JGBS: Bull-Flattener, BoJ Members Have Mixed Views On Next Hike Timing

Oil prices are slightly higher today but have held onto the bulk of Tuesday’s sharp losses which were driven by global demand worries. Brent is 0.2% higher at $73.15/bbl after a low of $73.07, while WTI is up 0.3% to $69.11 after dipping below $69.00 briefly earlier. The USD index is 0.1% higher, which may be weighing on dollar-denominated crude.

• Concerns over the strength of China’s economy are ongoing but after weak US consumer confidence and other surveys, markets are worried that uncertainty and US trade policies are weighing on US sentiment and thus growth.
• The supply outlook is also highly uncertainty with it still not clear what the impact of sanctions will be on global exports. Russia and Iran have been able to avoid them by increased vessel-to-vessel transfers. OPEC and US production plans are also unknowns at this point.
• Bloomberg reported that US crude inventories fell 600k barrels last week after rising 3.3mn the week before, according to people familiar with the API data. Gasoline increased 500k, while distillate fell 1.1mn. The official EIA data is out later today. Inventories have been impacted by scheduled refinery maintenance and Canadian producers increasing flows to the US to beat tariff deadlines.
• Later the Fed’s Barkin and Bostic speak and January building permits/new home sales print. Also March German GfK consumer confidence is released. 

The USD BBDXY index has tracked higher as the Wednesday Asia Pac session has unfolded but remains within recent ranges. The index was last 1286.8, up a little over 0.15% versus end Tuesday levels in US. 

• There has been some focus on US Tsy yields, with moves of +2-3bps firmer across the benchmarks. We opened a little weaker, with the 10yr getting close to 4.28%, but it is now around 4.32%.  
• Impetus for the yield move appeared to come from the passage of the budget blueprint by the US House. "The House budget would pave the way for $4.5 trillion in tax cuts — about enough to pay for extending the expiring cuts but not enough to also cover Trump’s campaign promises for additional tax relief." (per BBG).
• USD/JPY got to lows of 148.63 in early dealings, but now sits back in the 149.50/55 region, around 0.30% weaker in yen terms. EUR/USD is back close to 1.0500.
• AUD/USD has drifted down to be under 0.6330, off by a similar amount to yen. The Jan CPI came and went without much FX market impact. The headline eased, but core ticked up. We will get more information at the second month print of the quarter (for Feb), as this will include more services inflation updates. NZD/USD is off by a similar amount to AUD, last at 0.5710/15.
• US equity futures are higher, up by 0.30-0.40%.  Hong Kong markets are also much higher, but this hasn't aided higher beta FX much. Note early tomorrow morning Asia Pac time get Nvidia earnings.
• Looking ahead, EU data is second tier, but we do have some ECB speak, including Lagarde. In the US, new homes data prints, along with Fed speak from Barkin and Bostic.   

The RBA cut rates 25bp to 4.10% at its February 18 meeting as the Q4 CPI data suggested that “inflationary pressures are easing a little more quickly” than it expected. It also updated its forecasts and extended them to Q2 2027. While Q2 2025 trimmed mean inflation was revised down 0.3pp to 2.7%, the rest of the forecast horizon had it stuck at this rate and no longer reaching the band mid-point. Our policy reaction function uses the 2.5% mid-point and the RBA’s projections to calculate the core inflation gap and as a result, it is not suggesting any further rate cuts, in line with “the Board remains cautious on prospects for further policy easing”.

• The equation uses the one quarter lead of the inflation gap using trimmed mean inflation.
• It also includes the contemporaneous output gap calculated with the RBA’s GDP forecasts, which were revised lower this month, and an estimated trend growth rate of 2.2%. This results in a negative output gap for around two years with it trending towards neutral over 2026. However, this is not enough to offset the positive inflation gap and signal further cuts.
• Thus the policy function has rates stable around 4.1% over 2025 resulting in Q4 2025 around 60bp higher than current AUD OIS market pricing.
• It is worth noting that econometric calculations are just estimates and not projections.

Australia policy reaction function with trimmed mean inflation %