JGBS: Futures Weaker Overnight, US Tsys Modestly Weaker Ahead Of US Payrolls

Q4 CoreLogic home values were flat on the quarter to be up 5.3% y/y down from +1.3% q/q and 7.6% y/y in Q3. The capital city index fell in each of the three months in the final quarter driven by weakness only in Sydney and Melbourne. This levelling out in house prices, rising disposable income and stable mortgage rates have helped housing affordability to stabilise but at a particularly unfavourable level.

• Mortgage rates are likely to fall during 2025 but the timing remains unclear. The OIS market has a full 25bp by the April 1 RBA decision and close to 3 cuts by year end. But the RBA remains highly data dependent and while it is becoming more confident that inflation is sustainably returning to the band, there is still further to go.
• Flat Q4 house prices helped affordability to stabilise at 43% below trend but at this stage it is difficult to see a meaningful fall in dwelling prices which is needed to boost affordability but this hides state-based differences. In contrast, affordability is improving in NZ with falling rates and house prices.

Australia housing affordability vs valuation % deviation from trend

Source: MNI - Market News/Refinitiv

• Working age population growth moderated to 2.4% y/y in November from 3% a year ago, but it continues to grow by 40-50k/month ensuring continued robust housing demand. While supply remains constrained with only a tentative recovery in building approvals.
• Housing remains overvalued based on the house price to rents ratio but it has become less so over the last year. Our housing valuation index was 7.6% above trend in Q4, assuming Q4 CPI rents at 6.5% y/y, compared to 10.6% in Q4 2023 and a peak of 24.2% during Covid.
• The Westpac/MI “time to buy a home” index picked up in Q4 but remains at depressed levels due to high house prices and mortgage rates. But December house price expectations fell 5.3% m/m and 9.7% y/y to the lowest level since April 2023.  

Australia Westpac/MI "time to buy a home" nsa

TYH5 is 108-06, unchanged from NY closing levels. 

• Cash bonds drifted sideways for most of yesterday's session after establishing cheaps following the morning's data. Yields finished 2-7bps higher, with the curve steeper.  
• The JOLTS report saw surprisingly elevated job openings in November, but the quits rate reversed a surprise increase from October. Job openings were 8090k (cons 7740k) in November after an upward revised 7,839k (initial 7,744k) in October.
• Headline ISM strengthened to 54.1, a little higher than the 53.5 expected (52.1 prior), with New Orders (54.2, 53.7 prior) and Employment (51.4, 51.5 prior) exactly matching survey expectations. But Prices Paid soared to 64.4 (57.5 expected, 58.2 prior), jumping by the most since January to the highest level in 22 months.

European natural gas prices rose 1.3% on Tuesday to EUR 47.92, the intraday high, but are still down 2% this month. There has been downward pressure from technicals and positioning but cold weather is accelerating withdrawals of fuel from storage which drove prices higher yesterday.  

• Bloomberg is reporting that large parts of Europe are forecast to have the coldest weather in four years, including Spain. According to Weather Services International -15C is forecast for Salzbug on Monday and -7C in Madrid. Gas storage levels are under 70% and the spread of the cold snap across the region is likely to accelerate the drawdown as heating demand increases.
• US natural gas fell 6.2% to $3.44 on Tuesday and is now down 5.2% this month. It sold off as forecasts indicated that there will be some reprieve from the current freezing weather over January 17-18, according to NatGasWeather.
• Later today EIA US inventory data is released and is forecast to show a 42 bcf drawdown compared to the 5-year average of -93 bcf for the same week. As of December 27, stocks were around 4.7% above this average, according to Bloomberg.
• There has been less demand from Asia due to a mild winter with some reselling in China, according to ENN Group. Japan is also in the process of restarting nuclear power. This is good news for Europe who competes with Asia for global LNG supplies. Although 2024 saw record LNG imports into Asia.