GOLD: Gold Set for Strong Week

Headlines have crossed from an Rtrs interview with RBA Deputy Governor Hauser. Rtrs notes: "A top Australian central banker said on Wednesday that there was increasing debate about whether the current cash rate of 3.6% is restrictive enough to keep inflation in check, adding that the question is critical for the policy outlook." 

• This reinforces the current on hold stance from the central bank, but also raises the prospect that we may have seen an end of the easing cycle. Hauser also played down yesterday's bounce in the Westpac Consumer Sentiment Index, with the RBA maintaining a case for gradual/modest recovery in consumption.
• This echoes earlier remarks this week from Hauser, as we noted - Deputy Governor Hauser answered questions at the UBS Australasia Conference and noted that given capacity pressures and policy stance are difficult to measure, the outlook is unclear and the Board is monitoring the incoming data closely. The main takeaway was that the economy could already be close to trend growth and therefore supply constraints making further rate cuts difficult. If growth rises further without strengthening the supply side, then the pickup in inflation seen in Q3 may be persistent.
• Note we also updated our RBA policy model yesterday: When updated for Q3 CPI, Q2 GDP and the RBA’s November projections, our simple policy reaction function based on the core inflation and output gaps is signalling no further easing. As trimmed mean inflation doesn’t return to the 2.5% band mid-point by the end of 2027 on current assumptions, there is a risk of monetary tightening.

Ahead of tomorrow’s 5-year supply, the 2s/5s curve has steepened to near its cycle high of 32bps, last reached in late 2023. 

• Regression analysis shows a strong pro-cyclical relationship between the 5-year yield and the 2s/5s curve over the past 12 months (see chart).
• This dynamic is supported by expectations that the 5-year sector will sit in the “sweet spot” for increased issuance, as Prime Minister Sanae Takaichi looks to deploy her first stimulus package to jump-start the economy.

Bloomberg Finance LP

• The PBOC injected liquidity during the OMO this morning, taking injections to over CNY450bn for the last 3-days.  
• Bond futures are up in morning trade, with the 10-Yr out performing.  
• The 10-yr is up +0.04 to 108.53, and remains above all major moving averages.  
• The 2-Yr is up +0.01 at 102.46 and is at the mid-point of the 200-day EMA of 102.47 and the 20-day EMA of 102.45.
• The 10-Yr CGB is flat today on where it closed yesterday at at 1.80%