JGBS: Lower Than Expected Tokyo CPI & Risk-Off Drive Rally

The USD has lost some ground as Wednesday Asia Pac trade unfolds. The BBDXY index was last back under 1300, off a little over 0.10%. Aggregate G10 moves have remained fairly well contained so far. A lot of Asia markets are closed today, including China/HK and Singapore, which has curtailed liquidity, whilst the FOMC is due later in the Wednesday US session. 

• The A$ has seen the largest swings, thanks to the Q4 CPI miss (for both headline and trimmed mean). AUD/USD got to lows of 0.6227, but sits slightly higher in latest dealings near 0.6240 (off around 0.25%). Market pricing for the Feb RBA meeting is close to 95% priced (Westpac joined two other local banks in forecasting a rate move in Feb). April is more than 100% priced. AU-US yield differentials are lower, but haven't seen a sharp move so far today.
• NZD/USD fell in sympathy with AUD, but also sits up from session lows, last near 0.5660/65. Earlier the RBNZ's Conway stated that further easing from the central bank is likely (as they signalled late last year).
• The AUD/NZD cross is back in the 1.1015/20 region, post CPI lows were at 1.1007, levels last seen in Dec 2024.
• Regional equity markets, which are open, are higher, while US futures are also a touch firmer, but have been largely range bound. US yields sit slightly lower, with losses around 1bps or slightly more.
• USD/JPY is a touch lower, last near 155.30 but remains within recent ranges. Monday highs were just short of 156.00 and today we got to 155.79 in earlier dealings. The BoJ Dec Mins were released earlier, with "Many members pointed out that economic activity and prices had been developing in line with the Bank's outlook at the meeting." This obviously came before the central bank raised rates at the Jan policy meeting.
• Looking ahead, we have the Fed decision as the main focus point. No change is expected but the tone will be watched in terms of the outlook. Before the Fed, the BoC is expected to cut rates by 25bps. 

Crude has held onto most of Tuesday’s gains and traded in a narrow range during the APAC session with much of the region closed for holidays. WTI is down 0.2% to $73.64/bbl following a low of $73.56, while Brent is 0.2% lower at $77.33/bbl after reaching $77.27. Benchmarks are holding above their 50-day EMAs. Markets remain alert to US tariff news. The USD index is down 0.1% ahead of the Fed decision later today.

• Bloomberg reported that US inventories rose 2.86mn barrels last week, according to people familiar with the API data. There has been a sharp increase of flows from Canada to beat the February 1 introduction of tariffs. Gasoline stocks rose 1.89mn while distillate fell 3.75mn. Official EIA data is released later today and a stock build would be the first since mid-November.
• Oil is the most important Canadian export to the US and over half of US crude imports come from Canada. President Trump has threatened 25% tariffs from Saturday, which would likely increase domestic fuel prices.
• Bloomberg observes that WTI futures prices are signalling market tightness with the prompt spread 85c/barrel in backwardation.
• The Fed is expected to leave rates unchanged today (see MNI Fed Preview). The BoC is forecast to cut rates 25bp to 3%. December US trade and inventories, estimated Q4 Spanish GDP and December euro area M3 also print. 

ACGBs (YM +7.0 & XM +5.0) are sharply richer after today’s Q4 CPI data came in slightly below expectations across most metrics.

• Q4 trimmed mean inflation rose 0.5% q/q driving a moderation in the annual rate to 3.2% from an upwardly revised 3.6% in Q3. It excluded electricity and fuel prices and the increase was driven by recreation while housing (new dwellings -0.2% q/q) helped to offset it.
• Cash ACGBs are 5-7bps richer with the AU-US 10-year yield differential at -15bps.
• Cash US tsys are ~1bp richer in today’s Asia-Pac session ahead of today’s FOMC meeting.
• Swap rates are 6-7bps lower, with the 3s10s curve steeper.
• The bill strip pricing is +5 to +8.
• The RBA noted in the December minutes that “underlying inflation was still too high, underpinned by persistently high services price inflation”. Q4 data hasn’t improved this.
• Services inflation moderated to 4.3% y/y in Q4 from 4.6% but is still elevated and in line with the trend since Q4 2023.
• RBA-dated OIS pricing is 3-8bps softer across meetings on the day. A 25bp rate cut is more than fully priced for April (138%), with the probability of a February cut at 92% (effective cash rate of 4.34%). 
• Tomorrow, the local calendar will see Q4 Terms Of Trade data.