AUSSIE BONDS: Modestly Cheaper After Jobs Data Beat

Westpac expects Q4 NZ CPI to rise slightly higher than the RBNZ at 0.5% q/q compared with 0.4% but the annual rate is in line at 2.1% y/y. The surge in December airfares drove Westpac to revise up the quarterly expectation. It believes that core measures will continue moving towards the mid-point of the RBNZ’s 1-3% band and that the data won’t be a “big surprise for the RBNZ”. 

• Westpac notes that volatility in certain headline components is likely to mean that the RBNZ is “more focused on the underlying trend in inflation, which is now looking much better contained than it has in a long time”.
• “We estimate that inflation excluding food, fuel and energy costs will ease to 3.0% from 3.1% previously, while trimmed mean inflation is likely to fall to around 2.3%.”
• “The largest upside contributors to inflation are expected to be domestic and international airfares (up 9% and 7% respectively over the past three months), as well as holiday accommodation costs (up around 3%). Combined, those groups account for around 6% of the CPI and they typically record larger increases over the holiday months.”
• Non-tradeables inflation is likely to remain elevated but “that firmness masks some important detail under the surface. Price and cost pressures have been cooling in some sectors of the domestic economy that are sensitive to the high level of interest rates in recent years”.
• “One area that we’re keeping a close eye on is the New Zealand dollar, which has fallen to its lowest level since 2022. Over time, that decline could push up the cost of some imported goods, such as petrol. This will be an important area to watch over the coming year and will likely be a consideration for the RBNZ’s policy stance.”

After underperforming through Monday trade, yen is seeing some degree of catch up in the first part of Tuesday dealings. We tested the 50-day EMA (around 154.97) a short while ago, hitting lows of 154.91, but sit higher in latest dealings. Last around 155.15/20 still +0.30% firmer in yen terms. 

• A clean break under the 50-day EMA could see Dec lows of 154.44 targeted.
• Yen is benefiting from the sharp move lower in US yields, with cash Tsys re-opening after the long weekend. No early tariff action from the returning Trump administration is clearly weighing on the USD, whilst also a US yield headwind, as it will be viewed as less reflationary.
• The chart below plots USD/JPY against the US-JP 10yr and 2yr yield differentials. Recent correlations have arguably been stronger with the 10yr spread, which is still arguing for a downside USD/JPY bias, at least if current trends hold.
• Lack of sharp market volatility/risk aversion on the returning Trump administration will also add to the case for a BoJ hike later this week. Still, this is close to fully priced/expected by the market. 

Fig 1: USD/JPY Versus US-JP Government Bond Yield Differentials 

Source: MNI - Market News/Bloomberg 

India continues to see heavy outflows, while other regions in Asia saw mixed flows on Monday as investors were cautious ahead of Trumps Inauguration. 

• South Korea: Saw outflows of -$345m yesterday, contributing to a 5-day total of -$206m. YTD flows are slightly negative at -$57m. The 5-day average is -$41m, worse than the 20-day average of -$24m but better than the 100-day average of -$156m.
• Taiwan: Saw inflows of +$385m yesterday, leading to a 5-day total of +$442m. YTD flows are negative at -$1.77b. The 5-day average is +$88m, better than the 20-day average of -$21m and the 100-day average of -$122m.
• India: Saw outflows of -$419m Friday, resulting in a 5-day total of -$2.82b. YTD flows are deeply negative at -$4.95b. The 5-day average is -$564m, worse than the 20-day average of -$316m and the 100-day average of -$76m.
• Indonesia: Saw outflows of -$17m yesterday, bringing the 5-day total to +$21m. YTD flows remain negative at -$183m. The 5-day average is +$4m, better than the 20-day average of -$13m and the 100-day average of +$1m.
• Thailand: Saw inflows of +$13m yesterday, contributing to a 5-day total of -$150m. YTD flows are negative at -$209m. The 5-day average is -$30m, worse than the 20-day average of -$12m and the 100-day average of -$9m.
• Malaysia: Saw outflows of -$31m yesterday, leading to a 5-day total of -$254m. YTD flows are negative at -$460m. The 5-day average is -$51m, worse than the 20-day average of -$27m and the 100-day average of -$18m.
• Philippines: Saw outflows of -$2m yesterday, bringing the 5-day total to -$47m. YTD flows are negative at -$83m. The 5-day average is -$9m, worse than the 20-day average of -$7m and the 100-day average of -$1m.

Table 1: EM Asia Equity Flows