GOLD: Gold Clings to Modest Weekly Gain

• Following a second successive day of CNY209bn of liquidity injection via the OMO, bond futures are up at lunch time.  
• The 10YR is up +0.03 to 109.06 and remains above all major moving averages.  The nearest being the 20-day EMA at 108.99
• The 3YR is up +0.02 at 102.52 taking it above the 50-day EMA of 102.50.  Above at 102.61 lies the 100-day EMA.  
• The CBG 10YR remains at 1.64%

The AU-US 10-year cash yield differential currently stands at -16bps, positioned near the bottom of the +/- 30bps range that has largely held since November 2022.

• A simple regression of the 10-year yield differential against the AU-US 1-year forward 3-month swap rate (1Y3M) differential over the past year suggests the current spread is slightly below fair value at -12bps.
• The 1Y3M differential, a key gauge of expected relative policy trajectories over the next 12 months, has traded within a 40bp range this year and is currently near the middle of the range at ~-20bps.
• In early February, the 1Y3M differential had declined approximately 100bps since mid-September 2024, falling from +60bps to -40bps.

Figure 1: AU-US Cash 10-Year Yield Differential (%)

Source: MNI - Market News / Bloomberg

May headline CPI inflation was flat on the month, seasonally adjusted, driving a 0.3pp moderation in the annual rate to 2.1% driven by a broad-based easing across major components. The trimmed mean moderated to 2.4% y/y from 2.8%, the lowest since November 2021. However, CPI ex volatile items and holiday travel was only down 0.1pp to 2.7% y/y. The RBA decision is on July 8 and this data is likely to increase expectations of another rate cut but the Board prefers the quarterly CPI (due July 30) and updated staff forecasts are not provided until August.

Australia CPI y/y%

• Headline continued to be impacted by a number of volatile factors with automotive fuel down 2.9% m/m & 10% y/y due to global oil prices, which are likely to be higher in June given events in the Middle East. Also electricity prices fell 5.9% y/y although up from -6.5% y/y but would have been up 2% y/y without state and federal rebates. Fruit & veg eased to 2.8% y/y from 6.1%. Holiday travel & accommodation moderated sharply to 0.6% y/y from 5.3%.
• More stable components also saw a moderation with insurance at 3.9% y/y after 7.6% and rents 4.5% y/y down from 5.0%. New dwellings only rose 0.8% y/y, the slowest rate since April 2021 as discounts are offered to encourage new business.
• Domestically-driven measures saw a moderation with services inflation at 3.3% y/y from 4.1%, the lowest since May 2022, and non-tradeables 3.2% from 3.6%, softest since the more recent December 2024.
• Goods inflation was stable in May at 1.0% y/y while tradeables fell to 0% y/y from 0.3% due to fuel. 

Australia CPI services vs trimmed mean y/y%