Overnight market's wrap: US bond yields rose steeply - Westpac

Analysts at Westpac noted the events and price action in global marks overnight.

Key Quotes:

"US bond yields rose steeply on stronger than expected inflation data, though retail sales were weak. The US dollar bounced initially then surrendered its gains. This saw AUD/USD rally >1 cent from its lows to above 0.79. Equity markets rose. Today we see Australia's Jan labour force data and a flurry of second-tier US data.

US CPI rose 0.5% in Jan (vs 0.3% expected), keeping the annual pace at 2.1%. The core measure rose 0.3% (vs 0.1% expected), for a steady annual pace of 1.8%. Most of the upside surprise came from apparel (up a huge 1.7% in the month), while transportation costs also jumped (+1.8%) and medical care was above trend at 0.4% too. All told it looks like three components account for much of the upside surprise: clothing, cars and medical costs. There was also an update to hourly earnings, which rose 0.8% in Jan (from an upwardly revised 0.6% in Dec).

In contrast, the recent strong run of retail sales growth ended in Jan with a 0.3% fall (vs +0.2% expected). The core “control” group retail sales was flat in Jan and Dec was revised down sharply, from 0.3% to -0.2%. Economists cut their forecasts for Q1 GDP.

US 10yr treasury yields jumped after the CPI data, from 2.82% to 2.91% - the highest since Jan 2014. 2yr yields rose from 2.10% to 2.16%. Fed fund futures yields also rose, pricing the chance of another rate hike in March at effectively a done deal (Bloomberg calculations).

The combination of softer spending and higher inflation wasn’t ideal for equities and the S&P 500 opened slightly softer an hour after the data, but then settled into a steady rally, joining European equities in posting decent gains.

The US dollar bounced on the hot inflation data but within 2 hours had given up its gains across the board, down against all G10 currencies. USD/JPY was particularly soggy, popping up only briefly to 107.50 before resuming its decline to 106.72 – the lowest since Nov 2016.

EUR/USD dropped from 1.2350 to 1.2276 but was back to flat after about 90 minutes and then extended the rebound to 1.2442. GBP/USD retested 1.4000, up a net 0.7% over the day. USD/CAD fell 1% from its post-CPI highs to 1.2525.

AUD/USD sank from 0.7860 to 0.7773 but was back to flat on the day by the NY lunchtime and continued with the euro et al to 0.7910 by late NY. NZD rose a net 1.2% on the day to 0.7365, with earlier help from a rise in NZ inflation expectations. As a result, AUD/NZD broke below a week-old range, from 1.0750 to 1.0716 – a six-month low."