JGBS: Cash Bond Bull-Flattener To Close Out Week
JGB futures are stronger and hovering near session highs, +12 compared to settlement levels.
- Daily Chartbook on X: "Japan won't need to purchase as many Treasuries and other foreign bonds and stocks over the longer term after its trade deal with the US." @LondonSW via ZeroHedge.
- Taro Kimura, economist, said "Beneath the surface, cost pressures from earlier spikes in rice prices and rising labor expenses are still feeding through to costs of processed food and dining out," and the data should encourage the Bank of Japan to continue to raise rates gradually.
- (DJ via BBG) An early trade deal with the U.S. could put Bank of Japan's path towards monetary policy normalisation firmly back on track, according to HSBC economists in a research note.
- Cash US tsys are slightly richer in today's Asia-Pac session.
- Cash JGBs are showing a bull flattener across benchmarks, with yields flat to 6bps lower. The benchmark 10-year yield is 1.5bps lower at 1.591% versus the cycle high of 1.616%.
- Swap rates are 1-4bps lower, with a flatter curve. Swap spreads are mostly tighter.
- On Monday, the local calendar will be empty ahead of 2-year supply on Tuesday.
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AUSSIE BONDS: Moderately Richer, July Rate Cut At 95% After CPI Data
ACGBs (YM +2.0 & XM +2.5) are trading modestly stronger.
- May headline CPI inflation was flat on the month, driving a 0.3pp moderation in the annual rate to 2.1% driven by a broad-based easing across major components. The trimmed mean moderated to 2.4% y/y from 2.8%, the lowest since November 2021. However, CPI ex volatile items and holiday travel was only down 0.1pp to 2.7% y/y. The RBA decision is on July 8 and this data is likely to increase expectations of another rate cut but the Board prefers the quarterly CPI (due July 30) and updated staff forecasts are not provided until August.
- Cash US tsys are modestly mixed in today's Asia-Pac session after yesterday's modest gains.
- Cash ACGBs are 2bps richer with the AU-US 10-year yield differential at -16bps. At -16bps, the differential is positioned in the bottom half of the +/- 30bps range that has held since November 2022.
- The bills strip has bull-steepened, with pricing +1 to +7.
- RBA-dated OIS pricing is softer across meetings after today’s data. A 25bp rate cut in July is given a 95% probability (84% pre-data), with a cumulative 83bps of easing (78bps pre-data) priced by year-end.
- Tomorrow, the local calendar will see Job Vacancies data.
OIL: Crude Higher After US Inventories Fall, Also Monitoring Truce
After falling around 12% over the first two days of the week on a de-escalation of Middle East tensions, oil prices are over a percent higher today. They have stabilised as markets generally monitor the Iran-Israel ceasefire which so far today has held. A reported US crude inventory drawdown has also helped. WTI is up 1.4% to $65.24 after a low of $65.00, while Brent is 1.1% higher at $67.89/bbl, just off the intraday high OF $68.16. The USD index is slightly higher.
- With the abatement of concerns that Middle Eastern oil supplies would be impacted by conflict, fundamentals are back in focus. Bloomberg reported that US crude inventories fell 4.28mn barrels last week after declining over 10mn the previous week, according to people familiar with the API data. The official EIA data is out Wednesday. It reported a 11.5mn drop the previous week.
- Also on the supply front, there are tentative indications that restrictions on Iran could eventually be eased following the ceasefire agreement. Unexpectedly, President Trump openly allowed Iran to continue selling oil to China.
- OPEC also meets virtually on July 6 to decide August’s production target. Another +400kbd increase is likely as the group normalises output after reducing it, targets market share and punishes overproducing members.
- On the demand side, the progress of trade negotiations ahead of the July 9 deadline will also be monitored closely. Increased US trade protectionism rattled crude as it feared energy demand would sink.
- Later Fed Chair Powell continues his testimonies. The Fed’s Goolsbee, ECB’s Donnery and BoE’s Lombardelli speak. US May new home sales/permits print.
BUND TECHS: (U5) Support Remains Intact
- RES 4: 132.42 2.000 proj of the May 14 - 20 - 22 price swing
- RES 3: 132.00 Round number resistance
- RES 2: 131.95 High Jun 13 and the bull trigger
- RES 1: 131.33 High Jun 20
- PRICE: 130.63 @ 05:47 BST Jun 25
- SUP 1: 130.17 Low Jun 16
- SUP 2: 130.12 Low Jun 5 a key short-term support
- SUP 3: 129.30 Low May 22
- SUP 4: 128.97 Low May 14 and a reversal trigger
Bund futures remain in consolidation mode, trading below the Jun 13 high. For now, the recent move down appears to be a correction. Key short-term support to watch lies at 130.12, the Jun 5 low. A break of this level would highlight a stronger reversal and undermine the bullish theme. This would open 129.30, the May 22 low. Key short-term resistance and the bull trigger, has been defined at 131.95, the Jun 13 high.
