JGBS: Futures Unwind Overnight Weakness After Lower Than Expected Core Tokyo CPI
In Tokyo morning trade, JGB futures are little changed, -1 compared to settlement levels, after reversing overnight following lower-than-expected core Tokyo CPI measures.
- Tokyo’s core inflation slowed to 3.1% y/y in June from 3.6% in May, but remained above the Bank of Japan’s 2% target for the eighth consecutive month. The deceleration was mainly driven by a smaller rise in crude oil prices (+3.6% vs. +8.7% in May), though this was partially offset by higher prices for non-perishable food (+7.2% vs. +6.9%) and household durable goods (+3.3% vs. +2.7%).
- The core-core CPI, which excludes both fresh food and energy and is a key indicator of underlying inflation, also eased to 3.1% y/y in June from 3.3% in May, but stayed above 2% for the fourth straight month.
- Cash US tsys are 1-2bps cheaper, with a flattening bias, in today’s Asia-Pac session after yesterday’s gains.
- Cash JGBs are little changed across benchmarks. The benchmark 10-year yield is 0.2bp lower at 1.421% versus the cycle high of 1.596%.
- Swap rates are ~1bp lower. Swap spreads are mostly tighter.
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JPY: USD/JPY Rebounds, 40yr Debt Auction in Focus Later
USD/JPY just off session highs (144.75), last near 144.35/40. Earlier lows were at 143.85, as we heard comments from several Japan officials, including Governor Ueda (with focus on on watching yield developments). This comes ahead of the 40yr bond auction later. We appeared to find better demand for USD/JPY as we headed into the Tokyo fix. There doesn't appear to be any other fresh headline drivers for this bounce.
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NEW ZEALAND: Some Pickup In Recent Inflation Adds To Uncertainty
The RBNZ is widely expected to cut rates 25bp to 3.25% today bringing cumulative easing this cycle to 225bp and rates close to but still above its estimate of ‘neutral’. It still has room to reduce rates further if it feels the economy needs it with domestic activity still soft and global uncertainty elevated, thus its updated OCR profile will be monitored closely. However, data have shown some pickup in inflation recently, which it may reference.
- The RBNZ’s assessment that lower global and thus NZ growth are likely to be disinflationary should mean that the inflation outlook remains contained even if it is revised up in the short-term.
- Q1 CPI printed 0.1pp above the RBNZ’s February estimate at 0.9% q/q bringing the annual rate up to 2.5% from 2.2% but the RBNZ’s measure of core eased 0.1pp to 2.9% y/y, first time in the band in almost 4 years, and domestically-driven non-tradeables moderated 0.5pp to 4.0%, lowest since Q2 2021.
- However, Q2 inflation expectations 1-year ahead rose to 2.4% from 2.2% and 2-year ahead to 2.3% from 2.1%. Median household expectations were stable in Q2 but the mean 1-year ahead rose to 5.6% from 4.9%.
NZ inflation expectations %
- April monthly price data, which now account for 46.5% of the CPI, signalled some pressures, which could add a note of caution to the MPC’s statement. Volatile food prices rose 0.8% m/m & 3.7% y/y, highest since January 2024, as grocery prices rose.
- While Q1 wage growth moderated, the ANZ April business survey showed a rise in wage expectations for the year ahead but inflation expectations were stable.
- Q1 PPI input/output prices rose strongly at 2.9% q/q and 2.1% q/q respectively.
NZ ANZ business survey price/costs
