IRAN: Iran Attacks Two US Bases, Will Escalate If US Attacks Continue

The AU 1-year swap rate one year forward (1Y1Y) is lower sharply lower today but remains 10-15bps above its late May low. 

• Despite the recent rebound, we continue to see value in paying 1Y1Y on a retracement towards the 4.40–4.45% area, particularly if such a move occurs ahead of the key inflation releases over the next two months: the May Monthly CPI Indicator on 24 June and the Q2 CPI report on 29 July.
• This view is supported by the historical tendency for the 1Y1Y to peak in the lead-up to the final rate hike of a tightening cycle. In the current cycle, the market does not fully price the final 25bp hike until December.
• In terms of upside potential, an initial target would be a retest of the recent cycle high of 5.03%. This level sits 43bp above the market-implied peak cash rate of 4.60%, broadly in line with the premium observed at previous cycle peaks.
• Should inflation continue to surprise to the upside, markets may be forced to price a higher terminal cash rate, creating scope for the 1Y1Y to move beyond its recent highs.
• The attractiveness of a paid 1Y1Y position is further enhanced by favourable roll-down dynamics. Over the next nine months, the position benefits from positive roll, improving the carry profile and reducing the cost of maintaining the trade.

Figure 1: 1Y Swap Rate Forward Curve

Source: Bloomberg Finance LP / MNI

Offshore investors remain a focus point for South Korea. Yesterday actually saw a very modest inflow, see the table below. Whilst it only slightly positive it was the first positive inflow day since May 6 of this year. Yesterday's price action in the Kospi/Kosdaq was very poor (off 8%). As we have noted recently, very strongly selling pressures in recent months has been attributed to the outperformance of local tech bellwethers Samsung and SK Hynix, which has forced portfolio rebalancing flows. Is this a sign that such outflow pressures are starting to dissipate? Today's market is rebounding, the Kospi up +3.4%. BBG's NBUY function has foreign outflows so far today (around $350mn). The KRW continues to rally, with USD/KRW back to 1515/20, up a further 0.70% in won terms, as the authorities step up efforts against one-sided depreciation pressures, while National Pension Service (NPS) FX Hedging has also risen. 

• Elsewhere, we have seen Taiwan net outflows pick up in recent sessions. In the US the SOX index has pulled back sharply from the 14k level, although was stronger in Monday US trade. As we noted earlier, the AI trade has run into a market that is starting to take notice of inflation and the NFP print last week is now forcing it to consider a potential rate hike. The Taiex is up today, but will be a watch point for these themes.
• Elsewhere Indian equity outflow pressures remained fairly consistent to last Friday. The RBI has stepped up efforts to curb rupee weakness, but local markets remain under pressure. The Nifty isn't too away from a downside 23k test.
• In South East Asia, the outflow theme remains consistent, with only Thailand positive YTD from a net inflow standpoint. 

Table 1: Asian Markets Net Equity Flows 

Source: Bloomberg Finance L.P./MNI 

There seemed some stabilisation in the private sector in May with NAB business conditions stable at +3 and confidence improving substantially to -14 from -23. However, Q2 averages are signalling growth slowed in the quarter. Price/cost increases moderated from April but remained elevated compared to pre-Iran War rates and are signalling upside risks to Q2 CPI. The RBA remains alert to signs of a greater or faster pass through of higher costs to consumers and while the NAB survey shows some easing in the size of price rises they remain inconsistent with the inflation target.

• In terms of costs, labour costs moderated to 1.5% 3m/3m from 1.7%, while purchase costs were still strong at 2.6% 3m/3m but down from April’s 4.5%. Retail price rises remained elevated at 1.5% 3m/3m compared with the Q1 average at 0.6% and final product prices at 0.9% compared to Q1’s 0.8%.

Australia NAB final product prices vs CPI y/y%

Source: MNI - Market News/LSEG

• Business conditions rose slightly to 3.0 from 2.8 helped by better trading conditions (+0.7pp to 7.9) and employment (+0.4pp to 1.6) while profitability deteriorated (-0.7pp to -0.7 – the first negative in a year). The survey suggests hiring slowed in Q2.
• The outlook remained negative with forward orders at -0.4 but that was better than both March and April. Export sales improved to +3.2 from April’s -10.3, the best since January and suggesting some global economic resilience. Exports were also positive at +0.7 after -1.8.

Australia NAB business conditions vs GDP y/y%

Source: MNI - Market News/LSEG