US yields stabilize after falling to three-month lows

Overview: The 10-year US Treasury yield stabilized after hitting a three-month low near 1.43%, despite the US CPI rising more than expected to 5% year-on-year. Over the week, the drop of around ten basis points would be the strongest for a year. The benchmark yields of Australia, New Zealand and Italy saw a larger decline this week. The S&P 500 set new highs yesterday, but the ripple effect was muted. Japanese and Chinese stocks eased today, although most other markets rose. During the week, Thailand and the Philippines did the best in the region. The Dow Jones Stoxx 600 in Europe sets a new record, but the driving force is falling interest rates, and the rate-sensitive utilities sector is leading the advance. Finance and real estate are not participating today as the benchmark nears its fourth weekly gain. US futures are narrowly mixed. The forex market is calm. The greenback is mostly a little firmer, although the Australian and Canadian dollars are showing some resistance. Among emerging market currencies, the Turkish lira continues to recover. His 1% gain today brings the weekly increase to over 4%. The JP Morgan Emerging Market Currency index is up for the fifth time in six sessions. Barring a reversal, this will be the third consecutive weekly progression. Gold fell after going above $ 1900, and July’s WTI is hovering above $ 70 a barrel. Other industrial raw materials are firm. The CRB Index closed at new six-year highs yesterday.

Asia Pacific

Beijing has taken several initiatives in recent weeks on commodities, the yuan and crypto. It is stepping up its efforts to control the prices of raw materials. Two new efforts on raw materials were announced. First, base metals from official reserves, including copper, aluminum and zinc, will be made directly available to end users. Second, Tangshan Steel Mills have been ordered to restrict their production (effective June 10-June 15) to combat pollution. Iron ore and steel rebar futures rallied in China today for the third consecutive session.

The United States appears to be stepping up pressure on the United Arab Emirates to ditch Huawei and replace it. He appears to be threatening to drop the country from the F-35 jets and drones (~ $ 23 billion) that have been ordered for delivery in 2026-2027.

China was not invited to the G7 meeting, but it figures prominently. Having a common rival is the key to reasserting American leadership. Efforts to re-investigate the origins of the covid pandemic are obviously not necessary to fight the virus or strengthen laboratory security generally, which was considered lax. The origins of the so-called Spanish flu are still not fully recognized. In part, the pressure to keep the pressure on China. Tax reform is another element because it aims to reduce competition between large countries. The OECD Deputy Secretary (2011-2017) which oversaw tax matters said the effort was “incomplete” because the more equitable distribution of tax revenues only applied to 100 companies.

Despite the decline in US yields this week, the dollar has traded sideways against the Japanese yen. It remains in a narrow range: JPY109.20-JPY109.80. There is a $ 960 million option at JPY 109.80 which expires today. It is holding around the middle of the range in Europe (~ JPY 109.50), where it finished last week. The Australian dollar is trading today at a new marginal high for the week (~ $ 0.7775). It was capped at around half a cent, finding support around $ 0.7720. It settled around $ 0.7740 last week. The Chinese yuan is slightly firmer today and this week. Evaluating official efforts on the yuan is difficult because the goal is unclear. However, if the goal was to stabilize it around current levels, it has succeeded. The dollar ended last month around CNY 6.37 and moved this week to just below CNY 6.39. Since Beijing decided to increase reserves for currency deposits and protested through the daily fixings, the dollar has peaked near 6.41 CNY. According to the Bloomberg survey, the dollar benchmark rate was pegged at CNY 6.3856 today, slightly stronger than the median expectation of CNY 6.3847.


The ECB has pledged to keep its bond purchases at a “significantly higher” level until September, although there was some disagreement on what to do in August, as the lack of new issuance and liquidity usually results in lower purchases. It comes as staff have revised growth and inflation forecasts upwards. This year’s GDP has increased to 4.6% (from 4.2%) and next year to 4.7% (from 4.1%). Its inflation projection has been raised to 1.9% (against 1.5%) this year and to 1.5% (against 1.2%) in 2022. The 2023 forecast (2.1% of GDP and 1 , 4% of the CPI) remained unchanged. The risks would be broadly balanced for the first time since 2018.

The UK reported a 2.3% GDP increase in April after rising 2.1% in March. During the month, industrial and manufacturing production fell (-1.3% and -0.3%, respectively). Production in construction also weakened (-2.0%). However, a strength was observed in services (3.4%) and a reduced trade imbalance (-GBP935 mln against -GBP1.97 mln). Plans to fully reopen the economy in ten days appear to be postponed until the end of the month.

Biden and Putin are due to meet next week. The Nordstream 2 pipeline was completed yesterday and testing begins today. The Russian central bank is expected to hike rates by 50bp later today to raise the target to 5.50%. This will be the third hike this year. The first was 25bp, and the April move was 50bp. May inflation was reported earlier this week. The overall and basic rates increased from 5.5% to 6.0%.

The euro is trading quietly in yesterday’s range (~ $ 1.2145 – $ 1.2195). Two major option expirations today mark the wider range. There is a € 2.2 billion option at $ 1.21 and a € 1.8 billion option at $ 1.22. In the middle of the range is an option close to € 2 billion at $ 1.2150. The euro was sold in the European morning and the intraday momentum indicator is stretched before US brokers return to close the week. The euro moved slightly above $ 1.2165 last week. The British pound recovered around a cent from yesterday’s lows to close near $ 1.4175. Today it hit $ 1.4185, just short of the week’s high (it didn’t go above $ 1.4190 this week to hit nearly $ 1.4250 last week). It was also sold in Europe today. Initial support is seen near $ 1.4140.


The larger-than-expected rise in the US CPI in May did not derail the bond rally. Most of the increase appears to be attributable to sectors reinforcing the feeling that it is being driven by temporary adjustment factors upon reopening and some supply disruptions. Used car prices rose 7%, which alone represents about a third of the overall increase. Air fares have also risen sharply. Hotel accommodation, car insurance and restaurant prices have also increased after being depressed by the covid. The 10-year breakeven point is around 235 bps. It peaked in mid-May at nearly 260bp. The five-year term is around 237bp. It peaked in mid-May a little above 270bp.

A growing number of observers are warning that next week the FOMC may announce that it will start discussing tapering. And ideas that she might adjust the interest she pays on reserves and / or reverse repo have started to impact bill auctions. For example, yesterday’s four-week bond sale produced a return above zero for the first time in a month.

The North American economic calendar is light today. The United States presents the University of Michigan inflation and consumer confidence forecast for June. Recall that last month, 5-10 year inflation expectations fell from 2.7% to 2.8% to 3% so far this year. Although Fed officials often speak of inflation expectations, the focus has been on actual performance rather than projections. Mexico reports April industrial production figures and is expected to rise 0.3% after gaining 0.7% in March.

The US dollar is virtually unchanged against the Canadian dollar during the European morning around CAD 1.2100. Two big options expire today: $ 1.66 billion at CAD 1.2090 and the other for just over $ 600 million at CAD 1.2085. A move above the CAD1.2145 area will likely trigger the purchase of a US dollar stop loss. The greenback closed around CAD 1.2085 last week. The US dollar remains in Wednesday’s range against the Mexican peso (~ MXN 19.60 to MXN 19.79). It sits around the middle of the range and looks ready to test the lower end of the range. At the end of last week, on the eve of the legislative and local elections, it settled a little below MXN 20.00.

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