JGBS: Market Looks Past Price Data, 2/30 YC Holding Range Despite Rally
In Tokyo morning trade, JGB futures are stronger, +5 compared to settlement levels, after reversing overnight weakness despite today’s PPI beat.
- Earlier Japan PPI data was a touch above forecasts. Moreover, disinflation from the import side continues to dissipate, which will be a BoJ watch point, particularly given renewed yen weakness. It is arguably too soon, though, to push the central bank to tighten rates.
- Cash JGBs have seemingly looked past today’s data, with yields little changed across benchmarks apart from the futures-linked 7-year.
- The benchmark 30-year yield is down 0.2bps at 3.184%, after trading in a 3.15–3.35% range this week. The yield initially pushed to a new cycle high following a weekend change in political leadership, but reversed course after this week’s supply. With auction results coming in only mixed, the subsequent ~20bps rally in the 30-year appears to reflect an unwind of a yield overshoot linked to market perceptions of the new LDP leadership’s policy stance.
- Despite the recent rally, the 2/30 curve remains within the well-defined range observed since mid-year. With the BOJ likely to continue nudging the cash rate higher—and the 2-year yield expected to follow—a move back toward higher 30-year yields seems probable. (See Chart)
- Swap rates are, however, 1-3bps richer, with tighter swap spreads.
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CNH: USD/CNY Fixing Firmer, Error Term Slightly Wider
The USD/CNY fix printed at 7.1062, versus a BBG market consensus of 7.1369.
- The fixing rebounded in line with stronger USD levels, but it only puts us back to where we were at the end of last week. The fixing error was slightly wider at -307pips, versus -241pips yesterday.
- USD/CNH is little changed in the first part of Wednesday dealings, the pair last at 7.1270/75.
- Coming up soon we have the August inflation data.
CHINA SETS YUAN CENTRAL PARITY AT 7.1062 WEDS VS 7.1008
- CHINA SETS YUAN CENTRAL PARITY AT 7.1062 WEDS VS 7.1008
US STOCKS: Russell - Consolidates Above 2300, Yet To Test Highs
The Russell 2000 Friday night range was 2370.209 - 2393.554, closing -0.55%. The Russell 2000 continues to consolidate its recent break back above 2300, the cooling labour market pointing to a rate cutting cycle potentially coming. This scenario could see some further rotation back into small caps which will benefit the most from a cutting cycle, though this premise does ignore the risks to growth. The market will be laser focused on the all-time highs just above 2450, a break of which could trigger another wave of short covering.
- Julian Brigden on X: “If I hear another so-called expert suggest buying the Russell I'm going to vomit! The $ was a key component of US Exceptionalism, and it's peaking. In that scenario, the RTY might rally on money illusion, but vs tangible assets like Silver it will underperform.” See Graph Below.
- Daily Chartbook on X: “The Russell 2000 has now gone a record 960 days without reaching a new all-time high, surpassing the streak that followed the GFC.” - via @granthawkridge
- Seth Golden on X: “Fed cutting should be good for Small Caps, but… Only good when it satisfies 2 conditions: 1. Lower rates or consistent easing cycle, 2.Stronger economic growth. If it doesn't satisfy THE 2 conditions, it's a mean reverting trade.”
- CFTC data shows leveraged funds only slightly pared back their shorts last week to -76948( previously -78059).
- There are some large shorts still being held by hedge funds in the Russell which CFTC data shows has already started to be reduced in recent weeks.
Fig 1: Russell vs Silver Ratio
Source: MNI - Market News/Bloomberg Finance L.P
