AUSSIE BONDS: Cheaper, Risk Off After US Tariff On Canada Set At 35%

In Tokyo morning trade, JGB futures are stronger, +9 compared to settlement levels.

• Japan's May PPI was below market expectations, falling 0.2% m/m (against a +0.2% forecast). April's rise was revised to +0.3% (from 0.2%). In y/y terms, we printed 3.2%, against a 3.5% forecast (prior was 4.1%). In terms of the detail, manufacturing PPI was down 0.4%m/m. Weakness was evident in commodities, particularly petroleum, coal (-4.8%m/m). Iron ore and steel were also down in m/m terms. Import prices for commodities were down 1.1%m/m, continuing a negative trend, now off 10.3% in y/y terms.
• There has been limited market reaction to the headlines coming from US-China trade talks, with the main takeaway being that the Geneva consensus was agreed to by both sides. The US side appeared confident that this would see rare earth flows increase from China to the US (leaders from both China and the US still have to agree to implement the outcome of the talks).
• Cash US tsys are slightly richer in today’s Asia-Pac session ahead of today’s CPI data. 
• Cash JGBs are slightly mixed across benchmarks, with a mild steepening bias. The benchmark 10-year yield is 0.6bps lower at 1.472% versus the cycle high of 1.596%.
• Swap rates are flat to 1bp lower. Swap spreads are tighter.

Container rates are consistent with a trade recovery over Q2 following the delay of US tariffs to early July, as also signalled by Bloomberg ship tracking data. Rates are significantly higher over May/June. Increased sailings since end-May have increased vessel demand and thus costs. Trade talks with the US are ongoing and will determine if rates rise further but inventory build ahead of tariff deadlines may drive a reduction in global trade in H2 anyway.

• The recent rise in bulk and container rates suggests that global trade growth (CPB) could trend higher towards mid-year after picking up to 6.6% y/y in March from 3.0% y/y in December.

Global trade growth vs Baltic Freight Index

• The FBX global container index was up almost 60% on June 10 from 31 May with China/East Asia to North American east coast up 78%, to the Mediterranean +43% and Baltic Freight Index (BFI) +18.5%.

FBX container rates USD/points

• The month average FBX global rate fell sharply in the three months to April but then rose 4.7% m/m in May and is +69% m/m in June to date reaching its highest level since January. This increase is likely to reflect both optimism of a trade deals being reached plus further frontloading of exports in case they fail. But the FBX index is still down 15.2% y/y in June after -32% y/y.
• The China/East Asia to North American east coast route began to rise in April and the June average is up 85% m/m but still down 11.4% y/y but has reached its highest since September 2024.
• Bulk commodities have also seen an increase in shipping prices but less than containers. The BFI June average is up 22% m/m after falling in April and May and is still down 14.6% y/y but after 28.8% y/y.

Japan import prices in May fell to -10.3%y/y, the weakest read since Oct 2023. The chart below plots USD/JPY y/y changes against Japan import prices y/y. Note the y/y line for USD/JPY is extended to end Q3 of this year by assuming that current USD/JPY levels hold until then. If such conditions hold it suggests that the negative impulse to import prices from a stronger yen will fade by the end of Q3. 

• If USD/JPY falls to say 140.00 and holds there, then the negative y/y import pulse may persist beyond end Q3. The rough sell-side consensus is for USD/JPY to track lower, not higher as we progress through 2025.
• At the margin, the firmer yen backdrop compared to 2024 may have given the BoJ some comfort around holding steady from a policy standpoint in the near term, even with real policy rates remaining negative.
• Import price shifts have a strong correlation with PPI y/y shifts: +87% for the past decade. The earlier headline PPI print suggested we may see headline CPI lose some y/y momentum as we progress through Q2.
• The PPI and CPI correlation has also been reasonable at +58%, but is much lower in terms of import prices and CPI at just 25%. 

Fig 1: USD/JPY Y/Y & Japan Import Prices Y/Y

Source: Bloomberg Finance L.P./MNI