JGBS AUCTION: Poor Result For Today’s 2Y Supply

The AUD OIS market has almost no chance of a cut priced in for the 4 November RBA decision with only around 25% of 25bp for the 9 December decision following the broadly higher-than-expected Q3 CPI data. The October Bloomberg survey showed that economists were not unanimous as to when they expected the next cut. Of the big four local banks, only Westpac forecasted a November easing but that has now changed.

• Given that inflation is higher than the RBA expected and the “emerging consumer recovery”, Westpac now expects rates to be unchanged over the rest of 2025. It is re-evaluating the 2026 outlook but sees the February meeting also in doubt given how much higher inflation is.
• It points out though that the labour market may surprise to the downside next year. The Q3 unemployment rate was higher than the RBA expected and employment growth slower.
• Westpac consumption data are suggesting “solid gains in Q3 and into Q4” and so it now expects the RBA to revise up its consumption profile.
• In August the RBA forecast Q4 trimmed mean inflation at 2.6% and now a 0.2% q/q rise is needed to achieve that which hasn’t happened since 2016 outside of Covid. Thus there is likely to be a near-term upward revision to its inflation forecasts at a minimum. However, it uses market rates in its model and they are higher which may allow inflation further out to return to the 2.5% band mid-point.
• RBA Governor Bullock said this week the Board remains cautious and more information is needed on inflation and the labour market given the volatility of the monthly numbers. She also described a 0.9% q/q Q3 CPI rise as a “material miss”. 

• The largest liquidity injection in recent weeks this morning has given bonds a boost, with bond futures up in morning trade.  
• The 10-YR is up +0.19 to 108.61 trending back above all major moving averages.  
• The 2-Yr bond future is up +0.11 to 102.58 for its largest one day jump since April.  The move takes the 2-Yr above all major moving averages also.  
• The CGB market hasn't reacted as strongly with the 10-Yr down -1bp to 1.80%.  
• The PBOC governor indicated that the PBOC would re-enter the bond market and purchase CGB's according to Xinhua, without specify timing or amounts but with local commentators suggesting at present, amounts may not be significant.  The 10-Yr CGB traded in a 1.60 -1.70% range from March through to July before breaking higher to 1.88% in late September.  The PBOC has halted its bond buying this year, citing calm, stable markets and investors able to absorb issuance though with the move to equities from investors growing in strength, it seems likely that the PBOC may look to return the 10-Yr range back towards 1.60 -1.70%

Aussie is outperforming the G10 today after Q3 CPI printed higher than expected across the board and likely means that the RBA will be on hold on 4 November. The AUD OIS market has almost no chance of a cut priced in with only around 25% of 25bp for the 9 December decision. AUDUSD jumped to 0.6607 on the data release but has struggled to hold moves above 0.6600. It is currently up 0.2% to 0.6599. The USD index is flat and risk appetite mixed. 

• The difference in Australia-NZ central bank expectations has pushed AUDNZD higher with it reaching 1.1427 following the Aussie CPI, highest since 9 October, and is now up 0.2% to around 1.1409. NZDUSD is slightly higher today at 0.5784 off the intraday low of 0.5772.
• The RBNZ is widely expected to ease in November but the RBA looks like being on hold as underlying inflation hit the top of its 2-3% band. The RBA has been more wary of the Q3 pickup in inflation than the RBNZ, which believes that spare capacity will bring it back towards 2%.
• In August the RBA forecast Q4 trimmed mean inflation at 2.6% and now a 0.2% q/q rise is needed to achieve that which hasn’t happened since 2016 outside of Covid.
• Acting RBNZ Governor Hawkesby speaks on central bank independence at 1705 NZT/1505 AEDT today. The speech will be published on the RBNZ website.
• The Fed and BoC decisions are later Wednesday and both are expected to cut rates 25bp. US September inventories and pending home sales as well as Q3 Spanish GDP and UK September lending print.