US TSYS: Narrow Ranges Persisting

JGB futures pared overnight losses in early Tokyo trade, -17 compared to settlement levels, after the monetary base declined 1.3% y/y and the BoJ Minutes from the MPM were released. Given last week’s YCC tweak by the BoJ, the minutes are likely to have a less-than-normal impact on the markets.

• Bloomberg believes aggressive traders will be constructing various scenarios for when the BOJ is likely to buy bonds again to smooth secondary markets. If bond yields grind higher in an orderly fashion that would suggest 0.7% is the next threshold, after this week’s intervention at 0.6%. But if the influence of global debt markets triggers a swift selloff in Japan, that could prompt the BOJ to buy bonds near 0.65%. (See link)
• Cash JGBs have experienced a subdued open with yield changes bounded by -0.3bp (3-year) and +0.7bp (20-year). The benchmark 10-year yield is -0.3bp at 0.604%, above the BoJ's YCC old limit of 0.50% but below its new hard limit of 1.0%.
• Swap rates are mixed with the belly of the curve outperforming. Rates are 0.5bp lower (7-year) to 0.4bp higher (40-year). Swap spreads are tighter.

1 month USD/KRW currently sits around Tuesday session highs, last in the 1287/88 region, onshore spot gaped higher at the open, and now tracks close to the 1289 level. USD/KRW 1 month mostly tracked higher post the Asia close on Tuesday in line with CNH and Yen weakness. The pair is comfortably above the 20-day EMA, (1281.50) with the 50-day sitting a little higher at 1290, while beyond that lies the 1300 region.

• The won hasn't enjoyed any support from firmer yen levels in the first part of trade today, as the market takes on a more risk averse tone post the US ratings downgrade by Fitch.
• The Kospi has opened up weaker, sitting off by 0.40% at this stage. This is in line with weakness in the major global indices during Tuesday trade and the weakness in US equity futures so far today.
• Offshore investors were modest sellers of local equities yesterday (-$26.8mn).
• We have already had July CPI print, which came in a touch below expectations. This may not shift BOK thinking much though, given headline base effects become less favorable as we progress through the second half.

South Korea July CPI was weaker than expected, albeit at the margins. The headline was +0.1% m/m, versus +0.2% forecast, the prior outcome was flat. in y/y terms, we came in at 2.3%, against a 2.4% forecast and 2.7% prior. The core came in at 3.3% y/y, versus 3.5% prior. There is no consensus for this outcome.

• Headline CPI y/y momentum continues to retreat, we are now back to levels that prevailed in the first half of 2021. The authorities are also likely to be pleased with the continued move down in core CPI y/y momentum, see the chart below.
• Still, base effects become less favorable as we progress forward, with the y/y headline pace peaking in July last year. The BoK has stated headline inflation momentum may pick up in August. So, today's result may not shift their thinking around the policy outlook. The core measure didn't peak until November last year though.
• Looking at the detail, weaker housing/utilities (-1.3% m/m) offset a rebound in food prices (+0.8% m/m). Transport prices also edged higher (+0.4% m/m), as did restaurants/hotels (+0.5% m/m). 7 out of the 12 sub-indices for inflation recorded higher m/m outcomes relative to June.

Fig 1: South Korea Inflation - Headline & Core Y/Y

Source: MNI - Market News/Bloomberg