US TSYS: Higher Yields Consolidate Across the Curve.

• Discussions ahead of the National People’s Congress on Proposals for the refinancing of local government debt have been ongoing (source:  MNI – Markets News).
• Caixin PMY Services Stronger for October (source MNI – Market News)
• PBOC drains liquidity in this mornings OMO (source MNI – Market News)
• Equity markets very positive with the CSI300 +2.00%.
  
   

2yr 1.424%        5yr 1.776%        10yr 2.122%        30yr 2.307%

RBA Governor Bullock stated that bringing inflation down the last part of the way is “not easy” and that there are still upside risks to inflation, including continued weak productivity growth, tight labour market and the level of demand still exceeding supply. Overall, the risks remain balanced and so the Board is not “ruling anything in or out”. 

• The Board’s discussion was structured as it was in September with it asking if policy was “restrictive enough” to return inflation to target within the “reasonable timeframe”. It found that it was. It again looked at scenarios that would drive rates to have to rise or fall rather than debating a move at the November meeting.
• The Governor would not give rate guidance but said that the market OCR pricing was consistent with inflation not returning to target any time soon and its path “was as good as any”.
• Bullock observed that if the quarterly rise in trimmed mean CPI doesn’t moderate from Q3’s 0.8% q/q then it will not return to target. Over recent quarters it has been quite stable and is expected to decline only gradually. 
• Inflation can be quite “sticky” because it can take time to improve the supply side to meet demand. The unemployment rate is a good indicator of the size of this output gap and its stabilisation at a low level signals that demand is still above supply.
• On the downside, the Board is prepared to act if the pickup in real income growth doesn’t result in the forecast consumption recovery and it surprises to the downside. It is the same with a sudden weak surprise to the labour market. But the RBA is not expecting job losses but rather a rise in unemployment driven by employment growth running below the labour force. 

The USD is mixed against the majors in the first part of Tuesday trade. The BBDXY index is little changed, last near 1258.65. Yen has weakened a touch, while AUD is up modestly (as the RBA left rates on hold, but kept hawkish language). NZD is also up a touch. 

• AUD/USD is tracking back towards 0.6600, so up around 0.15% in latest dealings. As expected the RBA kept rates on hold, although with hawkish rhetoric. The central bank needs to vigilant to upside inflation risks and is not ruling anything in or out.
• OIS is slightly firmer for Australia and this is likely helping the A$, although outperformance is modest. RBA Governor Bullock noted that the current policy settings are correct and that the path back lower for inflation will be slow.
• NZD/USD is up a touch to 0.5980. We had a better Caixin services PMI print in China, aiding to recent positive China economic momentum. This has helped China and HK equities, a likely positive for the antipodean currencies.
• Still, aggregate moves are modest, with overnight vols very elevated ahead of US election outcomes tomorrow.
• USD/JPY is drifting higher, last near 152.45/50, off around 0.20% in yen terms. US yields are up a touch, but gains are less than 1bps at this stage.
• The above equity moves may be weighing on yen crosses at the margin. AUD/JPY is back to 100.55/60, still within recent ranges.
• Later US October services ISM/PMI and September trade print, as well as UK October services/composite PMIs. The eurogroup meeting continues and the ECB’s Lagarde and Schnabel speak.