JAPAN DATA: Japan Investors Continue To Buy Offshore Bonds

Risk sentiment has stayed on the backfoot following earlier remarks from US President Trump - via Truth Social he stated that everyone in Tehran should evacuate immediately. Since then it has emerged that US President Trump will leave G7 meetings in Canada early and head back to Washington. Headlines have also crossed that Trump has requested the National Security Council be prepared in the Situation Room - per Fox News (via Rtrs). China has also warned its citizens in Israel to leave the country as soon as possible as the security situation becomes more severe (via RTRS). 

• US equity futures continue to track lower, last off close to 0.60% for Eminis, while WTI is up over 2% to $73.40/bbl in latest dealings. Gold is above $3400/oz, +0.50% versus end Monday levels in the US.
• In the FX space, we are seeing higher beta plays like AUD and NZD down around 0.20%.
• US Tsy futures are firmer. TY is +04.
• The earlier Trump around evacuation of Tehran is leaving markets on edge in terms of how the situation in Iran may unfold. 

The global banks maintains its full year GDP forecast at just under 5%. It expects growth momentum to moderate towards the end of the year. It also still sees structural imbalances and deflation pressures. See below for more details. 

J.P. Morgan: "The escalation in tariff war risks has posed the biggest challenge for the Chinese economy. Even after the tariff détente from the Geneva talks, the US average tariff rate on China is still 30%pts higher than the beginning of the year. We maintain our forecast of growth moderation, anticipating the net export lift to growth will fade away yet policymakers will refrain from launching additional stimulus beyond the policy guidance approved at March NPC. 

Full-year growth forecast stays unchanged at 4.8%. The reason for the downward revision in 4Q is based on the assumptions that: 1) average tariff rates will stay unchanged; 2) fiscal policy will be front-loaded hence fiscal impulse will fade away in 4Q; and 3) the PBOC will continue to cut rates but the pace will be slow. In particular, we now expect only one more 10bp rate cut for the rest of the year (in 4Q) and postpone the other 10bp rate cut into 2026 (roughly the pace of 10bp cut every two quarters).

The major concern remains the structural imbalance and deflation pressure faced by the Chinese economy. GDP deflator has been negative for eight consecutive quarters (since 2Q23), and we do not anticipate it will end before the end of the year. Our forecast of nominal GDP growth is 3.8%, which means a negative GDP deflator at -1% in 2025 (vs -0.7% in 2024 and -0.5% in 2023). The government has taken actions to increase support for consumption, especially trade-in subsidy program for selected durable goods. Nonetheless, consumption package is still much smaller than investment package, and within consumption more can be done to liberalize the service sector (hence increase household income and boost service consumption) and improve the social safety network for disadvantaged groups (to reduce precautionary saving). The trade-in subsidy program has been effective, but the marginal impact may diminish and the temporary boost may face the payback of weaker future demand for durable goods."

In post-Tokyo trade, JGB futures closed stronger, +12 compared to settlement levels, despite markets reversing the initial risk-off move. With Israel’s aerial attack dominating, the conflict not spreading to include other countries, and oil infrastructure not targeted, the markets adopted a more sanguine view, with risk assets recovering and US tsys selling off. 

• US President Trump has posted on Truth Social, stating that Iran should have signed the deal he told them to sign, while also reiterating that Iran cannot have a nuclear weapon.
• The BoJ is expected to keep its policy rate unchanged at 0.50% today. The key area of interest will be Governor Kazuo Ueda's post-meeting press conference. Investors will closely examine his comments for any signals on the timing and likelihood of future rate hikes. If the BoJ begins to hint at stronger underlying inflationary trends or shows greater optimism about the economy, it could stoke expectations of a rate hike in the autumn.
• The second area of market focus is on the BoJ's JGB purchase program. Market expectations suggest a slower pace of reductions during fiscal year 2026. If the BoJ chooses to maintain the current pace of 400 billion reductions per quarter in FY2026, this would be interpreted as a mildly hawkish move. (See MNI BoJ Preview here)