CHINA: Data Preview: PMIs Set to Moderate, Services Still Robust

The US bond futures saw little or no movement in price today with volumes in the region mostly below average.  TYZ5 is where it started the day at 113-15+, having inched up to 113-16+ briefly.  

Cash was subdued also, with little expectations ahead of the FOMC meeting.  Yields drifted marginally higher by up half a basis point.  

• The US 2-Yr is at 3.498% (+0.6bps)
• The US 5-Yr is at 3.615% (+0.3bp)
• The US 10-Yr is at 3.981% (+0.4bp)
• The US 30-Yr is at 4.543% (+0.1bp)

Tonight markets focus on auctions for US$44bn of 2-Yr FRNs and various bills and notes.  

Key data focus prior to FOMC will be mortgage applications, pending home sales and wholesale inventories.  With much priced in now for bonds, the key risks remain any hawkish rhetoric from Powell, bringing into question future rate cuts.  The 10-Yr continues to consolidate below 4.00% but any sense of uncertainty for future rate cuts could see the 4.00-4.15% reestablished.  With so much riding on this week's cut and futures, the risks now are for disappointment and could see a move higher quicker in yields.  

Crude benchmarks are little changed today ahead of the Fed decision later and the release of EIA US oil market data. Prices have been supported by industry data showing a large US crude inventory drawdown. Brent is down 0.1% to $64.33/bbl after a high of $64.70 early in the APAC session before falling to $64.23. WTI is also 0.1% lower at $60.09/bbl after reaching $60.41. It fell to $59.95 but breaks below $60 have been short-lived. The USD index is up 0.1%.

• Bloomberg reported that US oil inventories fell a larger than expected 4mn barrels last week, after declining the previous week, according to people familiar with the API data. Gasoline and distillate were both lower down 6.3mn and 4.4mn respectively.
• With the focus on excess supply, a soft EIA report is likely to drive oil prices lower. They are down over 2.5% in October, which would be the third consecutive monthly decline.
• After today’s events, the market will be watching Sunday’s OPEC decision and the impact of the latest sanctions against Russia, as they cloud the outlook. Indian Oil said it wouldn’t discontinue its Russian crude purchases as long as they complied with sanctions. With restrictions focussed on the large Rosneft and Lukoil, both China and India refiners are looking to buy from smaller producers, according to Bloomberg.
• Presidents Trump and Xi meet Thursday and at this stage are expected to sign a trade deal.
• The Fed and BoC decisions are later Wednesday and both are expected to cut rates 25bp. US September inventories and pending home sales as well as Q3 Spanish GDP and UK September lending print. 

NZGB yields are higher across the benchmarks, led by the back end, positive spill over has been evident from the ACGB yield surge post the higher than forecast Q3 CPI print (ACGB yields are 4-11.5bps firmer led by the front end). NZGB 2yr is back to close to 2.57%, while the 10yr is near 4.04%, both benchmarks tracking towards 20-day EMA resistance tests (2.61% for the 2yr, around 4.07% for the 10yr). 

• The 2yr swap rate is already testing through the 20-day EMA resistance point, last near 2.41%, up 5bps for the session. The 50-day is at 2.53%. The AU-NZ 2yr swap rate differential continues to climb, up to 106bps.
• There hasn't been much of a shift in RBNZ pricing expectations. We are still close to 100% priced for a Nov 25bps cut.
• Earlier, RBNZ Director of Financial Markets Richardson spoke on the transmission of the 300bp of easing since August 2024. The MPC discussed this at the October meeting, implying they are concerned that the pass through of rate cuts to the economy has not been as efficient as expected. Richardson said today that global factors have increased NZ long-end yields, which have put upward pressure on domestic rates and thus financial conditions, the RBNZ could "adapt" policy to ease them again in order to achieve its 2%-mid-point inflation target.
• The NZGB 2/10s curve is holding elevated, last +147bps. In recent years we have struggled to maintain +150bps steepness. This may become more of a policy focus point if the NZ economy struggles for further positive traction in 2026.
• Note tomorrow we get the Oct ANZ activity outlook and business confidence prints.