ON DECK FOR WEDNESDAY, MAY 28
KEY POINTS:
- Bond market relief short-lived…
- …after a dud of a Japanese ultra-long auction…
- …neutral-hawkish RBNZ post-cut guidance…
- …sticky Aussie CPI…
- …and higher Eurozone CPI expectations
- FOMC minutes to reinforce ‘patience’ mantra
- Two more Canadian bank earnings beats
- Canada should run from Trump’s lowballed share of his ‘Golden Dome’ scam
Sovereign bonds are on the run this morning after a weak Japanese auction that reversed some of the prior session’s calm. Neutral-hawkish guidance from the RBNZ, firmer than expected Aussie CPI, and a jump in near-term Eurozone inflation expectations also didn’t help bonds. A pair of Canadian bank earnings beats now has four of them in the books with two more due out tomorrow. FOMC minutes are likely to remind everyone that the FOMC is going to remain very patient.
JAPAN’S 40-YEAR DUD
Japan’s 40-year ultra-long bond auction was somewhat of a dud. The bid-to-cover ratio on about ¥500B (US$3½B) of bonds fell to 2.21 from 2.92 at the prior auction which is toward the low end of recent history (chart 1). The result drove a steeper curve with the 10s and 30s portions rising by about 4bps each and thereby reversing some of the prior session’s rally that had been driven by talk of less long-end issuance.
RBNZ’S GUIDANCE DROVE HAWKISH REACTION
The RBNZ cut its official cash rate by 25bps to 3.25% as widely expected. The vote was 5–1. Explicit forward guidance points to at least another 25bs cut as the policy rate is deemed to be close to neutral (chart 2). Markets had more than that priced in before the guidance and so the NZ$ vaulted to the top of the pack of currency performers this morning while the kiwi curve bear flattened with the 2-year yield up 9bps. Guidance from Governor Hawkesby sounded noncommittal in pointing to the amount of easing to date and indicating they have flexibility versus “being pre-programmed or pre-set to make any particular move.” Markets now have slim odds for another cut in July, most of a cut priced for August and a little over a cumulative full cut priced between now and well into next year.
STICKY AUSSIE CPI
Aussie CPI was a bit firmer than expected in April’s reading. CPI was unchanged at 2.4% y/y (2.3% consensus) with trimmed mean CPI at 2.8% (2.7% prior, no consensus). Traditional core CPI jumped to 2.8% y/y from 2.6% previously and was hot in m/m SAAR terms (chart 3). The result contributed to slight front-end underperformance.
OTHER EUROPEAN DATA
A gain in German unemployment almost tripled consensus (+34k, 12k consensus) during May. That’s the biggest increase since July 2022.
French consumer spending posted a softer than expected rebound in April. It was up 0.3% m/m in real terms (0.8% consensus, -1.1% prior).
Eurozone inflation expectations registered an increase in the 1-year measure (3.1% from 2.9%) while the 3-year measure held steady at 2.5% (chart 4).
A PAIR OF CANADIAN BANK EARNINGS BEATS
BMO beat expectations with Q2 EPS OF C$2.62 ($2.54 consensus) and hiked its dividend by 5%. National Bank posted Q2 EPS of $2.85 ($2.40 consensus) and raised its dividend by 3½%.
FOMC MINUTES TO REINFORCE PATIENT MANTRA
FOMC minutes are due out at 2pmET this afternoon. They are likely to reinforce Chair Powell's core message that the Committee will be patient as it evaluates competing effects on its dual mandate goals of price stability and full employment before determining an appropriate course of action. This requires reams of data and much further evidence on US policy priorities across trade, fiscal, immigration and regulatory initiatives.
CANADA SHOULD RUN FROM THE ‘GOLDEN DOME’
Trump said last evening that Canada’s share of his ‘Golden Dome’ missile defence proposal would be $61 billion. Presumably he’s talking USD, so at the current spot exchange rate that’s about C$84B. And in his usual insulting fashion said the cost would be nothing if Canada became a 51st state; fat chance. Anyway, it’s a made-up number that’s very likely to be much bigger for a fanciful waste of taxpayer money. That’s because Trump’s total tally for the project of $175B is at the low-end of the CBO’s estimated cost that stretches to about half a trillion dollars. Canada’s implied share of the project would be 35% if we go with Trump’s numbers. If we went with the high range and the same implied share, then Canada’s cost could balloon to about US$175B (C$240B). This sounds like a Trump U or real estate scam in the making for an unproven technology that would take many years longer to deploy than Trump’s 3-year claim and cost an awful lot more. Signing on wouldn’t help the image the Canadian government is trying to cultivate by way of being more fiscally prudent than the prior regime.
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