STIR: BOJ Dated OIS Gives Little Chance Of A Hike Tomorrow

The RBNZ began its easing cycle in August driven by the deterioration in high frequency indicators. It included a box on these variables in the accompanying Monetary Policy Statement with charts of the performance of manufacturing and services indices as they showed that activity was contracting. Both those indices remained under the breakeven-50 level in October where they have essentially been through 2024. Thus the RBNZ is likely to again cut rates 50bp at its November 27 meeting.

• The October Business NZ performance of services index (PSI) improved to 46.0 from 45.7 thus signalling that activity continued to contract but at a slower pace. The outlook improved though with new orders higher. However, employment and sales continued to fall.
• The share of negative comments remained around 59% with the pessimism driven by the soft economic climate and cost-of-living issues.
• The Business NZ manufacturing PMI has signalled contracting activity in the sector since March 2023. It had been improving since June 2024 but deteriorated again in October falling to 45.8 from 47.0. The downward move was driven by production (-3.4 points) and employment (-1pt) and deliveries (-1pt).
• There was some good news for manufacturing though with new orders up 1.1 points to 49, close to the breakeven-50 mark and the highest since May 2023. Also BNZ reported a 10pp drop in negative comments to 53.5%.
• The ANZ business survey paints a more positive picture than the PSI and PMI.

NZ Business NZ PMI vs PSI

The latest ACGB May-41 supply auction continued the recent trend of firm pricing, with the weighted average yield printing 0.24bps through prevailing mids (per Yieldbroker).

• The cover ratio remained robust at 3.333x, reflecting solid demand. Today's auction was likely bolstered by an outright yield approximately 45-50bps higher than during the previous auction. Additionally, a 3/10 yield curve that was just shy of its steepest level since November 2023 likely provided further support for the bid.
• However, weaker sentiment toward longer-dated global bonds may have tempered demand.
• In early post-auction trading, XM futures and the bond line have shown little movement.

Japan's September core machine orders were below market expectations. They printed at -0.7% m/m, against a market expectation of a +1.5% rise. The prior month was a -1.9% dip. We fell through all the months of Q3. 

• In y/y terms, core machine orders were down to -4.8%. This is well off the Q2 highs, but still above earlier 2024 lows sub -10%y/y.
• The chart below overlays the core machine order in y/y terms against capital spending (ex software) for Japan.
• The softening momentum in core machine orders through Q3 points to some downside risks to capital spending for Q3, although there has been some disconnect between the two series in recent years.
• Note the Q3 capital spending data is due on Dec 2. 

Fig 1: Japan Core Machine Orders (White Line) & Capital Spending Y/Y 

Source: MNI - Market News/Bloomberg