JGBS AUCTION: PREVIEW - 30-Year JGB Auction Due

At the Tokyo lunch break, JGB futures are weaker, -17 compared to the settlement levels.

• Bank of Japan Governor Ueda, speaking in parliament, emphasised that trade uncertainties remain extremely high and are unlikely to ease even after tariff issues are resolved. He noted that the BoJ's baseline economic scenario could change significantly due to external conditions. Ueda reiterated there is no preset plan for interest rate hikes, which will only occur if economic and price conditions improve as expected. Despite this, the bias remains toward further rate increases. He also said the BoJ will review its bond tapering plans at the next policy meeting on June 17, taking into account feedback from bond market participants. Additionally, he pointed out that sharp movements in long-term yields could influence short-term rates.
• Note as well Governor Ueda will speak later today at 4:50pm local time.
• Cash US tsys are flat to 1bp cheaper, with a steepening bias, in today's Asia-Pac session after yesterday's sell-off.
• Cash JGBs are 1bp cheaper to 2bps richer across benchmarks, with a flattening bias. The benchmark 10-year yield is 0.9bps higher at 1.522% ahead of today's supply.
• Swap rates are flat to 1bp higher. Swap spreads are mixed.

The May meeting minutes confirmed that staying on hold, 25bp and 50bp rate cuts were discussed. It appears that not only is there considerable uncertainty regarding the outlook but that the Board prefers to remain cautious and move “predictably”, as a result it cut by the widely expected 25bp, which was also assumed in its updated staff projections. Given not just global uncertainties but also around the level of monetary restrictiveness and tightness in the labour market, another cut in July is not fixed and will be highly data and event dependent. 

• Rates were cut by 25bp as that was assumption in the forecasts brought underlying inflation close to the band mid-point, the “progress made on inflation”, the “slightly softer outlook for domestic consumption”, global developments would like slow Australian growth, it was “predictable” and would leave room to respond to events. 
• The Board decided to limit the move to 25bp because Australian data was yet to show any “adverse impact on domestic demand” from global events, concerns about Australia’s supply-side including productivity, “two-sided” uncertainty over the degree of labour market tightness, impact of a demand recovery on profit margins, trade policy outcomes and effects on global supply chains are still unknown, and it would be difficult to unwind “too rapid” easing.
• The arguments to hold policy included that the stance of current policy is not judged “very restrictive”, headline inflation would rise again when electricity rebates ended, “labour and product markets remained relatively tight”, case to wait and see how global trade policy evolved and there were currently “few observable effects on the Australian economy”.
• Domestic developments on their own warranted monetary policy easing, while global developments “strengthened the case”. The combination of the two is likely to be important for the rate outlook. 

USD/CNH is holding modestly lower in latest dealings, last near 7.2000, slightly up from session lows (7.1966). It is outperforming a slightly firmer USD trend against the majors (BBDXY index up close to 0.15%), as onshore China markets return from yesterday's long weekend. 

• We had the Caixin manufacturing PMI print a short while ago, which came in well below market forecasts (48.3, versus 50.7 expected). The points to the tariff impact, given the survey focuses on export orientated/small SMEs. In the middle of May we did see the US and China agree to lower tariff levels for 90 days.
• Firm focus remains on US-China trade talks, with the US side seemingly pushing for a Trump-XI call, but no confirmation yet that such a call will take place (we are likely to find out after the event in any case).
• The soft Caixin print hasn't impacted FX sentiment negatively though. Clear of month end flows from late last week may be helping sentiment at the margins.
• USD/CNH implied vols remain quite depressed, the 1 month last near 4.27%, just up from recent lows near 4%.
• The USD/CNY fixing earlier provided no fresh encouragement for yuan bills, as it was set comfortably above market consensus estimates.