CHINA: Bond Futures Take a Breather after Yesterday’s Fall. 

• Last week’s decline in interbank liquidity (it appears) could be targeted at bond bulls who have relentlessly pushed bond yields lower.
• The benchmark 10YR future has traded above all major EMA levels since late October last year as bond bulls took over, dragging yields lower.
• Recent developments have seen a modest pullback in the 10YR future to 109.1 where it is steady today, above the 20-day EMA of 108.9618.
• Other EMA levels: 50-day EMA 108.2276, 100-day EMA 107.3791 200-day EMA 106.4696.
• China’s 5YR future is up +0.05 today at 106.515 and 2YR future is up +0.38 to 102.816.
• The Lunar New Year holidays sees China out Jan 28-Feb 04 inclusive and it is likely that the Central Bank will provide liquidity leading into the holiday period which could see the resumption of the upward trend.
• Key data out this week: Industrial Profits Jan 27, PMI’s 27 Jan.   

In its December meeting minutes, the RBA said “a variety of labour market indicators could be signalling that progress in the labour market moving closer to its full employment level had stalled”. The December monthly labour market data were generally consistent with this statement with employment up 3.1% y/y and underemployment continuing to trend lower. 

• The RBA previously pointed out that it looks at other variables, not just employment and the unemployment rate.
• Underemployment trended lower over the second half of 2024 falling 0.7pp from the May peak to 6.0% in December. Signs that employees are working fewer hours than they would like would generally lead any drop in employment. The decline in underemployment is consistent with Governor Bullock’s view that layoffs are unlikely. 

Australia unemployment vs underemployment rates %

• Hours worked rose 0.5% m/m and 3.2% y/y, highest since July 2023, in December up from flat and 2.1% y/y. In Q4 they posted their third straight quarterly increase at 0.6% q/q, slower than Q3’s +0.8% though. The continued rise in hours is good news for households but is likely to mean that productivity remained lacklustre in Q4, an ongoing concern for the RBA.

Australia hours worked %

Source: MNI - Market News/ABS

• The youth unemployment rate is seen as a lead indicator of the labour market as a whole. The data is volatile and December rose 0.4pp but the Q4 average was 0.6pp lower than Q3 at 9.0%.
• Q4 vacancies rose 4.2% q/q, the first increase since Q2 2022, resulting in the ratio to unemployment rising almost 4pp. It has eased considerably from the post-Covid high but remains around 20pp above the historical average. SEEK monthly new job ads weren’t as optimistic though with both October and November falling leaving the level down 8.4% y/y in November.
• NAB’s measure of availability of suitable labour had been improving but also appears to have stalled. 

USD/CNH has stabilized somewhat, still up around 0.25% in CNH terms, but holding above 7.3200. Implied vols are ticking higher. Overnight implied is above 11%, elevated but sub cycle highs back to Nov last year (near 35%). It's a similar story for other tenors, with 1 week above 7.7%, while 1 month is near 6.57%. The 6 month is at 6.67%, closer to recent cycle highs around 7%. 

• In the risk reversal space, the recent bias has been to trend higher, with the USD favoured for longer dated tenors, with RRs sitting in positive territory 2 months and beyond. Like the implied vol space though, we remain sub recent extremes in terms of recent highs.
• These biases likely reflect market uncertainty around potential new US trade policies and the broader US/Fed and China macro outlooks. The timing and size of any potential tariff announcements is uncertain, but at this juncture the broader USD backdrop is still viewed favorably, given US growth and Fed dynamics, particularly relative to China (where the central bank still has a modest easing bias.
• For the near term, the chart below plots option expiry strikes (by volumes) for the coming week, per DTCC (via BBG). The yellow line is current spot levels. For 7.5000 and 7.6000, there is just over $2.6bn in volumes for these strike levels, dominated by calls. Next is 7.4500, then 8.00.
• On the downside, 6.85 puts have just over $1bn in volumes expiring over the next week.
• Again, the right hand tail of the option expiries relative to current spot matches with market concern around early tariff rises and a break higher in USD/CNY spot. 

Fig 1: USD/CNY Option Expiries For the Next Week 

Source: MNI - Market News/Bloomberg