US treasury yields modestly bull-steepened

Overnight developments in the Middle East show that a breakthrough remains elusive. Both sides are still at loggerheads, and each claims control of the Strait of Hormuz, with vessel flows through the waterway limited as President Trump bets that economic sanctions and a naval blockade will force Tehran to capitulate. With no resolution in sight, that risk premium is keeping Brent crude elevated near US$90/barrel.

On the macro front, yesterday’s US CPI inflation report was bang in line with estimates across the board. I am not sure I even remember the last time this happened. Disinflation came from energy and gasoline prices, though inflationary pressures were seen from airfares, used cars, and computers. Basically, we are looking at a slow disinflation trend, but this is unlikely to be good enough for the Fed hawks with inflation above the Fed’s target for five years.

We did see markets pare back rate-hike bets for September’s meeting, but we have not moved away from tightening entirely. The August US CPI inflation is all the more important now, as is what Fed Chairman Kevin Warsh says (or doesn’t) at Jackson Hole later this month. Data to monitor today are the July US PPI inflation report, which is expected to ease at both headline and core levels YY. With CPI coming in benign, this release may take on extra importance and subsequently deliver a more sizable move should a large deviation occur.

In the FX space, procyclicals are on the back foot this morning, with AUD and NZD both down against the USD. Elsewhere, price action is fairly lacklustre, which is surprising for the JPY, given Takaichi's government is now backing a near-term BoJ hike, likely in September or October. That said, traders in USD/JPY probably need to hear directly from the BoJ itself before it makes a real move. Of note, the curve has repriced over the last month, with tightening bets moving from around 5 bps to roughly 16 bps for September's meeting as of writing.

Equities were largely bid in the US session yesterday, while the Dow Jones closed unchanged. This came on the back of solid earnings results from AI infrastructure names and the benign US CPI inflation print. Overnight in Asia, South Korea’s KOSPI is now well and truly in bull market territory, and ahead of European and US cash session opens, futures point to modest starts.

In fixed-income, US Treasury yields modestly bull-steepened on the back of the in-line US inflation report.  We are also seeing a similar picture this morning, with shorter-dated maturities on the back foot.