CGB yields remain anchored alongside weak inflation prints, with the front-end 2Y yield falling to 1.24%. CPI has retreated from 1.2% YoY in May to 1.0% in June and has registered a second sequential contraction of 0.3% MoM. Rising energy and transportation prices are being offset by falling food prices. Domestic demand remains subdued, and core CPI has also eased from 1.1% YoY to 1.0%. Rent has fallen by 0.6% YoY alongside property market routs. Likewise, PPI has edged up from 3.9% to 4.1% but has declined by 0.3% MoM. As global energy prices appear to ease, factory gate prices could reach a plateau.
Against this backdrop, the PBOC is unlikely to derail from its easing stance. This stance is placing a ceiling on short-end rates. According to the PBOC Monetary Policy Committee Second Quarter report, the central bank is maintaining a moderately accommodative monetary policy stance, enlarging counter-cyclical adjustments, and injecting sufficient liquidity to cushion domestic demand. That said, we do not view that the PBOC will re-engineer a rate cut. Nominal yields are already too low. Any marginal decline in interest rates may pose limited support to the economy but could instead dampen the net interest margin of commercial banks.
Meanwhile, global central banks are turning hawkish to fight inflation and defend currencies. The PBOC will likely stay on hold at this juncture. We are wary that front-end onshore rates are rich in value. Notably, the offshore 1/5Y NDIRS curve has already flattened from approximately 12bps to 5bps, while the corresponding CGB curve is steep at around 33bps. 
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