AUSSIE BONDS: Drifted Cheaper Ahead Of US Payrolls

Previously the RBA had been concerned that Australian inflation was higher than other OECD countries. The picture is now mixed. However, Australia’s unemployment rate at 3.9% is below most developed markets contributing to the RBA’s extended monetary policy pause. In November underlying trimmed mean CPI rose 3.2% y/y, higher than the euro area, Norway and Canada but is now in line with the US, who has experienced stronger GDP growth. While services inflation has also been sticky in Australia rising 4.2% y/y in November, it is better than in the US (4.5%) and UK (5.0%) but still higher than the euro area and Norway. 

OECD underlying CPI y/y%

Source: MNI - Market News/ABS/Refinitiv

TYH5 is 108-05+, flat from NY closing levels. 

• Cash bonds are little changed in today’s Asia-Pac session after finishing 2-7bps cheaper yesterday, with a steeper curve, following stronger than expected ISM services and JOLTS data.
• MNI's preview of the Minutes includes what to watch for upon release; MNI's FOMC Hawk-Dove Spectrum; key highlights of FOMC participant commentary since the December meeting; and sell-side analyst expectations. See here
• Reminder, much of Thursday's data has been moved to Wednesday (Wholesale Sales, Weekly Jobless Claims) as well as the 30Y Bond auction re-open to avoid conflicts with Thursday's Federal Holiday/day of Mourning for former President Carter.
• The CME Group FI trade closes at 1315ET on Thursday. Thursday still includes Challenger Job cuts at 0730ET, Tsy 4- & 8W bill auctions at 1130ET, and several scheduled Fed speakers throughout the day.

ACGBs (YM flat & XM -4.0) are mixed but 2-4bps stronger versus pre-CPI Monthly levels.

• While November headline inflation picked up 0.2pp to 2.3% y/y, the focus was on trimmed mean today given current state & federal electricity rebates. This underlying measure eased 0.3pp to 3.2% to where it was in September.
• However, the RBA continues to focus on quarterly CPI data and it wants to be confident that inflation will return sustainably to the band. It is too early to tell if monthly inflation is trending lower again, thus attention will be firmly on Q4 CPI on January 29.
• Cash ACGBs are flat to 4bps cheaper, with a steeper curve. The AU-US 10-year yield differential is at -17bps.
• The swaps curve has bear-steepened, with rates flat to 4bps higher.
• The bills strip is slightly mixed, but 1-3bps richer after the data.
• RBA-dated OIS pricing is 1-4bps softer across meetings after the data, with July leading. A 25bp rate cut is back to being more than fully priced by April (117%), with the probability of a February cut standing at 64%.
• Before the data, the likelihood of a 25bp cut in April had slipped to 98%.
• The local calendar shows retail sales and trade balances tomorrow.