JGBS: Futures Steady, 40yr Yields Down Post Solid Auction, Tokyo CPI Tomorrow

Gold prices rose to $3386.58/oz following US President Trump announcing the removal of Fed Governor Lisa Cook effective immediately due to allegations of mortgage fraud. She refuses to resign and will continue her duties at the Fed. She also questioned Trump’s authority to fire her. Bullion is off its early high but still up 0.3% to $3377.5 today after falling to $3351.41 before the news. The US dollar index is down 0.1% but up from the day’s lows while the 2-year yield is down slightly.

• Gold benefited from safe-haven flows as markets see Trump’s move as interfering with the central bank’s independence as it will allow him to replace Cook with someone more dovish. He has been pushing for significantly lower rates for some time and has criticised Chair Powell heavily for leaving policy unchanged.
• Silver is also higher up 0.6% to $38.82, close to the intraday peak. It was down to $38.34 before Trump announced Cook’s removal and it bounced on the news.
• Equities are generally weaker with the S&P e-mini down 0.1% and Hang Seng -0.2% but CSI 300 is up 0.1%. Oil prices are lower with WTI -0.5% to $64.46/bbl. Copper is slightly higher.
• Later the Fed’s Barkin, BoE Mann and BoC Governor Macklem appear. US preliminary July orders, June house prices, August Richmond Fed, Dallas Fed services, Philly Fed non-manufacturing and consumer confidence print. 

JGB futures sit at 137.42, -.08 in latest dealings, close to session lows (137.36). This leaves us close to July lows (137.32 from July 25th). A clean break lower could see a move sub 137.00 targeted, with 136.57 - 1.382 proj of the Jan 28 - Feb 20 - Feb 26 bear leg. 

• Futures spiked higher on the news that Trump has ended Fed Governor Cook's term, effective immediately. This drove US Tsy futures higher, with JGB futures getting to 137.54. However, US Tsy futures at the back end of the curve how now turned lower, with the curve steepening in response to the Cook Fed news.
• On the data front, we had slightly softer July services PPI in Japan. This was in line with recent headline CPI softness though, so market reaction was minimal.
• Cash JGB yields are little changed. The 10yr has edged higher to 1.625%. This is close to recent cycle highs, but not a definitive break higher. In the swap space, the 10yr was last around 1.43%.
• Headlines have also crossed around a proposed fuel tax cut: "*KATO: PERMANENT SOURCE OF FUNDING IMPORTANT FOR FUEL TAX RATE" - via BBG, while also of note was onshore media reports: "Japan Mulls 5-Year Tax Break on Capital Investments: Yomiuri" - via BBG, while: "*JAPAN MOF TO SEEK 32T YEN FOR DEBT SERVICING COSTS: KYODO" also crossed.
• This would be a step up from the current fiscal year debt service costs. via BBG: "The amount will exceed the ~28.2t yen the ministry had sought in its initial budget for fiscal 2025." 

The Asia-Pac USD/JPY range has been 146.99-147.88, Asia is currently trading around 147.80, +0.01%. The demand  towards 146.00 has been pretty solid all of July and August, keeping us for the most part in a 146.00-149.00 range. CFTC data for last week shows leveraged accounts again added to JPY shorts so the initial reaction to Powell would have been unwelcome and they would be breathing a little easier today as the support continues to look solid. This morning this level held once more after again being challenged in our session in reaction to Trump firing Fed Governor Cook.

• Japan July Services PPI Weaker Than Forecast But In Line With Lower CPI: Japan's July PPI services print was below market forecasts. We printed 2.9%y/y, versus 3.2% forecast, which was also the June outcome. In m/m terms we rose 0.3%, the firmest gain since April and after a 0.2% decline in June. Broadly this data looks to be evolving as the BoJ expected. Core inflation pressures remain elevated, but the central bank appears to have time on its hands to assess such trends.
• "JAPAN FINMIN KATO: IMPORTANT FOR FX TO REFLECT FUNDAMENTALS, MOVE STABLY, ALARMED OVER FX MOVES, INCLUDING THOSE DRIVEN BY SPECULATORS,  WILL CLOSELY MONITOR JGB MARKET MOVEMENTS, WILL PURSUE APPROPRIATE DEBT MANAGEMENT” - [RTRS]
• "AKAZAWA: AIM TO SEEK CAR TARIFF CUT AND AMEND EXECUTIVE ORDER" - BBG
• Options : Close significant option expiries for NY cut, based on DTCC data: 148.00($992m), 146.35($716m).Upcoming Close Strikes : 148.00($893m Aug 27), 146.50($1.14b Aug 29), 145.00($1.7b Aug 29)  - BBG.
• CFTC data shows last week asset managers have begun to add to their JPY longs after a consistent period of reduction +71379( Last +60866), leveraged funds though again used the dip to add to their newly built short JPY position -50848(Last -41257).

Fig 1 : USD/JPY Spot Daily Chart

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