Risk aversion will dominate, but can it overturn renewed weakness in US Treasuries?
|Markets
Inflation was talk of town yesterday. What started with record-rallying metal prices turned to a preview for Wednesday’s US CPI release (headline 3.6% Y/Y; core 2.3% Y/Y) and ended with the NY Fed’s survey of consumer expectations. The latter showed that the median year-ahead consumer inflation expectations rose to 3.4% Y/Y in April from 3.2% Y/Y in March. It’s the highest level since September 2013. In the meantime, market based inflation expectations (eg 5y5y forward) continued surging higher, taking out 2.5% also for the first time since 2013. The FOMC meeting and US President Biden’s American Families plan broke the April status quo in inflation expectations which added 20 bps since. Real yields over that same period lost more or less the same amount. Anyway, future price pressure and the US Treasury’s upcoming mid-month refinancing operation prevailed for US Treasuries, causing bear steepening of the yield curve. US yields added 0.9 bps (2-yr) to 4.8 bps (30-yr). Moves confirm a firm bottom below long term bond yields after Friday’s failed spike lower on the huge US payrolls miss. A late faint on US stock markets (Nasdaq lost more than 2%) couldn’t trigger a flight to safety bid. Geopolitical tensions (Israel) are often cited as triggering the risk turnaround, but we deem that unlikely. It’s probably more a sign of fatigue with big tech names prone for correction and a consolidation phase. Rising production costs (commodity prices, chip shortages, supply-chain issues) risk eating into corporate profits and consumer’s wallets. From a technical point of view, the correction could be broader since the S&P managed a small fresh all-time high last week. The US dollar kept its cool and prevented additional losses after Friday’s blow. US real yields stabilized while European rates weren’t going anywhere. The German yield curve steepened with yield changes ranging between -0.4 bps (2-yr) and +0.6 bps (30-yr). The late risk-off even helped the greenback to small gains. EUR/USD closed at 1.2129. Sterling unleashed the Scottish election shackles and rallied its way from EUR/GBP 0.87 to EUR/GBP 0.8589, the final support before a return the YTD low of EUR/GBP 0.8472.
Risk aversion spills to Asian stock markets this morning with rising April Chinese CPI (0.9% Y/Y) and PPI (6.8% Y/Y) numbers adding to the inflation narrative. Spill-over effects to main FI and FX markets remain muted for now. Today’s eco calendar contains German ZEW investor confidence and second tier US eco data (NFIB small business optimism & JOLTS). We don’t expect them to overturn the trading story. Risk aversion will dominate, but can it overturn renewed weakness in US Treasuries? We fear not, at least not in a sustainable matter. For the US dollar, it could come as additional temporary reprieve. This week’s key events follow later with US CPI (Wednesday), 10y and 30y Note/Bond auctions (Wednesday/Thursday) and US retail sales (Friday).
News Headlines
Chinese consumer prices rose from 0.4% to 0.9% y/y in April, just short of a 1% consensus. That’s relatively subdued as pork prices continued to edge lower. Core inflation accelerated to 0.7%. Prices rose across the board with transport & communication (4.9%) and recreation & education (1.3%) being the most notable. Producer inflation was much more prominent though, jumping from 4.4% to 6.8% y/y. This fastest pace since end 2017 was driven by searing gains in raw materials (15.2% y/y) and mining (24.9%), posing concerns to not only Chinese but also global inflation.
Wrap-up of a slew of Fed speeches on Monday. Dallas Fed president Kaplan said the disappointing April job report a.o. comes from employers struggling to attract workers despite offering higher wages. It doesn’t change his rosy outlook for the labour market this year however. He repeated that it would be healthy to start the taper debate “sooner rather than later”, citing excesses, imbalances and side effects of the Fed’s bond buying. SF’s Daly remains bullish about the future though warned “we’re not there yet”. Evans voiced similar concerns. Another batch of Fed talk is due today.
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