Three is a magic number
US Treasury yields top 3%
US yields were on the move last night, with the curve from 5-year to 30-year duration now above 3%. That was enough to crimp the stock market‘s perpetual FOMO bulls, with Wall Street ending just above flat, while the US dollar also saw gains. Gold fell slightly while Oil also returned to early gains, with Brent Crude finishing nearly flat just below $120.00 a barrel.
One of the notable losers was the Japanese yen, with USD/JPY surging to two-decade highs around 131.90 overnight, before adding another 0.50% to 132.60 today. today. With the US/Japan rate differential widening the cross, Japanese authorities resorted to verbal intervention this morning, with BOJ officials declaring that a rapid weakening of the yen was undesirable.
The US yield curve is starting to look rather flat between the 5-year and 30-year maturities, which makes me a bit nervous. A US inflation print of over 8.50% could see it begin to price in a recession and head for a part-to-part reversal as data bolsters Fed tightening. In a stagflationary environment, central banks do not have the right choice, at least the less bad ones. That said, I don’t think the US is in stagflation yet, but if oil stays above $120.00 a barrel, it could soon be.
Looking at the price action overnight, I’m not entirely convinced that the move in US bonds was driven by inflation and fears of Fed tightening. Yes, the US dollar rallied, but without the yen, it was no monetary bonfire. US equities still ended up slightly and gold’s pullback was limited, it’s still boring everyone to death with range trading. The rise in US yields may well be in anticipation of the $96 billion in sales of US government bonds that will hit the markets this week in 3-, 10- and 30-year maturities. Time will tell, although if most of the US curve is still above 3.0% on Friday, US post-inflation price action could indeed be dashing.
When it comes to Asia-Pacific, all eyes are on the policy decision of the Reserve Bank of Australia at 12:30 p.m. SGT today. The market is heavily weighted by a rate hike of 0.25% to 0.60%, as am I. It would be a huge surprise if the RBA did a reverse Prince, didn’t let the doves cry, and increased by 0.40%. This would see the AUD/USD much higher and battlers in the stock market having a bad day, as well as sending a message that the RBA has entered panic mode. A 0.25% rise is priced in and should have minimal impact on the Australian dollar which remains at the mercy of sentiment flows derived from the US, like its flightless bird cousin on the other side of Tasmania. A shift in tone towards a more hawkish post-rate decision statement, however, could see some strength in the AUD.
Japanese household spending also disappointed this morning, improving slightly from March, but down 1.70%, well below forecasts. This would have been another reason to buy USD/JPY today, with the rhetoric emanating from the Bank of Japan this morning sounding a bit more nervous than before.
The rest of the Asian calendar is dead today, although we got UK BRC retail sales for May this morning, retail sales have improved slightly but are still solidly negative at -1.50%. The UK staged a post-jubilee railway strike yesterday and Boris Johnson survived a vote of no confidence. In BoJo’s case, TINA came to her rescue, there is no alternative. The railway strike is what I believe will be a summer/autumn/winter of discontent for the UK as the cost of living soars and the Bank of England waves the white flag. The war in Eastern Europe and a British government seemingly still determined to invalidate the Brexit deal on the North Island have me struggling to find a reason for GBP/USD to ever see a handful of 1 ,3000 in 2022.
The data calendar across Europe is also second tier with some construction PMIs, and the US releases its April trade balance. This should improve to a mere deficit of $89.5 billion; however, this data generally does not impact the market. It looks like we are 24 hours ahead of the markets which will once again be driven by headlines and swings in sentiment. Ride Friday.
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