US TSYS: Marginally Cheaper In Asia

NZGBs closed 3bp weaker, but off session cheaps as ACGBs positive reaction to the release of the June RBA Minutes crossed the Tasman. Australian market sentiment was influenced by subtle changes in wording regarding the necessity of additional tightening, along with the finely balanced decision on whether to raise interest rates or maintain the status quo. The NZ/AU 10-year yield differential was unchanged on the day at +43bp, a five-week low.

• Swap rates closed 2-3bp higher with implied swap spreads little changed.
• RBNZ dated OIS pricing closed 1-2bp firmer for meetings beyond November. Terminal OCR expectations closed at 5.60%.
• The government wants to help Kiwibank to continue to be a disruptor in NZ’s banking market, Finance Minister Grant Robertson told reporters Tuesday in Wellington. (See link)
• Later today sees the results of the Global Dairy Trade Auction. The last result was -3.0% reflecting strong NZ autumn supply and soft Chinese demand.
• The US calendar is slated to release May Housing Starts and Building Permits.

RBA Deputy Governor Bullock has just addressed the AIG in Newcastle. Her speech was focussed on recent labour market developments and she reiterated that Australia is currently at or above full employment and that the Board remains “resolute” in returning inflation to target. She also noted that the risks have increased that inflation is not contained soon enough. Bullock also didn’t answer if she would be happy to take over as RBA Governor.

• The unemployment rate will rise as inflation comes down and that the RBA expects it to reach 4.5% which they estimate is in line with the NAIRU and so demand and supply for labour should be in balance and consistent with the inflation target.
• Despite some easing, labour demand still exceeds supply, but Bullock said that migration is not the solution as it increases aggregate demand. The unemployment in the economy now is structural and retraining is needed.
• In terms of the labour market, the RBA is watching the underemployment rate, vacancies-to-unemployment and job mobility very closely. It is also focused on inflation data, especially services, consumers and what they do with their savings, and developments overseas, particularly inflation.
• The RBA is yet to see much labour saving occurring in the economy, which would help to improve lacklustre productivity.
• The government can help the RBA by not allowing wages to rise too much and not adding to aggregate demand.

The won is outperforming so far today. Spot is back to around the 1280 level, while the 1 month NDF sits sub 1278 in latest dealings. Earlier highs were around the 1282.60 level in the 1 month NDF.

• There doesn't appear an obvious catalyst for won gains, although it does continue the June trend of won outperformance.
• USD/CNH is back to 7.1800, while the region equity tone is a weaker one. The Kospi is only tracking modestly lower and still holding above the 2600 level for now. Offshore investors have been net sellers of local equities today, with -$267.1mn in outflows.
• These headwinds may constrain further won gains, with dips sub 1270 supported recently.
• Tomorrow the data focus will largely rest on the first 20-days of trade data for June.