JGBs trade mixed as US jobless claims slips to lowest in 7 weeks, crude oil prices fall

The Japanese government bond traded mixed Friday, following United States debt market as the world’s largest economy recorded the lowest level of jobless claims in seven weeks. On the contrary, bonds prices saw upward pressure at the short-end of the curve as energy prices pulled back on profit-taking.

The benchmark 10-year bond yield, which moves inversely to its price, rose 1-1/2 basis points to -0.019 percent, the super-long 30-year JGB yield climbed 6 basis points to 0.510 percent and the short-term 2-year JGB yield slid nearly 1 basis point to -0.199 percent by 06:50 GMT.

The US Initial jobless claims for the week ending 3 September August decreased -4k to 259k, below expectations for a 265k result, as compared to the unrevised 263k reading seen in the week prior.

Additionally, the 4-week average was reported at 261.3k, down from the unrevised 263.0k reading seen in the week prior. Meanwhile, continuing claims for week ending 27 August decreased to 2.144 million, versus the 2.151 million reading seen prior. The insured unemployment rate held unchanged at 1.6 percent. This will encourage the Federal Reserve officials looking to raise the benchmark interest rate before the end of 2016.

The JGBs have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Japan's target. Crude oil prices fell more than 1 percent after settling more than 4 percent higher Thursday as investors cashed in profits after relishing previous gain. The International benchmark Brent futures fell 1.30 percent to $49.35 and West Texas Intermediate (WTI) dipped 1.11 percent to $47.09 by 06:50 GMT.

Moreover, Japan’s second-quarter (final) seasonally adjusted GDP rose 0.2 percent q/q (consensus was for zero), which is an upward revision from the previous reading of 0.0 percent, though down from 0.5 percent in the first quarter of 2016.

On an annualised basis growth was 0.7 percent y/y, higher than the market expectations of 0.2 percent y/y growth, from previous 0.8 percent. The better GDP somewhat reduces the probability of further BOJ easing measures, but do note that inflation is still way below target. The next Bank of Japan meeting is September 20-21; our bias is for a 10 basis point rate cut.

In addition, the Bank of Japan will hold its two-day monetary policy meeting on 20-21 September, announcing its decision on Wednesday, 21 September is a close call. But, we foresee that the BoJ's 9-member policy board is likely to cut rates on excess reserves and expand its monetary base as stagnant growth and continued risk of deflation will weigh on BoJ Governor Kuroda’s decision.

According to recent Reuters poll, 60 percent of economists see the Bank of Japan easing in September 21; 40 percent see them stay unchanged. Pollsters are split on possible policy action and over 50 percent said the BoJ will adopt more flexible wording on inflation targeting.

Meanwhile, the benchmark Nikkei 225 closed marginally up 0.04 percent at 16,965.76 and the broader Topix index also closed 0.16 percent lower to 1,343.86 points.