JGBS: Futures heaper Overnight, Natl CPI Largely In Line

In post-Tokyo trade, JGB futures closed higher, +23 compared to settlement levels, after US tsys finished with a bull-flattener. Rising Middle East tensions, including the possibility that the US will join the war, lent risk-off support. 

• This move reversed the sell-off seen following yesterday’s BoJ decision. The BoJ kept rates at 0.50%, as widely expected. The central bank did announce that it would trim bond buying by 200bn/per quarter from April 2026 next year. 
• (Bloomberg) - "US President Donald Trump and Japanese Prime Minister Shigeru Ishiba failed to reach an agreement on a trade package on the sidelines of the Group of Seven summit, an outcome that leaves the Asian nation inching closer to a possible recession as the pain of US tariffs hits its economy."
• "Setting aside the human tragedy, the Israel-Iran clash poses a serious upside risk to Japan's inflation. The spike in oil prices has likely caught the Bank of Japan off guard, just as it was counting on easing energy costs to temper consumer-price pressures. Japan depends on oil for about 35% of its energy needs and sources nearly all of its crude from the Middle East." (BBG)
• Today, the local calendar will see Trade Balance and Core Machine Orders data.

ACGBs (YM +3.0 & XM +3.0) are modestly stronger after US tsys finished with a bull-flattener.

• Yesterday, President Trump cut short his appearance at the G7 leaders’ summit.
• Pres Trump: "We know exactly where the so-called “Supreme Leader” is hiding. He is an easy target, but is safe there - We are not going to take him out (kill!), at least not for now."
• Otherwise, markets await Wednesday's FOMC policy announcement.
• US Retail sales fell for a second month, down 0.9% m/m in May as lower auto sales dragged down the headline figure – a reversal of prior front-loaded tariff-related gains — but even the ex-auto sales and gas figure fell 0.1% m/m.
• Cash ACGBs are 3bps richer with the AU-US 10-year yield differential at -16bps.
• The bills strip has bull-flattened, with pricing flat to +3.
• RBA-dated OIS pricing is little changed across meetings today. A 25bp rate cut in July is given an 85% probability, with a cumulative 78bps of easing priced by year-end.
• Today, the local calendar will see the Westpac Leading Index. May's jobs data is on Thursday.
• The AOFM plans to sell A$900mn of the 2.75% 21 June 2035 bond today and A$800mn of the 1.00% 21 December 2030 bond on Friday.

The overnight range was 144.41 - 145.38, Asia is currently trading around 145.35. With the USD bouncing across the board as risk digests the potential of the US entering the fray in the middle east, the long JPY positions continue to be challenged. You would normally expect the JPY to outperform in this scenario but the outsized move in oil and a market that is already positioned very long is providing headwinds to the trade.

• (Bloomberg) - “US President Donald Trump and Japanese Prime Minister Shigeru Ishiba failed to reach an agreement on a trade package on the sidelines of the Group of Seven summit, an outcome that leaves the Asian notation inching closer to a possible recession as the pain of US tariffs hits its economy."
• “Setting aside the human tragedy, the Israel-Iran clash poses serious upside risk to Japan’s inflation. The spike in oil prices has likely caught the Bank of Japan off guard — just as it was counting on easing energy costs to temper consumer-price pressures. Japan depends on oil for about 35% of its energy needs and sources nearly all of its crude from the Middle East.”(BBG)
• USD/JPY found decent demand yesterday every time it had a look towards the 144.50 area. This price action stands out considering the risk backdrop and could hint at a market that is already very long JPY.
• Price is back in its recent 142.00 - 147.00 range and will need a break either side of that to get a clearer direction. 
• The market is clearly looking for a move lower in USD/JPY but with positioning quite large now we have seen the risk of pullbacks increase. A break above 147.00 would be needed to challenge the conviction of any shorts.
• Options : Close significant option expiries for NY cut, based on DTCC data: 144.00($725m). Upcoming Close Strikes : 146.00($1.92b June 20), 143.00($925m June 20)
• CFTC data shows Asset managers maintained their already extensive JPY longs, leveraged funds looked to have pared back their own longs once more.

• Data/Event : Trade Balance, Core Machine Orders

  Fig 1 : USD/JPY Spot Daily Chart

  

  Source: MNI - Market News/Bloomberg Finance L.P