AUSSIE BONDS: Slightly Cheaper Ahead Of Credit Data, US Tsys Closed Overnight

Oil continued normalising on Tuesday following the 24 October high driven by news of increased US/EU sanctions on Russia. The fall in the Dallas Fed services index pressured prices. The market is refocusing on supply/demand fundamentals with OPEC’s monthly meeting on Sunday and another output increase probable while the IEA revised the expected 2026 market surplus higher in its October report. This is likely to provide a headwind to oil prices for some time.

• WTI fell 1.8% to $60.18/bbl after breaching $60 a number of times but breaks below were brief. It reached a low of $59.76, just above support at $59.64, 23 October low. It is now 2.9% lower in October and almost 4% off Friday’s high.
• Brent was down 1.8% to $64.47/bbl to be 2.4% lower this month. It touched $64.00 after the Dallas Fed data and then settled around $64.50. It held above initial support at $63.86, while the bear trigger is at $60.07. The expiry of contracts around $65 could add to market volatility, according to Bloomberg.
• OPEC increased its output target 137kbd at the last 2 meetings and another one is likely at the 2 November meeting as the group continues to unwind its previous 1.66mbd reduction.
• According to data from Vortexa there are currently 1.4bn barrels of seaborne oil, which the market is concerned will add to inventories. This is the highest since 2016 (Bloomberg).
• Bloomberg reported that US oil inventories fell a larger than expected 4mn barrels last week, after declining the previous week, according to people familiar with the API data, which may support crude when it resumes trading. Gasoline and distillate were both lower down 6.3mn and 4.4mn respectively. The official EIA data is out on Wednesday.

Aussie bond futures are tracking with a modestly softer bias in early trade, as markets await the Q3 CPI (and monthly CPI print) later. RBA easing expectations for Nov have been pared, now around 9bps priced in (roughly 36% chance of a cut). We did have 16bps priced in at the end of last week. Given recent market shifts we could see greater reaction today to a dovish CPI outcome rather than a hawkish one. 

•  The Q3 trimmed mean is expected to rise 0.8% q/q leaving annual inflation stable at 2.7% y/y. A 2.5%y/y print is likely needed to re-ignite Nov easing prospects. A 2.6%y/y print could deliver an easing in Nov (if services inflation is supportive) as this was the Q4 RBA forecast made in Aug. A 2.8%y/y for trimmed mean or higher may reduce Nov easing chances back to flat.
• 3yr futures (YM) were last 96.525, (off 1.5bps), slightly underperforming the 10yr (XM) (last near 95.8050). Levels wise we are still some distance from important support for the 3yr (96.28, May 15 low), through late Sep/early Oct, dips under 96.40 were supported. On the upside, recent highs were marked at 96.70.
• Cash ACGB yields are up a little over 1bps across the benchmarks, the 3yr up to 3.46%, as it re-establishes a likely 3.40-3.60% range. The 10yr around 4.18%.
• The 3/10s curve is holding just under 72bps, while the AU-US 10yr spread is pushing up towards +21bps, eyeing another +30bps test. 

US Bond futures continue to tread water ahead of this week's FOMC with price action muted and volumes average.  TYZ5 finished marginally up at 113-15+, a gain of +02 and have opened the Asia trading day at 113-15, trading flat with very low volumes at the open.  

Cash curves flattened again, after an average 7-Yr auction.  Some commentators described the auction as 'average' though with the bid to cover at 2.46x, it was consistent with the prior two 7-Yr auctions of 2.40x and 2.49x. 

• The 2-Yr edged up +0.4bps to 3.492%
• The 5-Yr was up +0.3bps to 3.611%
• The 10-Yr declined -0.6bps to 3.978%
• The 30-Yr continues to be the outperformer, down -1.2bps to 4.542%

In data, Conference Board consumer confidence was mixed, with the headline index deteriorating less acutely than expected and the "labor differential" stabilizing after a multi-year low posted in the prior month - suggesting little additional urgency for the Fed to cut rates to buoy employment.  On that front we also got a surprise announcement from ADP that they would henceforth produce a weekly private payrolls update, the first of which showed a solid-by-recent-standards 57k gain in the 4 weeks to Oct 11, potentially underpinning cautious sentiment in rates.

The Richmond Fed's Fifth District sectoral surveys showed improvement in activity in October, but very divergent inflation sequential developments across Manufacturing vs Services.  The manufacturing survey's Composite Index showed a strong improvement in activity in October to -4 from -17 prior, marking the best reading since February and much better than the -12 consensus expectation, albeit still in soft territory (the report characterizes it as "slow" activity). New orders picked up to -6 from -15 (joint highest since February) and employment and shipments rose, though expectations fell to -5 from -1.

Ahead of tomorrow's FOMC decision, markets still broadly eye back-to-back cuts before a shift to a quarterly pace with a subsequent cut in March, but with slightly less conviction on a June cut.

• Cumulative cuts from 4.12% effective: 26bp for tomorrow, 48.5bp Dec, 61.5bp Jan, 72.5bp Mar, 79bp Apr and 92.5bp Jun.
• MNI Fed Preview: https://media.marketnews.com/Fed_Prev_Oct2025_With_Analysts_2c9e326366.pdf