AUSSIE BONDS: Futures Down, Led By Front End, AU-US10yr Spread Elevated
Aussie bond futures sit down a touch in Friday trade to date, with 3yr (YM) futures slightly softer, last at 96.575, off 2.5bps. 10yr futures (XM), were down 1bps to 95.68. Broader ranges are holding in both benchmarks, but the 10yr has underperformed US moves this week.
- For cash ACGB yields, we sit higher today, led by the front end. The 3 yr was last around 3.40%, up +2bps, while the 10yr was back near 4.29%. Both benchmarks are down a little over the past week, but not as much as US yield losses. The AU-US 10yr spread is threatening to test multi month highs, we were last near +8bps.
- Earlier July private credit data showed a 0.7%m/m rise, against a 0.6% forecast. We sit +7.2% in y/y terms.
- On the bond supply front via BBG: "Australia sold A$1 billion ($653.6 million) of bonds due Nov. 21, 2028 on Aug. 29. Investors offered to buy 4.12 times the amount of securities sold."
- Next week, the main focus will be on Wednesday's Q2 GDP print. Before then we get more partials, but at the momentum the markets is forecasting a 0.5%q/q gain, after +0.2% was recorded for Q1.
- We also have RBA speak from Governor Bullock next Wednesday, then Deputy Governor Hauser speaks with Rtrs on Thursday.
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US TSYS: Asia Wrap - Yields Edge Higher In A Quiet Session, Awaits FOMC
The TYU5 range has been 111-10+ to 111-13 during the Asia-Pacific session. It last changed hands at 111-11+, unchanged from the previous close.
- The US 2-year yield has edged higher trading around 3.87%.
- The US 10-year yield has shifted higher trading around 4.326%, up 0.01 from its close.
- The 10-year yield has moved back towards its pivot within the wider range 4.10% - 4.65%, decent supply was seen around 4.30/35% first up. A decent bounce was seen off this support but the move has failed to follow through above 4.40% for now. The Data this week should hopefully provide more clarity going forward. A Clear break of the support opens a move to the bottom end of the range.
- Renaissance Macro Research on X: ”Trade, inventory investment and public sector spending & investment adding 2.2ppts in Q2, according to Atlanta Fed. Thus, private domestic demand is running under 1% in real terms.”
- Andreas Steno Larsen on X: “The US has got the softest inflation surprises on Earth. That should impact the FOMC tomorrow.”
- Jeff Weniger on X: “The phone bill. Cereal. Gas. Coffee. A used car for work. These are things people still buy even when money is a big problem. The 12-month smoothed inflation rate on essentials is 1.8%. The last time the Fed Funds rate exceeded "essentials inflation" by this much was Q3/2007.” See Fig.1 below.
- Data/Events: MBA Mortgage Applications, ADP, US Treasury Quarterly refunding, GDP, Pending Home Sales, FOMC
Fig 1: Fed Funds vs "Essential Purchase" Inflation
Source: MNI/@JeffWeniger
CHINA: Bond Futures Rally After Yesterday's Fall
- China's bond futures are rallying modestly today, trying to recover from yesterday's fall.
- The 10-year is up +0.08 108.225 but remains below all major moving averages. The nearest, the 20-day EMA, is at 108.60.
- The 2-year bond future is up +0.04 to 102.338 yet remains below all major moving averages still; with the 20-day EMA at 102.39.
The 10-year CGB is at 1.73% today, having closed yesterday at 1.74%
CHINA: Viewpoint On The Surge In China Exports
Lots has been written recently regarding the US-EU trade deal but one point does stand out. The EU chose not to have a trade war with the US as it is currently looking to improve the structure of its trade terms with China. Brad Setser has written a thread on X expanding on China’s Manufacturing Policy and the ramifications thereof:
- “Probably the most important chart for the world economy right now -- Chinese export growth in both q1 and q2 was close to 10%; Chinese import growth has been flat (q2) or negative (q1). With exports 20% of GDP, implies a huge net export contribution …” See Fig.1 below
- “This excellent FT story provides the narrative to go along with the hard data -- China's localities have tremendous incentives to subsidize the production of overcapacity in new and old sectors alike. & with internal demand weak, exports result.” https://www.ft.com/content/f7979a8f-874a-4b47-8304-d93d30171980
- “Combine weak internal demand, a weak CNY & overly enthusiastic support for new sectors inside China & China ends up distorting the entire global economy.”
- “A country (or economic block) that doesn't have an effective industrial policy of its own effectively will end up importing Chinese industrial policy and let China set the structure of big parts of its industry, as Europe is discovering.”
- “Chinese export growth cannot outperform global trade unless another region of the global economy under-performs … Europe clearly has been losing out.”
Fig.1: Chinese Export and Import Volume Growth
Source: MNI/@Brad_Setser
