Underlying Aussie CPI Sees Traders Challenge RBA

Firmer than expected underlying inflation data out of Australia pressured core fixed income markets overnight

• TYZ1 -0-03 as a result, with the cash Tsy space seeing 1.0-2.5bp of weakness across the major benchmarks as the front end leads the way lower. NY hours will be headlined by 5-Year Tsy supply, with prelim. durable goods also due.
• JGB futures have recovered from worst levels, leaving the contract +1. The cash JGB curve flattened, with yields out to 20s ultimately little changed on net, while 30s & 40s run 1.5-2.0bp richer on the day, likely aided by the firming in longer dated U.S. Tsys on Tuesday and indications of continued long end demand from domestic life insurers. Local headline flow remains scarce. 2-Year JGB supply saw the low price narrowly miss broader exp. (which stood at 100.20, per the BBG dealer poll) while the global inflationary uncertainty and a lack of value proposition meant that the cover ratio nudged lower, but still held above 4.00x, just. Corporate supply saw Proctor & Gamble mandate for 5- & 10-Year JPY denominated bond issuance.
• Aussie bond futures struggled in the wake of the domestic Q3 CPI dataset. The headline readings were virtually in line with broader exp. at 3.0% Y/Y & 0.8% Q/Q, but the jump in the trimmed mean print, to 2.1% Y/Y, puts the RBA's preferred underlying measure back above the lower boundary of its 2-3% target band for the first time since Q415. A reminder that the RBA has noted that it will need to see realised inflation sustainably within its 2-3% target band before moving interest rates, and its sanguine view on medium term inflation and wage growth mean that the Bank isn't likely to shift its central opinion on the back of 1 CPI reading (although it may note heightened risks to its central view at next week's monetary policy decision). Still, the market is keen to test the RBA's resolve given the beat in the underlying print, leaving YM -16.0 and XM -2.5 at typing. For reference, ACGB Apr-24, the bond targeted by the Bank's YCT mechanism, last yields 0.205%. Focus will now move to whether the RBA chooses to step in to enforce YCT on Thursday.