AUSSIE BONDS: Steeper On The Day, Front End Underpinned

Follow through from a bit of an overnight session recovery in futures aided ACGB bulls in early Sydney trade, with notable screen lifts in YM futures further underpinning the front end.

• Still, the post-Sydney high in YM futures provided some resistance, halting the richening, before a subsequent round of cheapening in broader core global FI markets applied some pressure to ACGBs.
• That pushed the space away from best levels of the Sydney session, with some oscillation observed thereafter.
• YM finished +7.0 as a result, while XM was flat, with the steepening theme ever present through Wednesday dealing (whether it was in bull or twist fashion), leaving wider cash ACGBs running flat to 8.5bp richer at the bell.
• Bills finished 4-10bp richer through the reds, with some bull flattening apparent, while RBA dated OIS was little changed to a touch softer vs. late Tuesday levels, pricing 18bp of tightening for the Feb ’23 meeting and a terminal cash rate of ~3.70%.
• Local headline flow didn’t move the needle, with the continued thawing of Sino-Aussie relations and a soft Westpac leading index print observed.
• The domestic docket is now empty in the run up to Christmas.

NZGBS: Curve Steeper On Global Spill Over, Soft Data Noted

Post-BoJ catch up and spill over from Wednesday’s global core FI impulse (at least that observed during Asia-Pac hours) biased NZGB yields higher, leaving the major benchmarks sitting 4-12bp cheaper at the close.

• Swap rates were 3bp lower to 4bp higher, with the curve twist steepening, once again dragging the 2-/10-Year swap spread further away from its post-GFC lows.
• RBNZ dated OIS was essentially unchanged on the day.
• Local data wasn’t reassuring, as the expedited RBNZ tightening cycle continues to heap pressure on the economy (by design). M/M credit card spending was on the soft side, while there was another record low in the monthly ANZ consumer confidence headline print. The collator of the latter noted that “just like our Business Outlook survey, there appears to some post-MPS shock value in these figures. The RBNZ came out guns blazing in the November MPS, signalling further aggressive OCR hikes in 2023 and a technical recession. That’s clearly spooked the horses, but it’s not yet clear exactly how far they have bolted. All eyes are now on the degree of follow-through from businesses reporting negative employment intentions, and consumers saying they will significantly tighten their belts.”
• The soft data domestic probably aided the steepening impulse.
• The domestic docket is now empty into the Christmas break.

EQUITIES: Mixed Trends, Japan Markets Continue To Correct Lower

Asia Pac equity trends are mixed. Japan stocks continued to weaken, but sentiment was somewhat more positive elsewhere. US equity futures have spent much of the day in the green, last around +0.30/+0.35%.

• The Nikkei 225 is off a further 0.65%, which comes after yesterday's 2.46% drop in the aftermath of the BoJ YCC shift. The index has now weakened for the past 5 sessions. Dips below 26000 have been supported in the Index since April of this year (last levels 26392).
• The HSI is a touch higher, last around +0.10%, while onshore China shares are mixed. The Shanghai property sub-index is down a touch further after yesterday's 2.86% fall. The CSI aggregate index is a touch higher though.
• The ASX 200 is +1.20% higher, led by resource names. A firmer commodity price backdrop has helped, particularly firmer base metal and gold prices over the past 24 hours.
• The Kospi is down slightly (-0.15%), but the Taiex is up 0.30% at this stage. Philippine equities are +0.84%, continuing to recover from the sharp pull back at the start of the week.

GOLD: Bullion Holds Onto Its Tuesday’s Gains, Watch Friday’s PCE Price Data

Gold prices rose 1.7% on Tuesday to close to its December 13 high, as the JPY rallied and the USD fell after the surprise BoJ YCC adjustment. It has held onto those gains only falling 0.2% during today’s session. Bullion is now trading around $1814.90/oz.

• Gold has been in a very narrow range today reaching a high of $1819.82 and a low of $1813.79. If it clears the December 13 high of $1824.50, then it would be at its highest since the end of June.
• In the US today, December consumer confidence and existing home sales for November print. The focus is likely to be on Friday’s personal consumption data which includes the Fed’s preferred measure of inflation for November, the core PCE – price index.

OIL: Range Trading In Thin Liquidity

Oil prices have continued range trading today in a band of close to half a dollar in thin liquidity as we approach year end. Brent is trading around $80/bbl and WTI $76.20.

• US API data showed a 3.1mn bbl drawdown in crude inventories after a 7.82mn build the week before, which has helped to support prices during the APAC session. There was a 4.5mn bbl build in gasoline stocks and 3.4mn of distillate. US EIA inventory data is released later today.
• US inventory data added to supply concerns after Russia’s seaborne oil exports sank in the first week after the G7 price cap came into effect. But recession fears continue to weigh on crude prices.
• The focus later is on Canadian inflation and US consumer confidence and home sales. US EIA inventory data is also released. On Friday, US personal consumption data which includes the Fed’s preferred measure of inflation for November, the core PCE – price index, prints.

FOREX: USD Finds Some Support, NZD Testing Uptrend Channel Support Again

The USD regained some ground today, with the BBDXY index back near 1256. USD/JPY has been the main focus point, moving back above 132.00, but NZD has been on backfoot for much of the session, last near 0.6300.

• Firmer US cash Tsy yields have supported the USD, although there hasn't been much follow through to earlier moves. The 10yr last close to 3.71% (+2.5bps for the session). Equities are more mixed, while US/EU futures are higher this hasn't done much to support risk appetite.
• USD/JPY tried to break sub 131.50 close to the Tokyo fix but ran out of momentum and climbed back above 132.00, touching a high of 132.37, before settling back at 132.20.
• NZD/USD is off 0.75% for the session, last near 0.6300. This is below uptrend channel support and the 20-day EMA (0.6311). NZ survey data has been quite poor this week, with ANZ's consumer sentiment index falling sharply in December. The trade position also remain comfortably in deficit.
• AUD/USD is off 0.25% to 0.6660, outperforming the NZD. Support is evident sub 0.6660 at this stage, while the AUD/NZD cross climbed back to 1.0575. Higher iron ore prices, back above $110/tonne, has helped A$ sentiment at the margin.
• Coming up is German consumer confidence, Canadian CPI and in the US, consumer confidence and existing home sales.

FX OPTIONS: Expiries for Dec21 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0400-10(E890mln), $1.0450(E726mln), $1.0660-75(E744mln), $1.0700(E655mln)
• USD/JPY: Y132.00-25($696mln), Y134.00-05($560mln), Y134.84-00($555mln)), Y136.00-15($1.1bln), Y140.00($1.1bln)
• AUD/USD: $0.6800(A$613mln), $0.6900(A$1.2bln)
• USD/CNY: Cny6.9500($675mln), Cny7.0100($789mln), Cny7.1500($930mln)