Market movers today
- The key focus today is the US July CPI inflation release. Market consensus is expecting monthly inflation pressures to ease both for core and headline inflation. However, the inflation print for June surprised to the upside and if the same thing happens today, this would give further momentum for US yields and dollar as it stirs more hawkish expectations to the Fed.
The 60 second overview
US infrastructure package: The US Senate last night finally passed the USD 1tn infrastructure bill adding USD 550bn to infrastructure spending. It represents the biggest spending on infrastructure in several decades. The vote was 69-30 in the Senate underlining that Biden managed to get relatively broad bipartisan support for the package as 19 Republicans supported the bill. The plan is not fully financed and the Congressional Budget Office estimates that the package would add USD 256bn to the deficit over the next 10 years. The package now has be to cleared in the House, which could also pose a lot of challenges for Biden as many Democrats among other things wish to link the infrastructure bill with a separate USD 3.5tn budget bill that contains social programmes and climate initiatives among other things.
NFIB: The US small business confidence indicator fell slightly more than expected from 102.5 in June to 99.7 in July. A growing number of smaller firms reported persistent supply chain and hiring difficulties. The number of companies with vacant jobs and plans to raising wages and prices remains at or close to decade highs. Some of the hiring difficulties are expected to ease as unemployment benefits run out over the coming months and as children return to school making it easier for parents to have a full-time jobs.
Delta variant: Real-time activity data such as the Google mobility data, flight capacity in China and manufacturing and sentiment data in Asia shows that activity is being hurt. If the Delta variant continues to spread and government restricts production further it could very well extend the current supply and bottleneck problems seen globally in manufacturing. For now, markets are calm and Asian markets are overall in green this morning except the South Korean Kospi, which is in red after the country for the first time recorded more than 2,000 new daily infections. Only 16% of South Koreans are fully vaccinated.
Fed comments: Several Fed members have communicated their views on bond tapering the last couple of days and last night it was time for Chicago Fed President Evans. Contrary to many of his colleagues Evans seemed less eager to announce the start of tapering as early as next month. He wanted to see a ‘few more’ job reports, which would push any decision to November. Evans also said that the economy had made ‘good’ progress, but he stepped short of using the keyword ‘substantial’. Despite the softer rhetoric from Evans US 10Y treasury yields continued to edge higher and at 1.35% yields are up 20bp from the low a week ago. The infrastructure bill also weighed on the US treasury market.
Equities ended Tuesday slightly higher, while the comeback of value plays continued. Cyclicals outperformed defensives with financials and industrials among the winners, along with energy and materials as commodity market rebounded. Rates sensitive tech and bond-proxy real estate lagged. In the US, Dow closed up 0.5%, S&P 500 0.1%, Nasdaq -0.5% and Russell 2000 0.2%. This morning we see all Asian markets higher with value intense Japan leading. Futures in US point to a muted opening.
FI: US Treasury yields rose modestly yesterday ahead of the US inflation data released today. The US inflation data for July is today’s main event. US inflation is expected to ease as the m/m rise is expected to decline to 0.5% m/m relative to 0.9% m/m in June. However, the risk is clearly on the upside.
FX: Overview: USD rose against most currencies yesterday supported by a further rise in US interest rates. Commodity currencies AUD, CAD, NZD and NOK gained yesterday as commodity prices and in particular oil prices rebounded.
Credit: While European equities closed in green, credit remained under slight pressure with iTraxx Xover widening 2bp (to 235½bp) and Main 0.2bp (to 46½bp). HY bonds widened 2bp and IG 1bp.
