Overnight Losses Unwound After CPI Data Despite Upside From Core Measures

In Tokyo morning trade, JGB futures have unwound overnight losses, +5 compared to settlement levels, after the release of National CPI data.

• Japan's inflation rate dipped to 3% y/y for the first time in over a year, supporting the BOJ’s belief that the upward pressure on prices is plateauing. This development may temper expectations of an imminent end to negative interest rates.
• However, it's important to note that both the core (ex-fresh food) and core-core (ex-fresh food and energy) inflation measures exceeded expectations, standing at 2.8% y/y and 4.2% y/y, compared to estimates of 2.7% and 4.1%. The previous readings were 3.1% and 4.3%, respectively.
• The key question now is whether today’s data will impact the BOJ’s inflation projections.
• The JGB market has been pressured this week by news from Bloomberg sources that “the BOJ is likely to discuss raising its inflation projection for fiscal year 2023 and 2024 at its policy meeting later this month, extending the period in which it sees prices hitting or exceeding its 2% goal.”
• Cash JGBs are little changed out to the 4-year, with a twist-steepening of the curve beyond. The 5-year yield is 0.9bp lower. The benchmark 10-year yield is 0.3bp higher at 0.847%, slightly below the cycle high of 0.851% set yesterday.
• The swaps curve is richer, with the belly outperforming. Swap spreads are generally tighter.