JGBS: Bear-Steepener, BoJ Ueda Comments On Super Long-End Yields

SELL 3020 of TYM5 traded at 111-19+, post-time 01:36:55 BST (DV01 $193,162). The contract is currently trading at 111-18+, 0-02+ from closing levels.

Goldman Sachs: "JPY: Protection selection. Being long the Japanese Yen versus the Dollar—or short USD/JPY—tends to be one of the most effective FX hedges against recession fears. But price action over the past month exhibits both its benefits and limits as a risk hedge. USD/JPY did generally move lower across recent key periods, though it “failed to work” in late March around the auto tariffs announcement. A backdrop of higher yields tends to be the one case in which USD/JPY moves higher even alongside lower equities, as was the case last month. But the regime of shifting correlations since then and the perception of greater institutional risks leaves rates a less obvious headwind, at least until those concerns relax. We also continue to think that any dovish shift from the BoJ next week would not be a barrier to Yen strength. Our view that the Dollar should unwind its overvaluation of recent years—with high probability that it flips to undervalued on a broad basis—means that USD/JPY should be an effective hedge over time. We see USD/JPY falling to 135 over the next 12 months, with risks skewed towards getting to (and below) that level much earlier. But given that equities still look vulnerable to nearer-term downside and the speed of the Dollar sell-off leaves it susceptible to shorter-term swings, we prefer to be short AUD/JPY tactically. The main risk to this expression is that policy continues to shift in a market-friendly direction, or that the hard data remain resilient in the upcoming key data releases. Though while front-loading ahead of tariffs may mask any weakness in activity, we expect markets to continue to discount better data over the very near term." 

The focus of the week will be on Wednesday’s Q1 CPI which is forecast to show the RBA’s preferred trimmed mean falling below the top of the 2-3% target band for the first time since Q4 2021, which should signal another 25bp cut on May 20. Retail sales are on Friday and the federal election Saturday.

• Q1 headline inflation is projected to rise 0.8% q/q and 2.3% y/y, which is a significant quarterly rise up from Q4’s 0.2% but a slight drop in the annual pace from 2.4%.
• Consensus is forecasting trimmed mean to rise 0.6% q/q & 2.8% y/y in Q1 after 0.5% & 3.2% in Q4. Services will continue to be watched closely but monthly data suggest it moderated in Q1.
• Real retail sales for Q1 print on Friday and are forecast to slow to +0.3% q/q from Q4’s 1.0%. March values are expected to rise 0.4% m/m following 0.2%. Retail spending remains subdued but is no longer contracting.
• The Federal election vote is held on Saturday with a result likely in the evening local time, depending on how close it is. Polls suggest that the Labor party will hold government but there’s a distinct possibility in minority.
• Other price data include Q1 import/export prices on Thursday and PPI on Friday.
• March merchandise trade data are out on Thursday with the surplus forecast to widen slightly to $3.05bn from $2.97bn. Overall export growth remains weak driven by China and much of Asia but shipments to the US have soared recently likely to beat tariff deadlines.
• Other data include RBA March private credit on Wednesday, April CoreLogic home values on Thursday and final April S&P Global manufacturing PMI on Thursday.
• In terms of the RBA, Assistant Governor (Financial Markets) Kent speaks on Tuesday at 1205 AEST on “Australia’s external position and the evolution of the FX markets”.