JGBS: Futures Down But Up From Lows, Tokyo CPI In Focus Tomorrow

Asian shares declined amid concerns over inflated valuations in the AI sector following the rise of DeepSeek, a Chinese AI startup offering cheaper alternatives. The MSCI Asia Pacific Index fell 0.6%, with Japan’s tech stocks among the hardest hit. The dollar strengthened after President Trump advocated for steep universal tariffs and announced plans for levies on foreign semiconductors, metals, and pharmaceuticals. Meanwhile, Chinese markets were closed for the Lunar New Year holidays, leaving traders to assess slowing economic momentum. Indian small-cap stocks extended their bear market losses, while Japan’s semiconductor and AI-adjacent companies saw significant declines.

• Japanese semiconductor and AI-related stocks slumped, led by Advantest (-18% over two days), SoftBank (-6.7%), and Tokyo Electron. The DeepSeek AI model raised fears of falling semiconductor demand and AI infrastructure investments, which also dragged power generation stocks lower. The TOPIX is now trading unchanged, while Nikkei is -1.25% lower.
• Chinese markets were closed for the Lunar New Year, but investors are concerned about a slowdown in economic recovery despite recent stimulus. Developers like China Vanke saw some gains in Hong Kong after government support was pledged, but broader market sentiment remains cautious. The HStech Index is 0.75% higher, while the HSI is trading 0.15% higher.
• Indian small-cap stocks entered a bear market, with the NSE Nifty Smallcap 250 Index dropping over 20% from its peak amid concerns over economic and earnings slowdowns. Foreign funds have been pulling out, compounding losses in recent months.
• DeepSeek’s rise sparked a selloff in US tech stocks, with Nvidia losing $589b in market value overnight, the largest single-stock wipeout ever. Investors are closely watching major tech earnings this week to restore confidence in the AI sector as profit growth expectations weaken.

JGB futures are stronger, +21 compared to settlement levels

• Outside of the previously outlined lower-than-expected PPI Services data, there hasn't been much by way of domestic drivers to flag.
• PM Ishiba’s government nominates female economist Junko Koeda to join the BoJ’s policy-setting board at the end of March.
• The market has priced in a policy rate of 0.75% by the end of the year and is increasingly focused on the possibility of rates reaching 1.0% or higher. Current pricing reflects expectations of continued modest hikes, though some analysts caution that market assumptions may be overly optimistic. The BoJ’s statement reiterated its willingness to adjust rates further if economic conditions warrant, but the lack of specific guidance has left room for speculation.
• Cash US tsys are 1-2bps cheaper in today’s Asia-Pac session after yesterday’s strong rally. The focus remains on Wednesday's FOMC policy announcement, no move is expected.
• Cash JGBs are flat to 2bps richer across benchmarks, with a flattening bias. The benchmark 10-year yield is 1.2bps lower at 1.201% versus the cycle high of 1.262%.
• Swap rates are flat to 1bp higher. Swap spreads are wider.
• Tomorrow, the local calendar will see BOJ Minutes of the Dec. Meeting and the Consumer Confidence Index alongside 5-year GX supply.

ACGBs (YM +6.0 & XM +5.0) are stronger but off session bests after business conditions improved in December.

• The NAB survey showed that conditions climbed 3 points to +6, reversing declines from the prior month and almost returning to its long-run average. Business confidence edged up 1 point to -2.
• Cash US tsys are 1-2bps cheaper in today’s Asia-Pac session after yesterday’s strong rally.
• Cash ACGBs are 5-6bps richer with the AU-US 10-year yield differential at -12bps.
• Swap rates are 5bps lower.
• The bills strip has bull-flattened, with pricing +2 to +7.
• Tomorrow’s Q4 CPI data could be pivotal in determining whether the RBA initiates a long-anticipated monetary easing cycle. It may also influence the timing of an election, which must be held by May 17. Economists predict the trimmed-mean CPI will have declined to 3.3%, marking its lowest level in three years.
• RBA-dated OIS pricing is 1-6bps softer across meetings today. A 25bp rate cut is more than fully priced for April (124%), with the probability of a February cut at 78% (based on an effective cash rate of 4.34%).